<PAGE> 1
LOGO AUGUST 18, 1995
Common Sense(R) Trust (the "Trust") is a diversified open-end management
investment company which offers shares in ten separate Portfolios, five of which
are described in this Prospectus. The goals of such Portfolios are as
follows:
Common Sense(R) Growth Fund (the "Growth Fund") seeks capital
appreciation by investing in a portfolio of securities consisting
principally of common stocks and options on common stocks. Any income
realized on its investments will be purely incidental to its goal of
capital appreciation.
Common Sense(R) Growth and Income Fund (the "Growth and Income Fund")
seeks reasonable growth and income by investing principally in a portfolio
of equity securities that provide dividend or interest income, including
common and preferred stocks and securities convertible into common or
preferred stocks.
Common Sense(R) Government Fund (the "Government Fund") seeks high
current return consistent with preservation of capital by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Common Sense(R) Municipal Bond Fund (the "Municipal Bond Fund") seeks
as high a level of current interest income exempt from federal income tax
as is consistent with the preservation of capital.
Common Sense(R) Money Market Fund (the "Money Market Fund") seeks
protection of capital and a high level of current income through
investments in short-term money market securities.
INVESTMENTS IN THE MONEY MARKET FUND ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE MONEY MARKET FUND SEEKS TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE THERE IS NO ASSURANCE
THAT IT WILL BE ABLE TO DO SO.
In seeking their respective goals, each Fund, except the Money Market
Fund, may engage in portfolio management strategies and techniques
involving options, futures contracts and options on futures. See "Goals and
Investment Policies."
There is no assurance that each Fund will be successful in achieving
its goals.
THE FUNDS WILL NOT PURCHASE ANY SECURITIES ISSUED BY COMPANIES
PRIMARILY ENGAGED IN THE MANUFACTURE OF ALCOHOL OR TOBACCO.
This Prospectus tells investors briefly the information they should know
before investing in a Fund. Investors should read and retain this Prospectus for
future reference.
A Statement of Additional Information dated the same date as this
Prospectus has been filed with the Securities and Exchange Commission ("SEC")
and contains further information about the Funds. A copy of the Statement of
Additional Information may be obtained without charge by writing PFS
Distributors, 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0001.
The Statement of Additional Information is hereby incorporated by reference into
this Prospectus. Please call Customer Service at (800) 544-5445 for information
on the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CST-1
<PAGE> 2
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COMMON SENSE(R) TRUST
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
CUSTODIAN: INVESTMENT ADVISER:
State Street Bank and Trust Company Van Kampen American Capital
225 Franklin Street Asset Management, Inc.
Boston, Massachusetts 02110 2800 Post Oak Blvd.
Houston, Texas 77056
TRANSFER AGENT:
PFS Shareholder Services DISTRIBUTOR:
3100 Breckinridge Blvd., Bldg. 200 PFS Distributors
Duluth, Georgia 30199-0062 3100 Breckinridge Blvd., Bldg. 200
(800) 544-5445 Duluth, Georgia 30199-0001
(800) 544-7278 Spanish-speaking Representatives
(800) 824-1721 TDD Service for Hearing Impaired
</TABLE>
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TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary.................... 2
Expense Synopsis...................... 5
Financial Highlights.................. 6
Introduction.......................... 9
Goals and Investment Policies......... 9
Growth Fund......................... 9
Growth and Income Fund.............. 10
Government Fund..................... 10
Municipal Bond Fund................. 12
Money Market Fund................... 14
Investment Practices and Risks........ 14
The Trust and Its Management.......... 19
Purchase of Shares.................... 20
Shareholder Services.................. 23
Redemption of Shares.................. 25
Dividends, Distributions and Taxes.... 26
Prior Performance Information......... 27
Additional Information................ 29
</TABLE>
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
PROSPECTUS SUMMARY
Shares Offered.............. Shares of beneficial interest in five Portfolios:
the Growth Fund, the Growth and Income Fund, the
Government Fund, the Money Market Fund and the
Municipal Bond Fund.
Type of Company............. Diversified, open-end management investment
company.
Goals....................... The Growth Fund seeks capital appreciation; the
Growth and Income Fund seeks reasonable growth and
income; the Government Fund seeks high current
return consistent with preservation of capital; the
Money Market Fund seeks protection of capital and a
high level of current income; and the Municipal
Bond Fund seeks current interest income exempt from
federal income tax. There is, however, no assurance
that each Fund will be successful in achieving its
goals.
Investment Policies and
Risks....................... The Growth Fund invests principally in common
stocks that the investment adviser believes provide
unusually attractive growth opportunities and
options on such common stocks. Any income from
these investments will be incidental to the capital
appreciation goal. The Fund may use portfolio
management techniques and strategies involving
options, futures contracts and options on futures.
The utilization of options, futures contracts and
options on futures contracts may involve greater
than ordinary investment risks and the likelihood
of more volatile price fluctuation. See "Goals and
Investment Policies -- Growth Fund," "Investment
Practices and Risks -- Using Options, Futures
Contracts and Related Options," and the Statement
of Additional Information, for a discussion of risk
factors relating to options and futures strategies.
2
<PAGE> 3
The Growth and Income Fund invests principally in
common and preferred stocks, and in securities
convertible into common and preferred stocks, that
have provided dividend or interest income to their
security holders during the past twelve months. The
Fund may use portfolio management techniques and
strategies involving options, futures contracts and
options on futures. The utilization of options,
futures contracts and options on futures contracts
may involve greater than ordinary investment risks
and the likelihood of more volatile price
fluctuation. See "Goals and Investment
Policies -- Growth and Income Fund," "Investment
Practices and Risks -- Using Options, Futures
Contracts and Related Options," and the Statement
of Additional Information, for a discussion of risk
factors relating to options and futures strategies.
The Government Fund invests in debt securities
issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Fund may sell
and purchase options on U.S. Government securities;
and purchase and sell interest rate futures
contracts and options on such contracts since such
transactions are entered into for bona fide hedging
purposes. The market prices of debt securities,
including U.S. Government securities, generally
fluctuate with changes in interest rates so that
the Fund's net asset value can be expected to
decrease as interest rates rise. See "Goals and
Investment Policies -- Government Fund." The Fund
may also purchase or sell U.S. Government
securities on a forward commitment basis. See
"Investment Practices and Risks -- Options, Futures
Contracts and Related Options" and "Forward
Commitments" and the Statement of Additional
Information, for a discussion on forward
commitments and risk factors relating to options
and futures strategies.
The Municipal Bond Fund invests in a diversified
portfolio of obligations issued by states,
territories or possessions of the United States and
the District of Columbia and their political
subdivisions, agencies and instrumentalities, the
interest from which is exempt from federal income
tax ("Municipal Bonds"). The Fund will not purchase
any "private activity bonds" subject to the
alternative minimum tax. See "Goals and Investment
Policies -- Municipal Bond Fund." The Fund invests
primarily in long-term Municipal Bonds which tend
to produce higher yields and are subject to greater
market fluctuations as a result of changes in
interest rates ("market risk") than Municipal Bonds
with shorter maturities and lower yields. At least
75% of the Fund's total assets will be invested in
Municipal Bonds rated "A" or higher. Lower rated
securities are subject to greater market risks and
are also subject to the ability of the issuer to
meet its principal and interest obligations
("credit risk"). The Fund may acquire stand-by
commitments. Stand-by commitments involve an
element of risk. See "Investment Practices and
Risks -- Stand-by Commitments." The Fund may seek
to hedge interest rate risk through transactions in
listed futures contracts related to U.S. Government
securities, Municipal Bonds or to an index of
Municipal Bonds, and options on such contracts. Any
net gains from futures and options transactions are
subject to federal income tax and such transactions
may involve certain risks. See "Investment
Practices and Risks -- Options, Futures Contracts
and Related Options" and the Statement of
Additional Information for further discussion. The
market prices of debt securities, including
Municipal Bonds, generally fluctuate with changes
in interest rates so that the Fund's net asset
value can be expected to decrease as long-term
interest rates rise and to increase as long-term
interest rates fall.
The Money Market Fund invests in a diversified
portfolio of money market instruments. This Fund
seeks to maintain a constant net asset value of
$1.00 per share. There can be no guarantee that the
Fund will maintain its net asset value per share at
$1.00.
Under certain market conditions, all Funds except
the Money Market Fund may experience a high rate of
portfolio turnover. Higher portfolio turnover
involves correspondingly greater brokerage
commissions and other transaction costs. See
"Investment Practices and Risks -- Portfolio
Turnover."
3
<PAGE> 4
Investment Adviser.......... Van Kampen American Capital Asset Management, Inc.
(the "Adviser") is the investment adviser to the
Trust. See "The Trust and Its Management."
Distributor................. PFS Distributors (the "Distributor").
Sales Charge................ Shares of the Growth and Income Fund and the Growth
Fund are offered at a sales charge of 8.50% of
offering price (9.29% of net amount invested);
shares of the Government Fund are offered at a
sales charge of 6.75% of offering price (7.24% of
net amount invested); shares of the Municipal Bond
Fund are offered at a sales charge of 4.75% of
offering price (4.99% of net amount invested); the
sales charge is reduced on investments of $10,000
or more for the Growth Fund and the Growth and
Income Fund, $25,000 or more for the Government
Fund, and $100,000 or more for the Municipal Bond
Fund. Shares of the Money Market Fund are sold
without a sales charge. The Money Market Fund does,
however, require payment of an initial
administrative set-up fee of $15 for the
establishment of each investment account. See
"Purchase of Shares," "Sales Charge Tables,"
"Volume Discounts," "Cumulative Purchase Discount"
and "Letter of Intent."
Dividends and Capital
Gains....................... The Growth Fund may declare and pay dividends and
capital gain distributions annually. The Growth and
Income Fund may declare and pay dividends quarterly
and capital gain distributions annually. Income
dividends are declared each business day and paid
monthly for the Government Fund, the Municipal Bond
Fund and the Money Market Fund; any net short-term
or long-term capital gains are distributed at least
annually. All dividends and distributions are
automatically reinvested in shares of a Fund at net
asset value per share (without a sales charge)
unless payment in cash is requested. See
"Dividends, Distributions and Taxes."
Redemption.................. At the next determined net asset value. The Trust
may redeem any account with a net asset value of
less than $200 upon three months notice. See
"Redemption of Shares."
4
<PAGE> 5
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EXPENSE SYNOPSIS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH
& MUNICIPAL MONEY
GROWTH INCOME GOVERNMENT BOND MARET
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales load imposed on purchases
(as a percentage of offering price)......... 8.50% 8.50% 6.75% 4.75% None
Maximum sales charge on reinvestment of
dividends................................... None None None None None
Administrative set-up fee..................... None None None None $15
Redemption fee................................ None None None None None
12b-1 fee..................................... None None None None None
**Exchange fee.................................. $5 $5 $5 $5 $0
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets):
Management fees............................... .62% .65% .60% .60% .00%*
Other expenses (including accounting
services)................................... .47% .37% .29% .39% 1.00%*
Total fund operating expenses................. 1.09% 1.02% .89% .99% 1.00%*
* After expense reimbursements. In the absence of expense reimbursements, management
fees, other expenses, and total fund operating expenses would be .50%, 1.34%, and
1.84%, respectively.
** An investor may have to pay the excess, if any, of the sales load rate applicable to
the Fund being acquired over the sales load rate, if any, previously paid.
-----------------------------------------------------------------------------------------------
EXAMPLE
-----------------------------------------------------------------------------------------------
You would pay the following expenses on a
$1,000 investment assuming (1) five percent
annual return and (2) redemption at the end
of each time period:
1 year................................... $ 95 $ 95 $ 76 $ 57 $ 10
3 years.................................. $117 $115 $ 94 $ 78 $ 32
5 years.................................. $140 $137 $113 $100 $ 55
10 years................................. $207 $199 $170 $163 $122
</TABLE>
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The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in any Fund will
bear directly or indirectly. See "Purchase of Shares" and "The Trust and Its
Management." The example is included to provide a means for the investor to
compare expense levels of funds with different fee structures over varying
investment periods. To facilitate such comparison, all funds are required to
utilize a five percent annual return assumption. This assumption is unrelated to
a Fund's prior performance and is not a projection of future performance. The
example should not be considered a representation of past or future expenses.
Actual expenses may be greater or less than those shown.
5
<PAGE> 6
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FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
(For a share of beneficial interest outstanding throughout the period)
The information through October 31, 1994 has been audited by the Trust's
independent auditors, Ernst & Young LLP, whose report thereon was unqualified.
The information presented below for the six months ended April 30, 1995 is
unaudited. This information should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31
APRIL 30, ----------------------------------------------------------------------------------
GROWTH FUND 1995 1994 1993 1992 1991 1990 1989 1988 1987(1)
-------- -------- -------- -------- -------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period........................... $15.31 $16.26 $16.02 $15.47 $11.26 $13.15 $10.81 $9.37 $11.44(2)
-------- -------- -------- -------- -------- -------- -------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Investment income.................. .17 .29 .281 .30 .36 .38 .36 .24 .16
Expenses........................... (.08) (.16) (.165) (.17) (.17) (.175) (.17) (.14) (.16)
-------- -------- -------- -------- -------- -------- -------- ------ ------
Net investment income.............. .09 .13 .116 .13 .19 .205 .19 .10 --
Net realized and unrealized gain or
loss on securities............... .89 .2075 2.0065 1.3925 4.2425 (1.25) 2.26 1.435 (2.07)
-------- -------- -------- -------- -------- -------- -------- ------ ------
Total from investment operations... .98 .3375 2.1225 1.5225 4.4325 (1.045) 2.45 1.535 (2.07)
-------- -------- -------- -------- -------- -------- -------- ------ ------
LESS DISTRIBUTIONS FROM
Net investment income.............. (.155) (.1125) (.115) (.17) (.2225) (.2025) (.11) -- --
Net realized gain on securities.... (1.035) (1.175) (1.3996) (.8025) -- (.6425) -- (.095) --
Excess of net realized gain on
securities....................... -- -- (.3679) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------ ------
Total distributions................ (1.19) (1.2875) (1.8825) (.9725) (.2225) (.845) (.11) (.095) --
-------- -------- -------- -------- -------- -------- -------- ------ ------
Net asset value, end of period..... $15.10 $15.31 $16.26 $16.02 $15.47 $11.26 $13.15 $10.81 $9.37
========== ========== ========== ========== ========== ========== ========== ======== ========
TOTAL RETURN*...................... 7.18% 2.04% 14.27% 9.83% 39.90% (8.73%) 22.90% 16.51% (18.09%)
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
millions)........................ $2,302.3 $2,169.9 $2,065.7 $1,648.0 $1,311.5 $866.1 $767.8 $492.2 $196.3
Ratios to average net assets
(annualized)
Expenses......................... 1.09% 1.09% 1.14% 1.18% 1.26% 1.53% 1.63% 1.93% 2.82%
Net investment income (loss)..... 1.23% .89% .80% .91% 1.44% 1.79% 1.75% 1.30% (.09%)
Portfolio turnover rate............ 118% 164% 166% 134% 100% 99% 101% 63% 17%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUND
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period.......................... $15.77 $17.13 $15.54 $14.70 $11.49 $12.51 $10.49 $9.84 $11.44(2)
-------- -------- -------- -------- -------- -------- -------- ------ --------
INCOME FROM INVESTMENT OPERATIONS
Investment income................. .25 .45 .46 .435 .46 .47 .46 .40 .29
Expenses.......................... (.08) (.16) (.17) (.16) (.155) (.165) (.15) (.13) (.14)
-------- -------- -------- -------- -------- -------- -------- ------ --------
Net investment income............. .17 .29 .29 .275 .305 .305 .31 .27 .15
Net realized or unrealized gain or
loss on securities.............. 1.04 (.2125) 1.8775 1.2875 3.2225 (.9975) 2.00 .655 (1.685)
-------- -------- -------- -------- -------- -------- -------- ------ --------
Total from investment
operations...................... 1.21 .0775 2.1675 1.5625 3.5275 (.6925) 2.31 .925 (1.535)
-------- -------- -------- -------- -------- -------- -------- ------ --------
LESS DISTRIBUTIONS FROM
Net investment income............. (.165) (.275) (.2775) (.295) (.3175) (.325) (.29) (.24) (.065)
Net realized gain on securities... (1.595) (1.1625) (.30) (.4275) -- (.0025) -- (.035) --
-------- -------- -------- -------- -------- -------- -------- ------ --------
Total distributions............... (1.76) (1.4375) (.5775) (.7225) (.3175) (.3275) (.29) (.275) (.065)
-------- -------- -------- -------- -------- -------- -------- ------ --------
Net asset value, end of period.... $15.22 $15.77 $17.13 $15.54 $14.70 $11.49 $12.51 $10.49 $9.84
========== ========== ========== ========== ========== ========== ========== ======== ========
TOTAL RETURN*..................... 9.06% .51% 14.13% 10.85% 31.68% (5.84%) 22.38% 9.55% (13.48%)
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
millions)....................... $755.7 $712.9 $712.4 $591.0 $499.6 $366.6 $278.4 $168.0 $72.8
Ratios to average net assets
(annualized)
Expenses........................ 1.03% 1.02% 1.05% 1.09% 1.14% 1.37% 1.39% 1.57% 2.38%
Net investment income........... 2.39% 1.84% 1.76% 1.84% 2.29% 2.55% 2.81% 3.04% 2.64%
Portfolio turnover rate........... 61% 88% 51% 32% 42% 48% 26% 64% 4%
</TABLE>
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(1) Based on average month-end shares outstanding.
(2) The net asset value on April 14, 1987, the date the Fund commenced
operations.
* Total returns for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
6
<PAGE> 7
GOVERNMENT FUND
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31
APRIL 30, ---------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987(1)
-------- -------- -------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of period... $9.99 $11.80 $11.56 $11.47 $10.79 $11.46 $11.13 $11.08 $11.66(2)
-------- -------- -------- -------- -------- -------- --------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Investment income....... .39 .78 .8536 .97 1.012 1.073 1.16 1.09 .52
Expenses................ (.04) (.09) (.092) (.11) (.107) (.118) (.13) (.15) (.12)
-------- -------- -------- -------- -------- -------- --------- -------- --------
Net investment income... .35 .69 .7616 .86 .905 .955 1.03 .94 .40
Net realized and
unrealized gain or
loss on
securities............ .3443 (1.358) .4249 .1639 .6788 (.4421) .3274 .0436 (.58)
-------- -------- -------- -------- -------- -------- --------- -------- --------
Total from investment
operations............ .6943 (.668) 1.1865 1.0239 1.5838 .5129 1.3574 .9836 (.18)
-------- -------- -------- -------- -------- -------- --------- -------- --------
LESS DISTRIBUTIONS FROM
Net investment income... (.3443) (.6878) (.7615) (.8639) (.9038) (.9579) (1.0274) (.9336) (.40)
Net realized gain on
securities............ -- -- (.185) (.07) -- (.225) -- -- --
Excess of book-basis net
realized gains on
securities............ (.4542) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------- -------- --------
Total distributions..... (.3443) (1.142) (.9465) (.9339) (.9038) (1.1829) (1.0274) (.9336) (.40)
-------- -------- -------- -------- -------- -------- --------- -------- --------
Net asset value, end of
period................ $10.34 $9.99 $11.80 $11.56 $11.47 $10.79 $11.46 $11.13 $11.08
=========== ========== ========== ========== ========== =========== =========== ========== ==========
TOTAL RETURN*........... 7.11% (5.45%) 10.55% 9.32% 15.16% 4.94% 12.87% 9.20% (1.56%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in
millions)............. $329.8 $335.0 $370.2 $282.0 $189.0 $140.9 $101.0 $70.6 $21.6
Ratios to average net
assets (annualized)
Expenses.............. .85% .89% .89% .95% .96% 1.09% 1.20% 1.44% 2.12%
Net investment
income.............. 7.04% 7.06% 7.35% 7.46% 8.15% 8.78% 9.29% 8.55% 7.13%
Portfolio turnover
rate.................. 114% 256% 218% 112% 39% 28% 29% 51% 52%
</TABLE>
--------------------------------------------------------------------------------
(1) Based on average month-end shares outstanding.
(2) The net asset value on April 14, 1987, the date the Fund commenced
operations.
* Total returns for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
7
<PAGE> 8
MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
(UNAUDITED)
SIX
MONTHS
ENDED YEAR ENDED OCTOBER 31
APRIL 30, -------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................... $12.89 $14.07 $13.03 $12.84 $12.18 $12.37 $12.26 $11.91(1)
-------- -------- ------- ------- ------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income.................. .43 .84 .859 .875 .905 .91 .92 .25
Expenses........................... (.06) (.13) (.141) (.15) (.145) (.16) (.23) (.07)
Expense reimbursement.............. -- -- .01 -- -- .01 .08 .01
-------- -------- ------- ------- ------- ------- ------- --------
Net investment income.............. .37 .71 .728 .725 .76 .76 .77 .19
Net realized and unrealized gain or
loss on securities............... .434 (1.182) 1.038 .2175 .648 (.185) .10 .315
-------- -------- ------- ------- ------- ------- ------- --------
Total from investment operations... .804 (.472) 1.766 .9425 1.408 .575 .87 .505
-------- -------- ------- ------- ------- ------- ------- --------
DISTRIBUTIONS FROM NET INVESTMENT
INCOME........................... (.354) (.708) (.726) (.7525) (.748) (.765) (.76) (.155)
-------- -------- ------- ------- ------- ------- ------- --------
Net asset value, end of period..... $13.34 $12.89 $14.07 $13.03 $12.84 $12.18 $12.37 $12.26
========== ========== ========= ========= ========= ========= ========== ========
TOTAL RETURN*...................... 5.77% (3.38%) 13.84% 7.57% 11.79% 4.77% 7.31% 4.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
millions)........................ $113.4 $112.1 $95.9 $60.3 $42.5 $37.1 $24.7 $6.4
Ratios to average net assets
(annualized)
Expenses......................... .99% .99% .96% 1.14% 1.15% 1.25% 1.25% 1.91%
Expenses, without expense
reimbursement.................. -- -- 1.04% -- -- 1.28% 1.93% 2.22%
Net investment income............ 5.72% 5.27% 5.29% 5.56% 6.08% 6.21% 6.28% 5.55%
Net investment income, without
expense reimbursement.......... -- -- 5.21% -- -- 6.18% 5.60% 5.24%
Portfolio turnover rate............ 5% 4% 4% 6% 1% 4% 0% 5%
</TABLE>
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period.......................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00(2)
-------- -------- -------- -------- ------- ------- ------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income................. .0294 .0388 .033 .0424 .0647 .0839 .0946 .068
Expenses.......................... (.0089) (.0184) (.0174) (.016) (.014) (.014) (.012) (.015)
Expense reimbursement............. .0038 .0084 .0074 .006 .0041 .004 .002 .007
-------- -------- -------- -------- ------- ------- ------- ---------
Net investment income............. .0243 .0288 .023 .0324 .0548 .0739 .0846 .06
Net realized and unrealized gain
or loss on securities........... -- -- -- -- -- -- -- (.0037)
-------- -------- -------- -------- ------- ------- ------- ---------
Total from investment
operations...................... .0243 .0288 .023 .0324 .0548 .0739 .0846 .0563
-------- -------- -------- -------- ------- ------- ------- ---------
DISTRIBUTIONS FROM NET INVESTMENT
INCOME.......................... (.0243) (.0288) (.023) (.0324) (.0548) (.0739) (.0846) (.0563)
-------- -------- -------- -------- ------- ------- ------- ---------
Net asset value, end of period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
========== ========== ========== ========== ========= ========= ========== =========
TOTAL RETURN*..................... 2.43% 2.91% 2.31% 3.29% 5.65% 7.61% 8.80% 5.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
millions)....................... $54.5 $56.4 $59.2 $72.5 $84.8 $95.7 $66.2 $21.1
Ratios to average net assets
(annualized)
Expenses........................ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% .94%
Expenses, without expense
reimbursement................. 1.77% 1.84% 1.74% 1.60% 1.41% 1.36% 1.18% 1.76%
Net investment income........... 4.83% 2.87% 2.30% 3.27% 5.53% 7.37% 8.51% 7.10%
Net investment income, without
expense reimbursement......... 4.06% 2.03% 1.56% 2.67% 5.12% 7.01% 8.33% 6.28%
</TABLE>
--------------------------------------------------------------------------------
(1) The net asset value on July 13, 1988, the date the Fund commenced
operations.
(2) The net asset value on December 15, 1987, the date the Fund commenced
operations.
* Total returns for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
8
<PAGE> 9
--------------------------------------------------------------------------------
INTRODUCTION
--------------------------------------------------------------------------------
The Trust is a duly organized Massachusetts business trust with ten
separate Portfolios, five of which are described in this Prospectus -- the
Growth Fund, the Growth and Income Fund, the Government Fund, the Municipal Bond
Fund and the Money Market Fund. Each Fund has separate assets and liabilities
and a separate net asset value per share. Shares of a Fund represent an interest
only in the assets of that Fund. Since market risks are inherent in all
securities to varying degrees, assurance cannot be given that the goal of any of
the Funds will be met.
In addition to the five Portfolios described in this Prospectus, the Trust
offers shares in five Portfolios through other Prospectuses. Three of the
Portfolios have goals and investment policies like certain of the Funds
described in this Prospectus -- Common Sense II Growth Fund, Common Sense II
Growth and Income Fund and Common Sense II Government Fund ("Common Sense II
Funds"). The Common Sense II Funds offer Class A and Class B shares. Class A
shares are offered at net asset value per share plus a maximum initial sales
charge of 5.50% for the Growth II Fund and the Growth and Income II Fund and
4.75% for the Government II Fund and are subject to an annual service fee at the
rate of 0.25% of their average daily net assets attributable to such class of
shares. Class B shares are offered at the next determined net asset value, and
are subject to a contingent deferred sales charge if redeemed within five years
and pay a combined annual distribution fee and service fee at the rate of 1% of
its average daily net assets attributable to such class of shares. The
investment performance of the Common Sense II Funds may be expected to differ
from the investment performance of the Funds described in this Prospectus. A
prospectus of the Common Sense II Funds may be obtained from the Distributor or
PFS Investments.
--------------------------------------------------------------------------------
GOALS AND INVESTMENT POLICIES
--------------------------------------------------------------------------------
Although each Fund of the Trust has a different goal which it pursues
through separate investment policies described below, the Trust will not
purchase any securities issued by any company primarily engaged in the
manufacture of alcohol or tobacco. The differences in goals and investment
policies among the Funds can be expected to affect the return of each Fund and
the degree of market and financial risk to which each Fund is subject. The goal
and investment policies, the percentage limitations, and the kinds of securities
in which each Fund may invest are generally not fundamental policies and may be
changed by the Trustees, unless expressly governed by those limitations as
described under "Investment Practices and Risks" which can be changed only by
action of the shareholders. If there is a change in the goal of any Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs.
GROWTH FUND
The Growth Fund seeks capital appreciation through investments in common
stocks and options on common stocks.
Portfolio securities are selected by the Adviser using an investment
research process blending traditional security analysis and quantitative
security selection techniques. Such process includes focusing on securities of
companies that the Adviser believes either: (1) experienced above-average and
consistent long-term growth of earnings and have excellent prospects for
outstanding future growth in earnings; (2) are presently experiencing or
expected to have a material increase in profits and sales; (3) are undervalued
either in that such securities are selling at prices that do not reflect the
current market value of its securities and there is reason to expect realization
of this potential in the form of increased equity values or that the potential
improving prospects of the security is not reflected in the price of the
security; (4) will experience a fundamental change in structure that potentially
may result in higher earnings; or (5) will produce new products, new services or
new processes. The Fund may invest in options and other securities that have
above average volatility of price movement. Because prices of common stocks,
options and other investments fluctuate, the value of an investment in the Fund
will vary based upon the Fund's investment performance. The Fund attempts to
reduce overall exposure to risk from declines in securities prices by spreading
its investments over many different companies in a variety of industries and by
using stock index options and stock index futures and options thereon, as
discussed in the Statement of Additional Information. There is no assurance that
the Fund will be successful in achieving its goal.
The Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets the Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. Such
investments may be increased by the Fund, up to 100% of its assets, when deemed
appropriate by the Advisers for temporary defensive purposes. A description of
the ratings of commercial paper and bonds is contained in the Appendix to the
Statement of Additional Information. Short-term investments may include
repurchase agreements with banks or broker-dealers. See "Investment Practices
and Risks -- Repurchase Agreements."
Certain policies of the Fund, such as purchasing and selling options on
stocks, purchasing options on stock indices and purchasing stock index futures
contracts and options thereon inherently involve greater than ordinary
investment risk and the likelihood of more volatile price fluctuations. Options,
futures contracts and related options are described in "Investment Practices and
Risks -- Options, Futures Contracts and Related Options" and the Statement of
Additional Information. The Fund may also invest up to 20% of its total assets
in securities of foreign issuers and in investment companies. See "Investment
Practices and Risks -- Securities of Foreign Issuers" and "Investment in
Investment Companies." Since the Fund may take substantial risks in seeking its
goal of capital appreciation, it is not suitable for investors unable or
unwilling to assume such risks.
9
<PAGE> 10
GROWTH AND INCOME FUND
The Growth and Income Fund seeks reasonable growth and income through
investments in equity securities including common and preferred stocks and
securities convertible into common and preferred stocks.
Portfolio securities are selected by the Adviser using an investment
research process blending traditional security analysis and quantitative
security selection techniques. Such process includes focusing on securities of
companies that the Adviser believes either: (1) experienced above-average and
consistent long-term growth of earnings and have excellent prospects for
outstanding future growth in earnings; (2) are presently experiencing or
expected to have a material increase in profits and sales; (3) are undervalued
either in that such securities are selling at prices that do not reflect the
current market value of its securities and there is reason to expect realization
of this potential in the form of increased equity values or that the potential
improving prospects of the security is not reflected in the price of the
security; (4) will experience a fundamental change in structure that potentially
may result in higher earnings; or (5) will produce new products, new services or
new processes. In general, the Fund intends to invest primarily in securities
that have yielded a dividend or interest income to security holders within the
past twelve months; however, it may invest in non-income producing investments
held for anticipated increase in value. There is no assurance that the Fund will
be successful in achieving its goal.
Convertible securities rank senior to common stocks in a corporation's
capital structure. They are consequently of higher quality and entail less risk
than the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as fixed income security. The Fund may purchase
convertible securities rated Ba or lower by Moody's Investors Services, Inc.
("Moody's") or BB or lower by Standard & Poor's Corporation ("S&P") or in
non-rated securities considered by the Adviser to be of comparable quality.
Although the Fund selects these securities primarily on the basis of their
equity characteristics, investors should be aware that debt securities rated in
these categories are considered high risk securities; the rating agencies
consider them speculative, and payment of interest and principal is not
considered well assured. To the extent that such convertible securities are
acquired by the Fund there is a greater risk as to the timely payment of the
principal of, and timely payment of interest or dividends on, such securities
than in the case of higher rated convertible securities.
Although the portfolio turnover rate will not be considered a limiting
factor, the Fund does not intend to engage in trading directed at realizing
short-term profits. Nevertheless, changes in the portfolio will be made promptly
when determined to be advisable by reason of developments not foreseen at the
time of the investment decision, and usually without reference to the length of
time the security has been held.
The Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets the Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. Such
investments may be increased by the Fund, up to 100% of its assets, when deemed
appropriate by the Adviser for temporary defensive purposes. Short-term
investments may include repurchase agreements with banks or broker-dealers. See
"Investment Practices and Risks -- Repurchase Agreements." The Fund may also
invest up to 20% of its total assets in securities of foreign issuers and in
investment companies. See "Investment Practices and Risks -- Securities of
Foreign Issuers" and "Investment in Investment Companies." The Fund may engage
in portfolio management strategies and techniques involving options, futures
contracts and options on futures. Options, futures contracts and related options
are described in "Investment Practices and Risks -- Options, Futures Contracts
and Related Options" and the Statement of Additional Information.
GOVERNMENT FUND
The goal of the Government Fund is to seek to provide investors with a high
current return consistent with preservation of capital. The Fund invests
primarily in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. In order to hedge against changes in interest
rates, the Fund may purchase or sell options on U.S. Government securities and
engage in transactions involving interest rate futures contracts and options on
such contracts. See "Investment Practices and Risks -- Options, Futures
Contracts and Related Options" and the Statement of Additional Information for
further discussion. The Fund may invest in repurchase agreements fully
collateralized by U.S. Government securities. The Fund may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices and Risks -- Repurchase Agreements" and "Forward Commitments." The
Fund is not designed for investors seeking long-term capital appreciation.
Shares of the Fund are not insured or guaranteed by the U.S. Government, its
agencies or instrumentalities or by any other person or entity. There is no
assurance that the Fund will be successful in achieving its goal.
The Fund may also engage in transactions involving obligations issued or
guaranteed 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. Government
(such as Government National Mortgage Association ("GNMA" Certificates), (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government, (c) discretionary authority of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality. Agencies
and instrumentalities include, but are not limited to: Federal Land Banks,
Farmers Home Administration, Central Bank for Cooperatives, Federal Intermediate
Credit Banks, Federal Home Loan Banks and Federal National Mortgage Association.
The Fund expects in any event that at all times at least 80% of its assets will
be invested in U.S. Government securities.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities include: (1) U.S. Treasury obligations, which differ in their
interest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturity of one to ten years), and
U.S. Treasury bonds (generally maturities of greater than ten years), including
the principal components or the interest components issued by the U.S.
Government under the Separate Trading of Registered Interest and Principal of
Securities program (i.e., "STRIPS"), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, including
10
<PAGE> 11
government guaranteed mortgage-related securities, some of which are backed by
the full faith and credit of the U.S. Treasury, some of which are supported by
the right of the issue to borrow from the U.S. Government and some of which are
backed only by the credit of the issuer itself.
Mortgage loans made by banks, savings and loan institutions, and other
lenders are often assembled into pools, which are issued or guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this Prospectus calls
"mortgage-related securities."
Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned corporate instrumentality
of the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and
privately-owned corporation, and FHLMC, a federal corporation, are
instrumentalities of the United States. The securities and guarantees of FNMA
and FHLMC are not backed, directly or indirectly, by the full faith and credit
of the United States. Although the Secretary of the Treasury of the United
States has discretionary authority to lend FNMA up to $2.25 billion outstanding
at any time, neither the United States nor any agency thereof is obligated to
finance FNMA's or FHLMC's operations or to assist FNMA or FHLMC in any other
manner. Securities of FNMA and FHLMC include those issued in principal only or
interest only components.
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. Thus, the securityholders frequently receive prepayments of principal,
in addition to the principal which is part of the regular monthly payment. A
borrower is more likely to prepay a mortgage which bears a relatively high rate
of interest. This means that in times of declining interest rates, some of the
Fund's higher yielding securities might be converted to cash, and the Fund will
be forced to accept lower interest rates when that cash is used to purchase
additional securities. The increased likelihood of prepayment when interest
rates decline also limits market price appreciation of mortgage-related
securities. If the Fund buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a loss to the Fund of up to
the amount of the premium paid since only timely payment of principal and
interest is guaranteed.
In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of approximately four
to six years. Duration is a measure of the expected life of a debt security that
was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a debt security's yield, coupon interest
payments, final maturity and call features into one measure.
Duration is an objective computation which allows an investment manager to
make certain predictions regarding how the value of a portfolio will respond to
changes in interest rate levels. Generally, larger measures of duration
correspond to larger expected price changes in securities and portfolios. For
example, a portfolio consisting entirely of treasury notes with a remaining
maturity of five years would have a duration of about 4.5 years. A one percent
change in interest rate levels should impact the securities prices and portfolio
net asset value inversely to the change in direction in interest rates, by about
4.5%. A portfolio consisting entirely of treasury notes with a remaining
maturity of ten years would have a duration of about 7.5 years. Here, a one
percent change in interest rate levels should impact the securities prices and
portfolio net asset value inversely to the change in direction in interest
rates, by about seven to eight percent. This example, is intended for
demonstration purposes only; however, and is not intended to approximate how the
Fund's portfolio will respond to changes in interest rates. The Fund's
investment portfolio may include securities with differing maturities and
quality levels and the interest rates on those instruments may not all change by
the same amount at the same time as rates rise or fall generally in the
marketplace. Also, the treasury securities described in the example cannot be
retired prior to maturity, while some of the securities in the Fund's portfolio
can. These factors among others can cause the Fund's investment portfolio to
respond somewhat differently to changes in interest rates than shown in the
example.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest, the shorter the
maturity or the higher the yield-to-maturity of a debt security, the shorter its
duration.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-
11
<PAGE> 12
through securities. The stated final maturity of such securities is generally 30
years, but current prepayment rates are more critical in determining the
securities' interest rate exposure. In these and other similar situations, the
Adviser will use more sophisticated analytical techniques that incorporate the
economic life of a security into the determination of its interest rate
exposure. At October 31, 1994, the average maturity of the debt securities owned
by the Fund, as adjusted for investments in options, futures contracts and
related options, was approximately 6.20 years and the duration of the portfolio
was approximately 4.71 years. The duration is likely to vary from time to time
as the Adviser pursues its strategy of striving to maintain an active balance
between seeking to maximize income and endeavoring to maintain the value of the
Fund's capital. Thus, the objective of providing high current return consistent
with preservation of capital to shareholders is tempered by seeking to avoid
undue market risk and thus provide reasonable total return as well as high
distributed return. There is, of course, no assurance that the Adviser will be
successful in achieving such results for the Fund.
The Fund generally purchases debt securities at a premium over the
principal or face value in order to obtain higher current income. The amount of
any premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Fund's net asset value. Any such decline is realized for accounting purposes
as a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.
The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Fund reduces its potential
for capital appreciation on debt securities if interest rates decline. Thus if
market prices of debt securities increase, the Fund receives less total return
from its optioned positions than it would have received if the options had not
been sold. The purpose of selling options is intended to improve the Fund's
total return and not to "enhance" monthly distributions. During periods when the
Fund has capital loss carry forwards any capital gains generated from such
transactions will be retained in the Fund. See "Investment Practices and
Risks -- Options, Futures Contracts and Related Options," "Dividends,
Distributions and Taxes" and the Statement of Additional Information for further
discussion.
The purchase and sale of options may result in a high portfolio turnover
rate. The Fund's turnover rate is shown in the table of Financial Highlights.
See "Investment Practices and Risks -- Portfolio Turnover."
MUNICIPAL BOND FUND
The goal of the Municipal Bond Fund is to provide as high a level of
current interest income exempt from federal income tax as is consistent with the
preservation of capital. Because the value of and yield on Municipal Bonds
fluctuate, there can be no assurance that the Fund's goal will be achieved.
The Fund seeks to achieve its objective by investing in a diversified
portfolio of obligations issued by or on behalf of states, territories or
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which,
in the opinion of bond counsel for the issuer, is exempt from federal income
tax. See "Municipal Bonds." It is a fundamental policy of the Fund under normal
conditions to invest at least 80% of its assets in Municipal Bonds which are
considered tax-exempt. The Fund does not independently evaluate the tax-exempt
status of the Municipal Bonds in which it invests. The Fund invests principally
in Municipal Bonds rated at the time of purchase within the three highest grades
assigned by Moody's or S & P. Ratings at the time of purchase determine which
securities may be acquired, and a subsequent reduction in rating does not
require the Fund to dispose of a security. At least 75% of the Fund's total
assets will be invested in Municipal Bonds rated "A" or higher. The Fund may
invest up to 25% of its total assets in Municipal Bonds rated "Baa" by Moody's
or "BBB" by S & P or any non-rated Municipal Bonds having characteristics
similar to Municipal Bonds rated "Baa" or "BBB." Municipal Bonds rated BBB or
Baa may have speculative characteristics so that changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade Municipal
Bonds. The market prices of Municipal Bonds generally fluctuate with changes in
interest rates so that the value of investments in such securities can be
expected to decrease as interest rates rise and increase as interest rates fall.
Because investment in lower rated securities involves greater investment risks,
achievement of the Fund's goal may be more dependent on the Adviser's credit
analysis than would be the case if the Fund invested only in higher rated
securities. Non-rated Municipal Bonds are not necessarily of lower quality than
rated Municipal Bonds, but the market for rated Municipal Bonds is often
broader. The Fund may seek to hedge against changes in interest rates through
transactions in listed futures contracts related to U.S. Government securities,
Municipal Bonds or to an index of Municipal Bonds, and options on such
contracts. See the Statement of Additional Information for discussion of futures
contracts and options.
On a temporary basis, due to market conditions or pending investment in
Municipal Bonds, the Fund may invest up to 100% of its assets in "Temporary
Investments" consisting of short-term municipal notes rated MIG 1 through MIG 4
by Moody's or SP-1 or SP-2 by S & P; tax-exempt commercial paper rated P-1 or
P-2 in the case of Moody's or A-1 or A-2 by S & P; securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; corporate
bonds and debentures; certificates of deposit and bankers' acceptances of
domestic banks with assets of $500 million or more and having deposits insured
by the Federal Deposit Insurance Corporation; commercial paper and repurchase
agreements. The income on corporate bonds and debentures, certificates of
deposit and bankers' acceptances, commercial paper and repurchase agreements is
taxable. See the Appendix in the Statement of Additional Information for
discussion of ratings of commercial paper and bonds.
The Fund may invest up to 10% of its net assets in illiquid securities
which include Municipal Bonds issued in limited placements under which the Fund
represents that it is purchasing for investment purposes only, repurchase
agreements maturing in more than seven days and other securities subject to
legal or contractual restrictions on resale. Municipal Bonds acquired in limited
placements generally may be resold only in a privately negotiated transaction to
one or more other institutional investors. Restricted securities are generally
purchased at a discount from the market price of
12
<PAGE> 13
unrestricted securities of the same issuer. Investments in restricted securities
are not readily marketable without some time delay. A Fund position in
restricted securities might adversely affect the liquidity and marketability of
such securities. Such limitation could result in the Fund's inability to realize
a favorable price upon disposition, and in some cases might make disposition of
such securities at the time desired by the Fund impossible. The 10% limitation
applies at the time the purchase commitment is made. See "Investment Practices
and Risks -- Repurchase Agreements."
Variations in the quality and maturity of the Fund's portfolio investments
can be expected to affect the Fund's yield and the degree of market and
financial risk to which the Fund is subject. Generally, Municipal Bonds with
longer maturities tend to produce higher yields and are subject to greater
market fluctuations as a result of changes in interest rates than Municipal
Bonds with shorter maturities and lower yields. The market value of Municipal
Bonds generally rises when interest rates decline and falls when interest rates
rise. Generally lower rated Municipal Bonds provide a higher yield than higher
rated Municipal Bonds of similar maturity but are subject to greater market and
financial risk. The Fund is not limited as to the maturities of the Municipal
Bonds in which it invests. Such securities may have remaining maturities of up
to 30 years or more.
MUNICIPAL BONDS. Municipal Bonds include debt obligations of a state,
territory or a possession of the United States and the District of Columbia and
their political subdivisions, agencies and instrumentalities issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, highways, bridges, schools, hospitals,
housing, mass transportation, streets and water and sewer works. Other public
purposes for which Municipal 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. Certain types of Municipal
Bonds are issued to obtain funding for privately operated facilities.
Many new issues of Municipal Bonds are sold on a "when issued" basis. While
the Fund has ownership rights to the bonds, the Fund does not have to pay for
them until they are delivered, normally 15 to 45 days later. To meet that
payment obligation, the Fund sets aside with the custodian sufficient cash or
high grade securities equal to the amount that will be due. When the Fund
engages in when-issued and delayed delivery transactions, the Fund relies on the
buyer or seller, as the case may be, to consummate the trade. Failure of the
buyer or seller to do so may result in the Fund missing the opportunity of
obtaining a price considered to be advantageous. See "Investment Practices and
Risks -- Delayed Delivery and When-Issued Securities."
The yields of Municipal Bonds depend on, among other things, general money
market conditions, general conditions of the Municipal Bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of Moody's and S & P represent their opinions of the quality of the
Municipal Bonds they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Municipal Bonds of the same maturity and coupon with different
ratings may have the same yield. A description of the ratings is included in the
Statement of Additional Information.
Among the various types of Municipal Bonds are general obligation bonds,
revenue or special obligation bonds, industrial development bonds, pollution
control bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or
facility -- tolls from a toll-bridge, for example. Industrial development
revenue bonds are a specific type of revenue bond backed by the credit and
security of a private user. The Fund's ability to achieve its goal depends to a
great extent on the ability of these various issuers to meet their scheduled
payments of principal and interest.
The Fund considers investments in Municipal Bonds not to be subject to
concentration policies and may invest a relatively high percentage of its assets
in Municipal Bonds issued by entities having similar characteristics. The
issuers may be located in the same geographic area or may pay their interest
obligations from revenue of similar projects such as hospitals, utility systems
and housing finance agencies. This may make the Fund's investments more
susceptible to similar economic, political or regulatory occurrences. As the
similarity in issuers increases, the potential for fluctuation in the Fund's per
share net asset value also increases. The Fund may invest more than 25% of its
total assets in industrial development revenue bonds, but it does not intend to
invest more than 25% of its assets in industrial development revenue bonds
issued for companies in the same industry or state. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
issuers of any such related projects or facilities experience financial
difficulties.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. It may be expected that similar proposals may be
introduced in the future. If any such proposals were to be enacted, the ability
of the Fund to pay "exempt-interest" dividends may be adversely affected and the
Fund would re-evaluate its investment objective and policies and consider
changes in its structure.
TAX LEGISLATION. Interest on certain "private-activity bonds" issued after
August 7, 1986, is an item of tax preference subject to the alternative minimum
tax on individuals and corporations. THE TRUST WILL NOT PURCHASE ANY PRIVATE
ACTIVITY BONDS SUBJECT TO THE ALTERNATIVE MINIMUM TAX.
The Omnibus Budget Reconciliation Act of 1993, which was signed into law on
August 10, 1993, included certain provisions intended to prevent the conversion
of ordinary income into capital gain. One such provision affects tax-exempt
securities by requiring that gains on certain debt instruments purchased at a
market discount be treated as ordinary income to the extent of the accrued
market discount. The new law extends this treatment to market discount bonds
issued before July 18, 1984 and to tax-exempt bonds, if the bonds are acquired
after April 30, 1993. Such bonds were exempt from the market discount rules
under prior law.
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MONEY MARKET FUND
The Money Market Fund seeks protection of capital and a high level of
current income through investments in money market securities. Such securities
may include obligations of the U.S. Government, its agencies and
instrumentalities, bank obligations, commercial paper and repurchase agreements
secured by obligations of the U.S. Government, its agencies and
instrumentalities. Such securities are described below and repurchase agreements
are described under the caption "Investment Practices and Risks -- Repurchase
Agreements."
The Fund seeks to maintain a constant net asset value of $1.00 per share by
investing in a diversified portfolio of money market instruments maturing within
13 months with a dollar-weighted average maturity of 90 days or less. It seeks
high current income from these short-term investments to the extent consistent
with protection of capital. Of course, there can be no guarantee that the Fund
will achieve its objective or be able at all times to maintain its net asset
value per share at $1.00. In addition, the daily dividend rate paid by the Fund
may be expected to fluctuate. The Fund uses the amortized cost method for
valuing portfolio securities. See "Purchase of Shares."
OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS AGENCIES. The Fund may invest in
obligations issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, and instrumentalities which are supported by any of
the following: (a) the full faith and credit of the U.S. Government, (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government, (c) discretionary authority of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality. Such
agencies or instrumentalities include, but are not limited to, FNMA, GNMA,
Federal Land Banks, and the Farmer's Home Administration.
BANK OBLIGATIONS. The Fund may invest in negotiable time deposits,
certificates of deposit and bankers' acceptances which are obligations of
domestic banks having total assets in excess of $1 billion as of the date of
their most recently published financial statements. The Fund is also authorized
to invest up to 5% of its total assets in certificates of deposit issued by
domestic banks having total assets of less than $1 billion, provided that the
principal amount of the certificate of deposit acquired by the Fund is insured
in full by the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER. The Fund may invest in short-term obligations of
companies which at the time of investment are (a) rated in the two highest
categories by S & P (A-1 and A-2) or by Moody's (Prime-1 and Prime-2), or (b) if
not rated, are in the opinion of the Adviser, of comparable quality. Commercial
paper consists of short-term (usually from 1 to 270 days) unsecured promissory
notes issued by corporations in order to finance their current operations. (See
the Statement of Additional Information for an explanation of these ratings.)
The Fund's current policy is to limit investments in commercial paper to
obligations rated A-1 or Prime-1.
--------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RISKS
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
broker-dealers or domestic banks. A repurchase agreement is a short-term
investment in which the purchaser (e.g., the Fund) acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time and
set price, thereby determining the yield during the purchaser's holding period.
Repurchase agreements involve certain risks in the event of a default by the
other party. No Fund will invest in repurchase agreements maturing in more than
seven days if any such investment, together with any other illiquid securities
held by such Fund, exceeds 10% of the value of the Fund's net assets. See the
Statement of Additional Information.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for a Fund than would be
available to a Fund investing separately. The manner in which the joint account
is managed is subject to conditions set forth in the SEC order authorizing this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS (ALL FUNDS EXCEPT MONEY
MARKET FUND). The Funds expect to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of a Fund's
portfolio and the Adviser's expectations concerning the securities markets.
For example, in times of stable or rising security prices, a Fund generally
seeks to obtain maximum exposure to the securities markets, i.e., to be "fully
invested." Nevertheless, even when a Fund is fully invested, prudent management
requires that at least a small portion of assets be available as cash to honor
redemption requests and for other short-term needs. A Fund may also have cash on
hand that has not yet been invested. The portion of a Fund's assets that is
invested in cash equivalents does not fluctuate with security market prices, so
that, in times of rising market prices, a Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
futures contracts, however, a Fund can compensate for the cash portion of its
assets and obtain equivalent performance to investing 100% of its assets in
equity securities.
If the Adviser forecasts a market decline, a Fund may take a defensive
position, reducing its exposure to the securities markets by increasing its cash
position. By selling futures contracts instead of portfolio securities, a
similar result can be achieved to the extent that the performance of the futures
contracts correlates to the performance of a Fund's portfolio securities. Sale
of futures contracts could frequently be accomplished more
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rapidly and at less cost than the actual sale of securities. Once the desired
hedged position has been effected, a Fund could then liquidate securities in a
more deliberate manner, reducing its futures position simultaneously to maintain
the desired balance, or it could maintain the hedged position.
As an alternative to selling futures contracts, a Fund can purchase puts
(or futures puts) to hedge the portfolio's risk in a declining market. Since the
value of a put increases as the index declines below a specified level, the
portfolio's value is protected against a market decline to the degree the
performance of the index correlates with the performance of a Fund's investment
portfolio. If the market remains stable or advances, a Fund can refrain from
exercising the put and its portfolio will participate in the advance, having
incurred only the premium cost for the put.
In many cases, a Fund could achieve results similar to those available from
options and futures contracts without investing in the options and futures
markets. For example, instead of hedging portfolio securities it owned with
options and futures contracts, the Fund could sell the securities and invest the
proceeds in money market instruments. In other cases, however, the options and
futures markets provide investment or risk management opportunities that are not
available from direct investments in securities. In addition, some strategies
can be implemented with greater ease and at lower cost by utilizing the options
and futures markets.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments may be advantageous to a
Fund, if the Adviser is not successful in employing such instruments in managing
a Fund's investments, a Fund's performance will be worse than if a Fund did not
make such investments. In addition, a Fund would pay commissions and other costs
in connection with such investments, which may increase a Fund's expenses and
reduce its return.
The Government Fund, the Growth and Income Fund and the Growth Fund may
write or purchase options in privately negotiated transactions ("OTC Options")
as well as listed options. OTC Options can be closed out only by agreement with
the other party to the transaction. Any OTC Option purchased by a Fund will be
considered an illiquid security. Any OTC Option written by a Fund will be with a
qualified dealer pursuant to an agreement under which the Fund may repurchase
the option at a formula price. Such options will be considered illiquid to the
extent that the formula price exceeds the intrinsic value of the option. Each
Fund may not purchase or sell futures contracts or related options for which the
aggregate initial margin and premiums exceed five percent of the fair market
value of the Fund's assets. In order to prevent leverage in connection with the
purchase of futures contracts thereon by the Fund, an amount of cash, cash
equivalents or liquid high grade debt securities equal to the market value of
the obligation under the futures contracts (less any related margin deposits)
will be maintained in a segregated account with the Custodian. A Fund may not
invest more than 10% of its net assets in illiquid securities and repurchase
agreements which have a maturity of longer than seven days. A more complete
discussion of the potential risks involved in transactions involving options or
futures contracts and related options, is contained in the Statement of
Additional Information.
SECURITIES OF FOREIGN ISSUERS. The Growth Fund and the Growth and Income
Fund may invest up to 20% of the value of their total assets in securities of
foreign governments and companies of developed and emerging market countries.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Since each Fund may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of investments in the portfolio and the accrued
income and unrealized appreciation or depreciation of investments. Changes in
foreign currency rates relative to the U.S. dollar will affect the U.S. dollar
value of the Fund's assets denominated in that currency and the Fund's yield on
such assets.
Each Fund may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR, and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. Each Fund may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by the Fund may be subject to foreign withholding taxes, which
would reduce the Fund's total return on such investments and the amounts
available for distributions by the Fund to its shareholders. See "Dividends,
Distributions and Taxes." Foreign financial markets, while growing in volume,
have, for the most part, substantially less volume than United States markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. The foreign markets
also have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when assets
of the Fund are not invested and no return is earned thereon. The inability of
each Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or,
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if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage commissions,
are generally higher than with transactions in United States securities. In
addition, each Fund will incur cost in connection with conversions between
various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there are in the United States. These risks may be intensified in the case
of investments in developing or emerging markets. In many developing markets,
there is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States. The foreign securities markets of many of the countries in which the
Fund may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the United States.
The Growth Fund and the Growth and Income Fund may invest in the securities
of developing countries. A developing country generally is considered to be a
country that is in the initial stages of its industrialization cycle. Investing
in the equity and fixed-income markets of developing countries involves exposure
to economic structures that are generally less diverse and mature, and to
political systems that can be expected to have less stability, than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of the more mature
economies of developed countries; however, such markets often have provided
higher rates of return to investors.
One or more of the risks discussed above could affect adversely the economy
of a developing market or a Fund's investments in such a market. In Eastern
Europe, for example, upon the accession to power of Communist regimes in the
past, the governments of a number of Eastern European countries expropriated a
large amount of property. The claims of many property owners against those
governments were never finally settled. There can be no assurance that any
investments that the Fund might make in such emerging markets would not be
expropriated, nationalized or otherwise confiscated at some time in the future.
In such an event, the Fund could lose its entire investment in the market
involved. Moreover, changes in the leadership or policies of such markets could
halt the expansion or reverse the liberalization of foreign investment policies
now occurring in certain of these markets and adversely affect existing
investment opportunities.
FORWARD COMMITMENTS (GOVERNMENT FUND). The Fund may purchase or sell U.S.
Government securities on a "when-issued" or "delayed delivery" basis ("Forward
Commitments"). These transactions occur when securities are purchased or sold by
the Fund with payment and delivery taking place in the future, frequently a
month or more after such transactions. The price is fixed on the date of the
commitment, and the seller continues to accrue interest on the securities
covered by the Forward Commitment until delivery and payment take place. At the
time of settlement, the market value of the securities may be more or less than
the purchase or sale price.
The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or before
the settlement date in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction; should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure.
The Fund maintains a segregated account (which is marked to market daily)
of cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase or sell continues.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend portfolio securities to
unaffiliated brokers, dealers and financial institutions provided that (a)
immediately after any such loan, the value of the securities loaned does not
exceed 10% of the total value of that Fund's assets, and (b) any securities loan
is collateralized in accordance with applicable regulatory requirements. The
Adviser believes the risk of loss on such transactions is slight, because, if a
borrower was to default for any reason, the collateral should satisfy the
obligation. See the Statement of Additional Information.
VARIABLE RATE DEMAND NOTES (MUNICIPAL BOND FUND). The Fund may invest in
variable rate demand notes ("VRDNs") which are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and which are
subject to an unconditional right of demand to receive payment of the principal
balance plus accrued interest either at any time or at specified intervals not
exceeding one year and in either case upon no more than seven days' notice. The
interest rates are adjustable at intervals ranging from daily ("floating rate")
to up to one year to some prevailing market rate for similar investments, such
adjustment formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.
The Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days.
The Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.
STAND-BY COMMITMENTS (MUNICIPAL BOND FUND). The Fund may acquire stand-by
commitments with respect to Municipal Bonds held by it. Under a stand-by
commitment, a bank or dealer from which Municipal Bonds are acquired agrees to
purchase from the Fund, at the Fund's option, the Municipal Bonds at a specified
price. Such commitments are sometimes called "liquidity puts."
The amount payable to the Fund upon its exercise of a stand-by commitment
is normally (i) the Fund's acquisition cost of the Municipal Bonds (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or
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original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. Stand-by commitments generally can be acquired when the
remaining maturity of the underlying Municipal Bonds is not greater than one
year, and are exercisable by the Fund at any time before the maturity of such
obligations.
The Fund's right to exercise stand-by commitments is unconditional and
unqualified. A stand-by commitment generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Bonds to a third party at
any time.
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund will not exceed
one-half of one percent of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired. The Fund intends to
enter into stand-by commitments only with banks and dealers which, in the
Adviser's opinion, present minimal credit risks.
The Fund would acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a stand-by commitment would not affect the
valuation of the underlying Municipal Bonds which would continue to be valued in
accordance with the method of valuation employed by the Fund. Stand-by
commitments acquired by the Fund would be valued at zero in determining net
asset value. Where the Fund paid any consideration directly or indirectly for a
stand-by commitment, the cost would be reflected as unrealized depreciation for
the period during which the commitment was held by the Fund.
DELAYED DELIVERY AND WHEN-ISSUED SECURITIES (MUNICIPAL BOND
FUND). Municipal Bonds may at times be purchased or sold on a "delayed
delivery" or a "when-issued" basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and the
interest rate are each fixed at the time the Fund enters into the commitment.
The Fund will only make commitments to purchase such securities with the
intention of actually acquiring the securities, but the Fund may sell these
securities prior to settlement date if it is deemed advisable. Purchasing
Municipal Bonds on a when-issued basis involves the risk that the yields
available in the market when the delivery takes place may actually be higher
than those obtained in the transaction itself; if yields so increase, the value
of the when-issued obligation will generally decrease. The Fund maintains a
separate account at its custodian bank consisting of cash or liquid high grade
debt obligations (valued on a daily basis) equal at all times to the amount of
any when-issued commitment.
RESTRICTED SECURITIES. Each Fund may invest up to 5% of its net assets in
restricted securities. As used herein, restricted securities are those that have
been sold in the United States without registration under the Securities Act of
1933 and are thus subject to restrictions on resale. Excluded from the
limitation, however, are any restricted securities which are eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 and which have been
determined to be liquid by the Trustees or by the Adviser pursuant to
board-approved guidelines. The determination of liquidity is based on the volume
of reported trading in the institutional secondary market for each security.
Since it is not possible to predict with assurance how the markets for
restricted securities sold and offered under Rule 144A will develop, the
Trustees will carefully monitor each Fund's investment in these securities
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in each Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
These difficulties and delays could result in a Fund's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time desired by the Fund
impossible. Since market quotations are not readily available for restricted
securities, such securities will be valued by a method that the Trustees believe
accurately reflects fair value.
PORTFOLIO TURNOVER. Each Fund may purchase or sell securities without
regard to the length of time the security has been held and thus may experience
a high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Under certain market conditions, the Growth Fund and the Government Fund
may experience a high rate of portfolio turnover. This may occur, for example,
if the Fund writes a substantial number of covered call options and the market
prices of the underlying securities appreciate. The rate of portfolio turnover
is not a limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in options transactions. The annual turnover rates of
the Growth Fund, the Government Fund and the Municipal Bond Fund are not
expected to exceed 400%; and the annual turnover rate of the Growth and Income
Fund is not expected to exceed 100%. High portfolio turnover involves
correspondingly greater transaction costs, including any brokerage commissions,
which are borne directly by the respective Fund and may increase the recognition
of short-term, rather than long-term, capital gains. See "Dividends,
Distributions and Taxes."
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Trust and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuous basis. Brokerage firms are selected on the basis of their
professional capability for the type of transaction and the value and quality of
execution services rendered on a continuing basis. Orders may be directed to any
broker including, to the extent and in the manner permitted by applicable law,
Smith Barney, Inc. ("Smith Barney") and Robinson Humphrey, Inc. ("Robinson
Humphrey"). Smith Barney and Robinson Humphrey may be considered affiliated
persons of the Distributor's parent, The Travelers Inc. ("Travelers"). In order
for Smith Barney and Robinson Humphrey to effect any such transaction, the
commissions, fees or other remuneration received by Smith Barney and Robinson
Humphrey must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities, futures or options on futures being purchased or
sold on an exchange during a comparable period of time. This standard would
allow Smith Barney and
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Robinson Humphrey to receive no more than the remuneration that would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. Furthermore, the Board of Trustees of the Trust, including a
majority of the Trustees who are not "interested" Trustees, has adopted
procedures that are reasonably designed to provide that any commissions, fees or
other remuneration paid to Smith Barney and Robinson Humphrey are consistent
with the foregoing standard. Brokerage transactions with Smith Barney and
Robinson Humphrey are also subject to such fiduciary standards as may be imposed
upon Smith Barney and Robinson Humphrey by applicable law. U.S. Government
securities in which the Trust invests are traded in the over-the-counter market.
Such securities are generally traded on a net basis with a dealer acting as
principal for its own account without a stated commission, although the prices
of the securities usually include a profit to the dealer. Most transactions made
by the Money Market Fund are principal transactions at net prices which incur
little or no brokerage costs. It is the policy of the Trust to seek to obtain
the best net results taking into account such factors as price (including the
applicable dealer spread), the size, type and difficulty of the transaction
involved, the firm's general execution and operational facilities, the firm's
risk in positioning the securities involved, and the provision of supplemental
investment research by the firm. While the Trust seeks reasonably competitive
spreads, the Trust will not necessarily be paying the lowest spread available.
Brokerage commissions are paid on transactions in listed options, futures
contracts and options thereon. The Adviser is authorized to place portfolio
transactions with broker-dealers participating in the distribution of shares of
the Trust if it reasonably believes that the quality of the execution and any
commission are comparable to that available from other qualified firms. The
Adviser is authorized to pay higher commissions to brokerage firms that provide
it with investment and research information than to firms which do not provide
such service if they determine that such commissions are reasonable in relation
to the overall services provided. The information received may be used by the
Adviser in managing the assets of other advisory accounts managed by the Adviser
as well as in the management of the assets of the Trust.
INVESTMENT IN INVESTMENT COMPANIES (GROWTH FUND AND GROWTH AND INCOME
FUND). The Growth Fund and the Growth and Income Fund, may invest in a separate
investment company, Van Kampen American Capital Small Capitalization Fund
("Small Cap Fund"), that invests in a broad selection of small capitalization
securities. The shares of the Small Cap Fund are available only to investment
companies advised by the Adviser. The Adviser believes that the use of the Small
Cap Fund provides the Funds with the most effective exposure to the performance
of the small capitalization sector of the stock market while at the same time
minimizing costs. The Adviser charges no advisory fee for managing the Small Cap
Fund, nor are there any sales load or other charges associated with distribution
of its shares. Other expenses incurred by the Small Cap Fund are borne by it,
and thus indirectly by the Funds and the Van Kampen American Capital funds that
invest in it. With respect to such other expenses, the Adviser anticipates that
the efficiencies resulting from use of the Small Cap Fund will result in cost
savings for the Funds and the Van Kampen American Capital funds that invest in
the Small Cap Fund. In large part, these savings will be attributable to the
fact that administrative actions that would have to be performed multiple times
if each Fund held its own portfolio of small capitalization stocks will need to
be performed only once. The Adviser expects that the Small Cap Fund will
experience trading costs that will be substantially less than the trading costs
that would be incurred if small capitalization stocks were purchased separately
for the Funds and the Van Kampen American Capital funds.
The securities of small and medium sized companies that the Small Cap Fund
may invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies.
Each Fund will be deemed to own a pro rata portion of each investment of
the Small Cap Fund. For example, if a Fund's investment in the Small Cap Fund
were $10 million, and the Small Cap Fund had five percent of its assets invested
in the electronics industry, the Fund would be considered to have an investment
of $500,000 in the electronics industry.
INVESTMENT RESTRICTIONS
RESTRICTIONS APPLICABLE TO ALL OF THE FUNDS. Each Fund has adopted a number
of investment restrictions which may not be changed without the approval of the
holders of a majority (as defined by the 1940 Act) of the shares of such Fund.
The percentage limitations need only be met at the time the investment is made
or other relevant action taken. These restrictions provide, among other things,
that a Fund may not:
1. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured thereby), or
purchase more than 10% of the outstanding voting securities of any one issuer.
Neither limitation shall apply to the acquisition of shares of other open-end
investment companies by the Growth Fund or the Growth and Income Fund to the
extent permitted by rule or order of the SEC exempting them from the limitations
imposed by Section 12(d)(1) of the 1940 Act;
2. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 5% of the
Fund's assets would be invested in such securities, provided, however, that with
respect to the Growth Fund and the Growth and Income Fund, this limitation shall
exclude shares of other open-end investment companies owned by the Fund but
include the Fund's pro rata portion of the securities and other assets owned by
any such company;
3. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry; provided, however, that with respect to the
Growth Fund and the Growth and Income Fund, this limitation shall exclude shares
of other open-end investment companies owned by the Fund but include the Fund's
pro rata portion of the securities and other assets owned by any such company
(This does not restrict any of the Funds from
18
<PAGE> 19
investing in obligations of the U.S. Government and repurchase agreements
secured thereby, and, in the case of the Money Market Fund, does not restrict
investments in money market instruments of banks.);
4. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% of the market or other
fair value of its total assets, provided that so long as any borrowing exceeds
5% of the value of the Fund's total assets, the Fund shall not purchase
portfolio securities. Any such borrowings shall be from banks and shall be
undertaken only as a temporary measure for extraordinary or emergency purposes.
Deposits in escrow in connection with the writing of covered call or secured put
options, or in connection with the purchase or sale of futures contracts and
related options, are not deemed to be a pledge or other encumbrance;
5. Invest more than 5% of its assets in companies having a record together
with predecessors, of less than three years' continuous operation, except that
the Growth Fund and the Growth and Income Fund, may acquire shares of other
open-end investment companies to the extent permitted by rule or order of the
SEC exempting them from the limitations imposed by Section 12(d)(1) of the 1940
Act.
6. Engage in option writing for speculative purposes or purchase call or
put options on securities if, as a result, more than 5% of its net assets of the
Fund would be invested in premiums on such options; or
7. Purchase any security issued by any company deriving more than 25% of
its gross revenues from the manufacture of alcohol or tobacco.
Each state and each political subdivision, agency or instrumentality of
such state, and each multi-state agency of which a state is a member is a
separate "issuer" as that term is used in this Prospectus. The non-government
user of facilities financed by industrial development or pollution control bonds
is also considered as a separate issuer. In certain circumstances, the guarantor
of a guaranteed security may also be considered to be an issuer in connection
with such guarantee.
In addition to the foregoing, the Trust has adopted additional investment
restrictions, which may be changed by the Trustees without a vote of
shareholders, as follows:
FOREIGN INVESTMENTS. The Growth Fund and the Growth and Income Fund may not
invest in the securities of a foreign issuer if, at the time of acquisition,
more than 20% of the value of the Fund's total assets would be invested in such
securities.
FUTURES CONTRACTS AND OPTIONS. In addition, the Growth and Income Fund and
the Growth Fund may not write, purchase or sell puts, calls or combinations
thereof, except that each Fund may (a) write covered call options with respect
to any part or all of its portfolio securities, write secured put options, or
enter into closing purchase transactions with respect to such options, (b)
purchase and sell put and call options to the extent that the premiums paid for
all such options do not exceed 10% of its total assets and only if the Fund owns
the securities covered by the put option at the time of purchase, and (c) engage
in futures contracts and related options transactions as described in the
Statement of Additional Information.
The Government Fund may not write, purchase or sell puts, calls or
combinations thereof, except that the Fund may (a) write covered or fully
collateralized call options, write secured put options, and enter into closing
or offsetting purchase transactions with respect to such options, (b) purchase
and sell options to the extent that the premiums paid for all such options owned
at any time do not exceed 10% of its total assets, and (c) engage in futures
contracts and related options transactions as described in the Statement of
Additional Information.
The Municipal Bond Fund may engage in futures contracts and related options
as described in the Statement of Additional Information.
--------------------------------------------------------------------------------
THE TRUST AND ITS MANAGEMENT
--------------------------------------------------------------------------------
The Trust is a diversified, open-end management investment company,
generally known as a mutual fund, organized as a Massachusetts business trust on
January 29, 1987. A mutual fund provides, for those who have similar investment
goals, a practical and convenient way to invest in a diversified portfolio of
securities by combining their resources in an effort to achieve such goals.
The Trustees have the responsibility for overseeing the affairs of the
Trust. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines
the investment of the Trust's assets, provides administrative services and
manages the Trust's business and affairs. The Adviser is a wholly owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and nearly $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc.
is controlled through the ownership of a substantial majority of its common
stock, by The Clayton & Dubilier Private Equity Fund IV Limited Partnership (the
"C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York private investment firm. The general partner
of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel,
Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition certain officers,
directors and employees of Van Kampen American Capital own, in the aggregate,
not more than seven percent of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
11% of the common stock of VK/AC Holding, Inc. Presently, and after giving
effect to the exercise of such options, no officer or trustee of the Trust owns
or would own five percent or more of the common stock of VK/AC Holding, Inc. The
Adviser, together with its predecessors, has been in the investment advisory
business since 1926.
19
<PAGE> 20
The Trust retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under
separate investment advisory agreements with each Fund, dated December 20, 1994,
the Trust pays the Adviser an annual fee for the Growth Fund and the Growth and
Income Fund, calculated separately for each Fund at the following rates: 0.65%
of the first $1 billion of the Fund's average daily net assets; 0.60% of the
next $1 billion of the Fund's average daily net assets; 0.55% of the next $1
billion of the Fund's average daily net assets; 0.50% of the next $1 billion of
the Fund's average daily net assets; and 0.45% of the Fund's average daily net
assets in excess of $4 billion. The Trust pays the Adviser an annual fee for the
Government Fund of 0.60% of the first $1 billion of the Fund's average daily net
assets; 0.55% of the next $1 billion of the Fund's average daily net assets;
0.50% of the next $1 billion of the Fund's average daily net assets; 0.45% of
the next $1 billion of the Fund's average daily net assets; 0.40% of the next $1
billion of the Fund's average daily net assets; and 0.35% of the Fund's average
daily net assets in excess of $5 billion. For the Municipal Bond Fund, the Trust
pays the Adviser an annual fee of 0.60% of the first $1 billion of the Fund's
average daily net assets; 0.55% of the next $1 billion of the Fund's average
daily net assets; 0.50% of the next $1 billion of the Fund's average daily net
assets; and 0.45% of the Fund's average daily net assets over $3 billion. For
the Money Market Fund, the Trust pays the Adviser an annual fee of 0.50% of the
first $2 billion of the Fund's average daily net assets; 0.475% of the next $2
billion of the Fund's average daily net assets; and 0.45% of the Fund's average
daily net assets over $4 billion. The fee is computed daily and payable monthly
with respect to each Fund.
Under each of the foregoing Advisory Agreements, the Trust also reimburses
the Adviser for the actual cost of the Trust's accounting services, which
include maintaining its financial books and records and calculating the daily
net asset value of each Fund. Operating expenses paid by the Trust include
transfer agency fees, custodian fees, legal and auditing fees, trustees' fees,
the cost of registration of its shares under federal laws and state blue sky
laws, the cost of reports and proxies to shareholders, and all other ordinary
business expenses not specifically assumed by the Adviser or any other party.
For the last fiscal year, advisory fees plus the cost of accounting services
paid by the Growth Fund, Growth and Income Fund, Government Fund, Municipal Bond
Fund and Money Market Fund equaled .63%, .67%, .63%, .69% and .10%,
respectively, of each Fund's average net assets. For the same period, the total
operating expenses of the Growth Fund, Growth and Income Fund, Government Fund,
Municipal Bond Fund and Money Market Fund were .46%, .35%, .26%, .30% and .90%,
respectively, of average net assets.
The Adviser may, from time to time, agree to waive their respective
investment advisory fees or any portion thereof or elect to reimburse a Fund for
ordinary business expenses in excess of an agreed upon amount.
Stephen Boyd has been primarily responsible for the day-to-day management
of Growth Fund's investment portfolio since 1989. Mr. Boyd is Vice President of
the Trust and Senior Vice President -- Portfolio Manager of the Adviser. Mr.
Boyd was formerly Investment Vice President of the Adviser from May, 1989 to
July, 1990; Senior Vice President of the Adviser from July, 1990 to July, 1991;
and Senior Vice President and Chief Investment Officer of Wertheim Asset
Management Services, Inc. from 1986 to 1989. James Gilligan has been primarily
responsible for the day-to-day management of Growth and Income Fund's investment
portfolio since July 11, 1994. Mr. Gilligan is Vice President of the Trust and
Vice President -- Portfolio Manager of the Adviser since March 1990. Prior to
that time he was a securities analyst with the Adviser. John Reynoldson has been
primarily responsible for the day-to-day management of Government Fund's
investment portfolio since 1988. Mr. Reynoldson is Vice President of the Trust
and Senior Vice President -- Portfolio Manager of the Adviser. Mr. Reynoldson
was formerly Investment Vice President of the Adviser from January, 1988 to
July, 1991. David Troth has been primarily responsible for the day-to-day
management of Money Market Fund's investment portfolio since its inception. Mr.
Troth is Vice President of the Trust and Senior Investment Vice President of the
Adviser. Mr. Troth was formerly Investment Vice President of the Adviser from
March, 1978 to July, 1991. David Johnson has been primarily responsible for the
day-to-day management of Municipal Bond Fund's investment portfolio since June
13, 1995. Mr. Johnson is Vice President of the Trust and the Adviser. Mr.
Johnson has been employed by Van Kampen American Capital Investment Advisory
Corp., an affiliate of the Adviser, for the last five years.
--------------------------------------------------------------------------------
PURCHASE OF SHARES
--------------------------------------------------------------------------------
Shares of beneficial interest in each Fund are offered continuously for
sale by the Distributor, an indirect subsidiary of Travelers Group Inc. (the
"Travelers"), 65 East 55th Street, New York, New York 10022. Travelers is a
financial services holding company engaged through its subsidiaries, principally
in three business segments -- investment services, consumer finance services and
insurance services. Shares of beneficial interest in each Fund are available
through PFS Investments Inc. ("PFS Investments"), an affiliate of Travelers.
Initial investments in a Fund must be at least $250 and subsequent investments
must be at least $25. The Distributor may waive the minimum amount for initial
investment for shares involving periodic investments. The Trust reserves the
right to suspend the sale of any Fund's shares to the public in response to
conditions in the securities markets or for other reasons and to refuse any
order for the purchase of shares.
Shares may be purchased on any business day by completing the application
included in this Prospectus and forwarding the application through PFS
Investments to PFS Shareholder Services (the "Transfer Agent"), 3100
Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0062. Checks drawn on
foreign banks must be payable in U.S. dollars and have the routing number of the
U.S. bank encoded on the check.
Additionally, investments of $25,000 or more may be made by having your
bank wire federal funds (funds of the Federal Reserve System) to the Transfer
Agent's bank. Wire transfers will only be accepted on days your bank, the
Transfer Agent, the Trust, and Bank South of Atlanta ("Bank South") are open for
business. Your wired funds must be received by 4:00 p.m. Eastern time by Bank
South to be credited to your account that day. Otherwise, your wire purchase
will be processed the next business day. The wire purchase will not be
considered made until the wired amount is received and the purchase is accepted
by the Trust. If the wire purchase does not contain the information stated
below, the Trust may reject it. Any delays that may occur in wiring funds,
including delays in processing by the banks, are not the responsibility of the
Trust or Transfer Agent.
20
<PAGE> 21
You must pay any charge assessed by your bank for the wire service. If a
wire transfer is rejected, all money received by the Trust, less any costs
incurred by the Trust or Transfer Agent in rejecting it, will be returned
promptly.
To insure the proper handling of your investment, the following procedures
should be observed:
New Account Procedures -- If the wire transfer is for a new account,
you and your PFS Investments representative should call the Transfer
Agent's Customer Service Department at (800) 544-5445 and ask for the Wire
Purchase Desk. They will assist you in establishing your account and
processing your wire purchase.
Existing Account Procedures -- If the wire transfer is for an existing
account, the wire must be sent to Bank South, Routing Number 061000078,
Atlanta, Georgia. It should state the following:
"Credit PFS Account #6380344
For Further Credit to CST Account #
(your account number)
For (your name)"
Upon executing your wire transfer, you or your PFS Investments
representative should contact the Transfer Agent's Wire Purchase Desk to notify
them of your name, your Trust account number and the name of the bank
transmitting the federal funds.
Shares are offered at the next determined net asset value per share, plus a
sales charge as described below with respect to the Growth Fund, the Growth and
Income Fund, the Government Fund, and the Municipal Bond Fund. Shares of the
Trust may be purchased at net asset value by the PFS Primerica Corporation
Savings and Retirement Plan (the "Plan") for its participants, subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
Shares so purchased are purchased for investment purposes and may not be resold
except by redemption or repurchase by or on behalf of the Plan. Shares are also
offered at net asset value to accounts opened for shareholders by PFS
Investments representatives where the amounts invested represent the redemption
proceeds from investment companies distributed by an entity other than the
Distributor if such redemption has occurred no more than 60 days prior to the
purchase of shares of the Trust and the shareholder paid an initial sales charge
and was not subject to a deferred sales charge on the redeemed account. Shares
are offered at net asset value to such persons because of anticipated economies
in sales efforts and sales related expenses. The Trust may terminate, or amend
the terms of, offering shares of the Trust at net asset value to such persons at
any time. The Distributor may pay PFS Investments representatives through whom
purchases are made at net asset value an amount equal to 0.40% of the amount
invested if the purchase represents redemption proceeds from an investment
company distributed by an entity other than the Distributor. Contact the
Transfer Agent at (800) 544-5445 for further information and appropriate forms.
Net asset value per share of each Fund is computed as of the close of
trading on the New York Stock Exchange ("Exchange") (currently 4:00 p.m. Eastern
time) on each day the Exchange is open for trading, except in the case of the
Money Market Fund, for which net asset value is computed as of 12:00 noon New
York time on each such day. Net asset value of each Fund is determined by
dividing the value of all the portfolio securities held by such Fund, cash, and
other assets (including accrued interest) less all liabilities (including
accrued expenses) by the total number of shares outstanding of the Fund. The
Money Market Fund's assets are valued on the basis of amortized cost, which
involves valuing a portfolio security at its cost and, thereafter, assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the security. While
this method provides for certainty in valuation it may result in periods in
which value as determined by amortized cost is higher or lower than the price
the Fund would receive if it sold the security.
Shares of the Money Market Fund are offered at the next determined net
asset value after a purchase order becomes effective, which is when the check
payment is converted into federal funds. A check payment is normally converted
into federal funds on the second business day following receipt of payment by
the Transfer Agent. With respect to the other Funds, the price paid for shares
purchased is based on the net asset value next computed after an order is
received by the Transfer Agent. For a discussion of the methods used to value
the portfolio securities of each Fund, see the Statement of Additional
Information.
The tables included herein show the sales charge at various investment
levels with respect to the Growth Fund, the Growth and Income Fund, the
Government Fund and the Municipal Bond Fund. No sales charge is payable on
purchases of shares of the Money Market Fund. The Money Market Fund does,
however, require payment of an initial administrative set-up fee of $15 for the
establishment of each investment account. See "Shareholder
Services -- Investment Account."
21
<PAGE> 22
SALES CHARGE TABLES
GROWTH FUND AND GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
REALLOWED
TO PFS
INVESTMENTS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)*
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $10,000.................................................................... 9.29% 8.50% 7.00%
$10,000 but less than $25,000........................................................ 8.40% 7.75% 6.25%
$25,000 but less than $50,000........................................................ 6.38% 6.00% 5.00%
$50,000 but less than $100,000....................................................... 4.71% 4.50% 3.75%
$100,000 but less than $250,000...................................................... 3.63% 3.50% 3.00%
$250,000 but less than $400,000...................................................... 2.56% 2.50% 2.00%
$400,000 but less than $600,000...................................................... 2.04% 2.00% 1.60%
$600,000 but less than $5,000,000.................................................... 1.01% 1.00% 0.75%
$5,000,000 or more................................................................... 0.25% 0.25% 0.20%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
REALLOWED
TO PFS
INVESTMENTS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)*
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000.................................................................... 7.24% 6.75% 6.00%
$25,000 but less than $50,000........................................................ 6.10% 5.75% 5.00%
$50,000 but less than $100,000....................................................... 4.44% 4.25% 3.50%
$100,000 but less than $250,000...................................................... 3.63% 3.50% 2.75%
$250,000 but less than $500,000...................................................... 2.56% 2.50% 2.00%
$500,000 but less than $1,000,000.................................................... 2.04% 2.00% 1.60%
$1,000,000 but less than $2,500,000.................................................. 1.01% 1.00% 0.75%
$2,500,000 but less than $5,000,000.................................................. 0.50% 0.50% 0.40%
$5,000,000 or more................................................................... 0.25% 0.25% 0.20%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Additionally, the Distributor will pay to PFS Investments a promotional fee
calculated as a percentage of the sales charge reallowed to PFS Investments.
The percentage used in the calculation is 3%.
MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
REALLOWED
TO PFS
INVESTMENTS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)*
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000................................................................... 4.99% 4.75% 4.25%
$100,000 but less than $250,000...................................................... 3.90% 3.75% 3.25%
$250,000 but less than $500,000...................................................... 3.09% 3.00% 2.50%
$500,000 but less than $1,000,000.................................................... 2.04% 2.00% 1.60%
$1,000,000 but less than $2,500,000.................................................. 1.01% 1.00% .75%
$2,500,000 but less than $5,000,000.................................................. .50% .50% .40%
$5,000,000 or more................................................................... .25% .25% .20%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Additionally, the Distributor will pay to PFS Investments a promotional fee
calculated as a percentage of the sales charge reallowed to PFS Investments.
The percentage used in the calculation is 3%.
PFS Investments may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, the Distributor or its affiliates may
also pay for certain non-cash sales incentives provided to PFS Investments
representatives. Such incentives do not have any effect on the net amount
invested. In addition to the reallowances from the applicable public offering
price described above, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation to PFS Investments representatives that sell shares of the Trust.
VOLUME DISCOUNTS. The size of the investment shown in the preceding tables
applies to the total amount being invested by any person in shares of the
indicated Fund alone, or in any combination of shares of the Fund and shares of
the Common Sense Funds (except the Money Market Fund). A person eligible for a
volume discount includes an individual; members of a family unit comprising
husband, wife and minor children; a trustee or other fiduciary purchasing for a
single fiduciary account including pension, profit-sharing and other employee
benefit trusts qualified under Section 401(a) of the Internal Revenue Code
("Code"), or multiple custodial accounts where more than one beneficiary is
involved if purchases are made by salary reduction and/or payroll deduction for
qualified and nonqualified accounts and transmitted by a common employer entity.
Employer entity for payroll deduction accounts may include trade and craft
associations and any other similar organizations.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
tables may also be determined by combining the amount being invested in shares
of the indicated Fund plus the current offering price of all shares of such
Funds described in this Prospectus and other Common Sense Funds (except the
Money Market Fund) which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Transfer Agent is notified by the shareholder at the time an order is placed for
a purchase which would qualify
22
<PAGE> 23
for a reduced sales load on the basis of the current value of previous purchases
and if sufficient information is furnished to permit confirmation of such
purchases.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating all investments over a
13-month period to determine the sales load as outlined in the preceding tables.
Each investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal as if it were a single
investment. The size of investment shown in the preceding tables also includes
purchases of shares of any Fund and other Common Sense Funds (except the Money
Market Fund) over a 13-month period, based on the total amount of intended
purchases plus the value of all shares at the offering price of such Funds
previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charge applicable to the aggregate purchases made and the sales charge
previously paid. The initial purchase must be for an amount equal to at least
five percent of the minimum total purchase amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form included in this Prospectus.
--------------------------------------------------------------------------------
SHAREHOLDER SERVICES
--------------------------------------------------------------------------------
The Trust offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. A CST Shareholder Service Form should be completed
to effect a change or cancel any Common Sense Trust account option. The CST
Shareholder Service Form is provided in the CST New Account Welcome Package.
Additional CST Shareholder Service Forms may be obtained from the Transfer
Agent. Customer Service representatives are available from 9:00 a.m. to 8:00
p.m. Monday through Friday (Eastern time) to assist you. If you prefer a
Spanish-speaking representative, please call (800) 544-7278 (Monday through
Friday). TDD service is available for the hearing impaired at (800) 824-1721.
INVESTMENT ACCOUNT. Each shareholder of record has an investment account
under which shares are held by the Transfer Agent. The Trust recommends that
shares be left on deposit with the Transfer Agent. If a share certificate is
desired, it is issued only for full shares (preferably 100 shares or more) and
must be requested in writing from the Transfer Agent for each transaction.
Except as described below, after each share transaction in an account, the
shareholder will receive a report showing the activity in the account. A
quarterly report will be sent to shareholders utilizing the pre-authorized check
plan. Additions to an investment account may be made at any time by mailing a
check directly to the Transfer Agent. There is no charge for establishing an
investment account in the Growth, Growth and Income, Government or Municipal
Bond Funds. An investor in the Money Market Fund pays the Transfer Agent an
initial administrative set-up fee of $15 for establishing each investment
account on the books of the Fund.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of a
Fund. Such shares are acquired at net asset value (without a sales charge). This
reinvestment is automatic unless the shareholder instructs otherwise. The
investor may, on the CST Additional New Account Options Form found in the
Prospectus, instruct that dividends and/or capital gains distributions be paid
in cash or be credited to another account of a Fund described in this
Prospectus. If you are changing this option after your account has been
established, you should complete a CST Shareholder Service Form and mail it to
the Transfer Agent.
PRE-AUTHORIZED CHECK PLAN. A pre-authorized check plan is available under
which a shareholder can authorize the Transfer Agent to draw on a bank account
on a regular basis to invest pre-determined amounts in shares of a Fund. To
establish or change an existing pre-authorized check plan, a shareholder should
give the Transfer Agent ten days prior notice before drawing on such bank
account. You may choose to have your draft on any day of the month and the
Transfer Agent will submit the draft to your bank on that day. Additionally, the
Transfer Agent will purchase shares in your Common Sense Trust account on the
day indicated for the amount of the draft. If the draft is returned to the
Transfer Agent from the depository bank, it may attempt to redeposit the draft
in an effort to collect the proceeds before cancelling the shares bought with
the draft. A shareholder may designate in the application to increase the amount
of the pre-authorized check on an automatic basis. Additional information is
contained in the application included in this Prospectus. There is no charge for
establishing a pre-authorized check plan. Standard Pre-Authorized Check Plan
minimum draft amount is $25.
RETIREMENT PLAN. Eligible investors may establish individual retirement
accounts ("IRAs"). Van Kampen American Capital Trust Company, c/o Common
Sense(R) Custodial Services L.P., 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0062 serves as custodian under IRA, SEP and 403(b)(7) plans.
Common Sense(R) Custodial Services, L.P. is a limited partnership which is an
indirect wholly owned subsidiary of Travelers. It is anticipated in the near
future that PFS Investments will commence serving as custodian for such plans.
There is an annual $20 maintenance fee. This fee is deducted from a
shareholder's account balance each December, unless prepaid. If a redemption is
requested during the year, the maintenance fee will be deducted from the
redemption proceeds. There will be no additional fees for the redemption of an
account or the establishment of new accounts. Details regarding fees, as well as
plan administration, and other details regarding this Retirement Plan is
available from PFS Investments' registered representatives.
23
<PAGE> 24
EXCHANGE PRIVILEGE. Shares of any Fund may be exchanged for shares of any
of the other Funds described in this Prospectus upon payment of the excess, if
any, of the sales charge applicable to the Fund being acquired over the sales
charge paid on the purchase. Shares of the Money Market Fund may be exchanged
for shares of the other Funds upon payment of the sales charge applicable to
shares of the Fund being acquired unless a sales charge previously has been
paid. An investor exchanging shares from any Fund into the Money Market Fund
will incur an initial administrative set-up fee of $15 for the establishment of
an account.
Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by the Transfer Agent except as described herein under "Systematic Exchange" for
all exchanges other than exchanges from the Money Market Fund. Exchanges of
shares are sales and may result in a gain or loss for federal income tax
purposes, although if the shares exchanged have been held for less than 91 days,
the sales charge paid on such shares is not included in the tax basis of the
exchanged shares, but is carried over and included in the tax basis of the
shares acquired. A Fund reserves the right to reject any order to acquire its
shares through exchange, or otherwise modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by completing a CST
Exchange Form and sending it to the Transfer Agent. A signature guarantee and
other documentary evidence may be required for certain registrations other than
individual accounts (e.g., corporation, trust, etc.). Exchanges are effected at
the net asset value next calculated after the request is received in good order.
See "Purchase of Shares" and "Redemption of Shares." If the exchanging
shareholder does not have an account in the Fund whose shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan or a pre-authorized bank draft for the new account, however, an
exchanging shareholder must file a specific written request.
A shareholder may utilize the Transfer Agent's Facsimile Transaction Line
("FAX") to effect an exchange as long as a signature guarantee or other
documentary evidence is not required. Exchange requests should be properly
signed by all owners of the account and faxed to the Transfer Agent at (800)
554-2374. Facsimile exchanges may not be available if the shareholder cannot
reach the Transfer Agent by FAX, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
regular exchange procedure described above. Facsimile exchanges received by the
Transfer Agent prior to 4:00 p.m. Eastern time on a regular business day will be
processed at the net asset value per share determined that day.
SYSTEMATIC EXCHANGE. A shareholder has the option to systematically
exchange a dollar or share amount on a monthly basis. You may automatically
exchange shares from one CST account for shares in another CST account on a
regular schedule (e.g., monthly or quarterly). The accounts must have identical
registrations and the originating account must have a minimum balance of $5,000.
The $5 transaction fee will be waived for all systematic exchanges. The minimum
exchange amount is $50. You may add this service to your account by completing
the CST Additional New Account Options Form found in the Prospectus, and
submitting it with your initial application. If you are selecting this option
after your account has been established, you should complete a CST Shareholder
Service Form and mail it to the Transfer Agent.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering price next computed after receipt of
instructions may establish a withdrawal plan. This plan provides for the orderly
use of the entire account, not only the income but also the capital, if
necessary. Each withdrawal constitutes a redemption of shares on which any
capital gain or loss will be recognized. The planholder may arrange for monthly,
quarterly, semiannual or annual checks in any amount not less than $50, in
multiples of $5, unless specifically authorized by the Distributor.
Under the plan, sufficient shares of a Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gain
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchase of additional shares ordinarily will
be disadvantageous to the shareholder because of the duplication of sales
charges. There is no charge for establishing a systematic withdrawal plan. You
may add this service to your account by completing the CST Additional New
Account Options Form found in the Prospectus and submitting it with your initial
application. If you are selecting this option after your account has been
established, you should complete a CST Shareholder Service Form and mail it to
the Transfer Agent.
CHECK WRITING PRIVILEGE. A shareholder holding shares of the Government
Fund, Money Market Fund and Municipal Bond Fund for which certificates have not
been issued may appoint the Fund's Transfer Agent as agent and request, on the
application form, special forms of drafts payable through Fidelity National Bank
("Fidelity"). The Transfer Agent issues these drafts on behalf of the Fund in
books of ten drafts, for which there is a charge by the Fund of $7.50 per book.
These drafts may be made payable by the shareholder to the order of any person
in any amount of $250 or more. When a draft is presented to Fidelity for
payment, full and fractional shares required to cover the amount of the draft
will be redeemed from the shareholder's account by the Transfer Agent at the
next determined net asset value. Any gain or loss realized on the sale of shares
is a taxable event. See "Redemption of Shares." Drafts will not be honored for
redemption of shares held less than fifteen (15) days, or until the Transfer
Agent is presented with satisfactory evidence that the purchase check has
cleared. Any shares for which there are outstanding certificates may not be
redeemed by draft. If the amount of the draft is greater than the proceeds of
all uncertificated shares held in the shareholder's account, the draft will be
returned and the shareholder may be subject to additional charges imposed by
banks. A shareholder may not liquidate the entire account by means of a draft.
The check writing privilege may be terminated or suspended at any time by the
Fund or Fidelity. Retirement plans and accounts that are subject to backup
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withholding are not eligible for the privilege. A "stop payment" system is not
available on Government Fund, Money Market Fund and Municipal Bond Fund checks.
Fidelity will only honor those drafts authorized by the Trust.
DOLLAR COST AVERAGING. Special services are available that enable investors
to take advantage of dollar cost averaging through automatic monthly
investments. Dollar cost averaging involves the investment of a fixed dollar
amount in investment vehicles such as the Funds at pre-set intervals. This
practice will result in more shares being purchased when a Fund's net asset
value is relatively low, and fewer shares being purchased when a Fund's net
asset value is relatively high. Therefore, the investor's overall cost of shares
purchased is lower than it would be if the investor purchased a fixed number of
shares at pre-set intervals.
Investors may purchase shares of any of the Funds by using pre-authorized
checks drawn on the investor's bank account. See "Pre-Authorized Check Plan."
Further information on automatic investing and the advantages of dollar cost
averaging is set forth in the Statement of Additional Information.
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REDEMPTION OF SHARES
--------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares of any Fund at
any time by sending a written request in proper form directly to the Transfer
Agent at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0062. There
is no charge for a redemption. If you should have any questions concerning how
to redeem your account after reviewing the information below, please contact the
Transfer Agent at (800) 544-5445, Spanish-speaking representatives (800)
544-7278 or TDD Line for the Hearing Impaired (800) 824-1721.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner(s) at the record address, if the
shareholder(s) has had an address change in the past 45 days, or if the
shareholder(s) is a corporation, sole proprietor, partnership, trust or
fiduciary, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly completed CST Redemption Form with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. For example, in the case of
shareholders holding certificates, the certificates for the shares being
redeemed must accompany the redemption request. Additional documentary evidence
of authority is also required by the Transfer Agent in the event redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator. Additionally, if a shareholder requests a redemption from a
Retirement Plan account (IRA, SEP or 403(b)(7)), such request must state whether
or not federal income tax is to be withheld from the proceeds of the redemption
check.
A shareholder may utilize the Transfer Agent's FAX to redeem their account
as long as a signature guarantee or other documentary evidence is not required.
Redemption requests should be properly signed by all owners of the account and
faxed to the Transfer Agent at (800) 554-2374. Facsimile redemptions may not be
available if the shareholder cannot reach the Transfer Agent by FAX, whether
because all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's regular redemption procedure described
above. Facsimile redemptions received by the Transfer Agent prior to 4:00 p.m.
Eastern time on a regular business day will be processed at the net asset value
per share determined that day.
In all cases, the redemption price is the net asset value per share of the
Fund next determined after the request for redemption is received in proper form
by the Transfer Agent. Payment for shares redeemed will be made by check mailed
within seven days after acceptance by the Transfer Agent of the request and any
other necessary documents in proper order. Such payment may be postponed or the
right of redemption suspended as provided by the rules of the SEC. If the shares
to be redeemed have been recently purchased by check or draft, the Transfer
Agent may hold the payment of the proceeds until the purchase check or draft has
cleared, usually a period of up to 15 days. Any taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
After following the above-stated redemption guidelines, a shareholder(s)
may elect to have the redemption proceeds wire-transferred directly to the
shareholder's bank account of record (defined as a currently established
pre-authorized draft on the shareholder's account with no changes within the
previous 45 days), as long as the bank account is registered in the same name(s)
as the account with the Fund. If the proceeds are not to be wired to the bank
account of record, or to the registered owner(s), a signature guarantee will be
required from all shareholder(s). A $25 service fee will be charged by the
Transfer Agent to help defray the administrative expense of executing a wire
redemption. Redemption proceeds will normally be wired to the designated bank
account on the next business day following the redemption, and should ordinarily
be credited to your bank account by your bank within 48 to 72 hours.
The Trust may redeem any shareholder account with a net asset value of less
than $200. Three months advance notice of any such involuntary redemption is
required and the shareholder may purchase prior to such redemption the required
value of additional shares in order to avoid such involuntary redemption. Any
involuntary redemption may only occur if the shareholder's account is less than
the required minimum due to shareholder redemptions or did not reach the
required minimum because the shareholder failed to meet the shareholder's
obligations under a periodic investment arrangement. Any taxable gain or loss
will be recognized by the shareholder upon redemption of shares.
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<PAGE> 26
REINSTATEMENT PRIVILEGE. A shareholder who has redeemed shares of the Trust
may reinvest any portion or all of the proceeds of such redemption in shares of
any Fund described in this Prospectus. Such reinvestment is made at the net
asset value (without sales load) next determined after the order is received,
which must be within 60 days after the date of the redemption. This privilege
can be exercised only once.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
Unless the shareholder instructs otherwise, all dividends and capital gain
distributions of each Fund are automatically reinvested in additional shares of
such Fund. See "Shareholder Services -- Reinvestment Plan." Dividends and
distributions paid by a Fund have the effect of reducing the net asset value per
share on the record date by the amount of the dividend or distribution.
Therefore, a dividend or distribution paid shortly after a purchase of shares by
an investor would represent, in substance, a return of capital to the
shareholder (to the extent it is paid on the shares so purchased), even though
it would be subject to income taxes, as discussed below.
DIVIDENDS AND DISTRIBUTIONS OF THE GROWTH FUND AND GROWTH INCOME
FUND. Dividends from stocks and interest earned from other investments are the
main source of income for the Growth Fund and the Growth and Income Fund. When a
Fund sells portfolio securities, it may realize capital gains or losses,
depending on whether the prices of the securities sold are higher or lower than
the prices the Fund paid to purchase them. Net realized capital gains represent
the total profit from sales of securities minus total losses from sales of
securities including any losses carried forward from prior years.
The Growth Fund distributes substantially all its net investment income,
less expenses, and any net realized capital gains annually, normally in
December. The Growth and Income Fund distributes substantially all its net
investment income, less expenses quarterly, normally in March, June, September
and December, and it distributes any net realized capital gains annually,
normally in December. Net long-term gains realized from both Funds' transactions
in options, futures and related options transactions may be paid out more
frequently (with short-term gains) as may be determined from time to time by the
Trustees, but only after appropriate regulatory approval is first obtained.
There is no assurance that such regulatory approval will be obtained.
DIVIDENDS AND DISTRIBUTIONS OF THE GOVERNMENT FUND. Income dividends are
declared each business day, and paid monthly. Any taxable net realized
short-term capital gains may be distributed quarterly and any net realized
short-term gains are distributed to shareholders annually, normally in December.
Net long-term gains realized from the Fund's transactions in options, futures
and related options transactions may be paid out more frequently (with
short-term gains) as may be determined from time to time by the Trustees, but
only after appropriate regulatory approval is first obtained. There is no
assurance that such regulatory approval will be obtained.
In computing interest income, the Fund does not amortize debt discount or
premiums resulting from the purchase of debt securities. Thus in the case of
U.S. Government securities purchased at a premium, interest income is greater
than it would be if the premium was amortized.
DIVIDENDS AND DISTRIBUTIONS OF THE MUNICIPAL BOND FUND. Income dividends
are declared each business day, and paid monthly. The daily dividend is a fixed
amount determined at least monthly which is not expected to exceed the net
income of the Fund for the month divided by the number of business days during
the month. The Fund intends to distribute after the end of a fiscal year the net
capital gains, if any, realized during the fiscal year, except to the extent
that such gains are offset by capital loss carryovers of the Fund.
Net long-term gains realized from transactions in futures and related
options transactions may be paid out more frequently (with short-term gains) as
may be determined from time to time by the Trustees, but only after appropriate
regulatory approval is first obtained. There is no assurance that such
regulatory approval will be obtained.
DIVIDENDS OF THE MONEY MARKET FUND. Income dividends are declared each
business day, and paid monthly. Dividends are paid to shareholders of record
immediately prior to the determination of net asset value for that day. Since
shares are issued and redeemed at the time net asset value is determined,
dividends commence on the day following the date shares are issued and are
received for the day shares are redeemed. Shareholders may elect to receive
monthly payments of dividends in cash by written instruction to the Transfer
Agent. Shares purchased as a result of the accrual of daily dividends are
liquidated at the net asset value on the last business day of the month and the
proceeds of such redemption mailed to the shareholder electing cash payment. A
redeeming shareholder receives all dividends accrued through the date of
redemption.
The Fund's net income for dividend purposes is calculated daily and
consists of interest accrued or discount earned, plus or minus any net realized
gains or losses on portfolio securities, less any amortization of premium and
the expenses of the Fund.
TAXES. Each Fund intends to qualify as a "regulated investment company"
under the Code. By so qualifying and by distributing all of its net investment
income and net realized capital gains within the time periods specified in the
Code, each Fund would not be required to pay any federal income tax. Dividends
from net investment income and distributions from any net realized short-term
capital gains are taxable to shareholders as ordinary income. All such dividends
are taxable to the shareholder whether or not reinvested in shares. However,
shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them.
In addition, the Municipal Bond Fund intends to invest in sufficient
Municipal Bonds to permit payment of "exempt-interest dividends" (as defined in
the Code). Dividends paid by the Fund from the net tax-exempt interest earned
from Municipal Securities qualify as exempt-interest
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<PAGE> 27
dividends if, at the close of each quarter of the fiscal year, at least 50% of
the value of the total assets of the Fund consists of Municipal Bonds. See
"Federal Tax Information" in the Statement of Additional Information.
Exempt-interest dividends paid to shareholders are not includable in the
shareholder's gross income for federal income tax purposes. The percentage of
the total dividends paid by the Fund during any taxable year that qualify as
exempt-interest dividends will be the same for all shareholders of the Fund
receiving dividends during such year.
Dividends and interest received by the Growth Fund and the Growth and
Income Fund may give rise to withholding and other taxes imposed by foreign
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Investors may be entitled to claim United States
foreign tax credits with respect to such taxes, subject to certain provisions
and limitations contained in the Code.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Trust and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisors for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or citizenship tax consequences of receipt of
dividends and distributions from the Trust.
Shareholders are notified annually of the federal tax status of dividends
and capital gains distributions, including information as to the portion
(including short-term capital gains) taxable as ordinary income, and the portion
taxable as long-term capital gains. TO AVOID BEING SUBJECT TO A 31% FEDERAL
BACKUP WITHHOLDING ON DIVIDENDS, DISTRIBUTIONS AND REDEMPTION PAYMENTS,
SHAREHOLDERS MUST FURNISH THE FUND WITH THEIR CORRECT TAXPAYER IDENTIFICATION
NUMBER. Shareholders are urged to consult their tax advisers with specific
reference to their own tax situation.
STATE AND LOCAL TAXES. The exemption of interest income for federal income
tax purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that shareholders consult their tax advisers for information in this
regard. The Municipal Bond Fund will report annually to its shareholders the
percentage and source, on a state-by-state basis, of interest income earned on
Municipal Bonds held by the Fund during the preceding year. Distributions paid
by the Fund from sources other than tax-exempt interest are generally subject to
taxation at the state and local levels.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS. Gains or losses on the
Growth Fund's, the Growth and Income Fund's, the Government Fund's and the
Municipal Bond Fund's transactions in certain listed options (except certain
equity options) on securities or indices, futures or options on futures
generally are treated as 60% long-term and 40% short-term, and positions held by
a Fund at the end of its fiscal year generally are required to be marked to
market, with the result that unrealized gains and losses are treated as though
they were realized. Gains and losses realized by a Fund on transactions in
over-the-counter options generally are short-term capital gains or losses unless
the option is exercised in which case the character of the gain or loss is
determined by the holding period of the underlying security. The Code contains
certain "straddle" rules which require deferral of losses incurred in certain
transactions involving hedged positions to the extent a Fund has unrealized
gains in offsetting positions and generally terminates the holding period of the
subject position. Additional information is set forth in the Statement of
Additional Information.
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PRIOR PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
From time to time, each of the Funds, except for the Money Market Fund, may
advertise its total return for prior periods. Any such advertisement would
include at least average annual total return quotations for one year, five years
and for the life of each Fund. Other total return quotations, aggregate or
average, over other time periods may also be included.
The total return of a Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the maximum public offering price and that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value. Total return is based on historical earnings
and asset value fluctuations and is not intended to indicate future performance.
No adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, the Government Fund and the
Municipal Bond Fund may also advertise their current "yield." Yield figures are
based on historical earnings and are not intended to indicate future
performance. Yield is determined by analyzing the Fund's net income per share
for a 30-day (or one-month) period (which period will be stated in the
advertisement), and dividing by the maximum offering price per share on the last
day of the period. A "bond equivalent" annualization method is used to reflect a
semiannual compounding. The Municipal Bond Fund's "tax-equivalent yield" is
calculated by determining the rate of return that would have to be achieved on a
fully taxable investment to produce the after-tax equivalent of the Municipal
Bond Fund's yield, assuming certain tax brackets for a Fund shareholder.
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<PAGE> 28
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Fund in accordance with generally accepted
accounting principles and from net income computed for federal income tax
reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Fund's then current dividend rate.
A Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by a Fund, portfolio maturity and a Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Fund's shares, a Fund's investment policies, and the risks of
investing in shares of a Fund. The investment return and principal value of an
investment in a Fund will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
From time to time the Money Market Fund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Fund refers to
the income generated by an investment in the Fund over a seven-day period (which
will be stated in the advertisement). This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The current and effective
yields for the seven-day period ending October 31, 1994 and a description of the
method by which the yield was calculated is contained in the Statement of
Additional Information.
To increase the yield of the Money Market Fund, the Adviser, for an
indefinite period has agreed to absorb a certain amount of the ordinary business
expenses. A yield quotation which reflects an expense reimbursement or
subsidization by the Adviser will be higher than a yield quotation without such
expense reimbursement or subsidization. The Adviser may stop absorbing these
expenses at any time without prior notice.
Since yield fluctuates, yield data 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
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions.
In reports or other communications to shareholders or in advertising
material, a Fund may compare its performance with that of other mutual funds as
listed in the ratings or rankings prepared by Lipper Analytical Services, Inc.,
Donaghue's Money Market Report, CDA, Ibbotson Associates or similar independent
services which monitor the performance of mutual funds or with the Consumer
Price Index, Dow Jones Industrial Average, Salomon Brothers' various indices,
Standard & Poor's or NASDAQ or other appropriate indices of investment
securities or with investment or savings vehicles. The performance information
may also include evaluations of a Fund published by nationally recognized
ranking services and by financial publications that are nationally recognized,
such as Business Week, Forbes, Fortune, Financial World, Institutional Investor,
Investor's Business Daily, Kiplinger's Personal Finance Magazine, Money, Mutual
Fund Forecaster, New York Times, Pension World, Stanger's Investment Advisor,
U.S. News & World Report, USA Today and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement would also
include the standard performance information required by the SEC as described
above. For these purposes, the performance of a Fund, as well as the performance
of other mutual funds or indices, do not reflect sales charges, the inclusion of
which would reduce Fund performance.
The Funds, except for the Money Market Fund, may, from time to time,
illustrate the benefits of tax-deferral by comparing taxable investments to
investments made through tax-deferred retirement plans and the Funds may
illustrate in graph or chart form, or otherwise, the benefits of dollar cost
averaging by comparing investments made pursuant to a systematic investment plan
to investments made in a rising market.
The Funds may, from time to time, in reports or other communications to
shareholders or in advertising material, illustrate the benefits of compounding
at various assumed rates of return. Such illustrations may be in the form of
charts or graphs and will not be based on historical returns experienced by the
Funds. The Funds may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Funds may, from time to time, in communications to shareholders or in
advertising material illustrate in graph, chart or narrative form: a) the
importance of investment goals such as owning a home, funding a college
education, or saving money for retirement. These illustrations may depict the
rising costs of college and mortgage payments and the declining number of
workers supporting the Social Security system. Fund communications and
advertisements may also encourage investments in the Funds for purposes of
helping families to achieve their investment goals; b) the benefits and
popularity of purchasing term insurance as opposed to other, more expensive
types of insurance in addition to the possible benefits of investing the savings
in mutual funds; c) the growth of mutual fund assets as reported by industry
publications; and d) the theory of decreasing responsibility, i.e. as
individuals grow older and their assets increase, the need for life insurance
generally decreases.
The Municipal Bond Fund may, from time to time, illustrate the growth
advantage of tax-free income by comparing hypothetical taxable growth
compounding examples to hypothetical tax-free growth compounding examples.
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The Trust's Annual Report contains additional performance information with
respect to each Fund discussed in this Prospectus. A copy of the Annual Report
may be obtained without charge by calling or writing the Trust at the telephone
number and address printed on the cover page of this Prospectus.
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
ORGANIZATION OF THE TRUST. The Trust was organized under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." It is a diversified, open-end management
investment company. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of $.01 par value, in the Funds. Shares issued are
fully paid, non-assessable and have no preemptive or conversion rights. In the
event of liquidation of any Fund, shareholders of such Fund are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares have equal voting rights, except that only shares of
the respective Fund are entitled to vote on matters concerning only that Fund.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Shareholders may, in accordance with the Declaration of Trust, cause a meeting
of shareholders to be held for the purpose of voting on the removal of Trustees.
Except as set forth above, the Trustees shall continue to hold office and
appoint successor Trustees.
The Declaration of Trust establishing the Trust, dated January 29, 1987, a
copy of which together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Common Sense Trust" refers to the Trustees under the
Declaration collectively as Trustees, not as individuals or personally; and no
Trustee, officer or shareholder of the Trust shall be held to any personal
liability, nor shall resort be had to their private property for the
satisfaction of any obligation or liability of any Fund but the assets of the
applicable Fund only shall be liable.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed by writing
the Transfer Agent at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia
30199-0062 or calling (800) 544-5445.
TRANSFER AGENT. PFS Shareholder Services, an indirect subsidiary of
Travelers, serves as Transfer Agent for the Fund. See "The Trust and Its
Management."
LEGAL COUNSEL. Sullivan & Worcester, 1025 Connecticut Avenue N.W.,
Washington, D.C. 20036, is legal counsel to the Trust.
INDEPENDENT AUDITORS. Ernst & Young LLP, 1221 McKinney, Suite 2400,
Houston, Texas 77010, are the independent auditors for the Trust.
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STATEMENT OF ADDITIONAL INFORMATION
COMMON SENSE TRUST
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
AUGUST 18, 1995
Common Sense Trust (the "Trust") is a diversified, open-end management
investment company with ten separate Portfolios, five of which are discussed
herein: the Common Sense Growth Fund (the "Growth Fund"), the Common Sense
Growth and Income Fund (the "Growth and Income Fund"), the Common Sense
Government Fund (the "Government Fund"), the Common Sense Municipal Bond Fund
(the "Municipal Bond Fund") and the Common Sense Money Market Fund (the "Money
Market Fund"). Each Fund is in effect a separate fund issuing its own shares.
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus bearing the same date and should be read in conjunction with the
Prospectus. A Prospectus may be obtained without charge by writing PFS
Distributors at 3100 Breckinridge Boulevard, Bldg. 200, Duluth, Georgia
30199-0001.
TABLE OF CONTENTS
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GENERAL INFORMATION................................................................... 2
GOALS AND INVESTMENT POLICIES......................................................... 2
Growth Fund......................................................................... 2
Growth and Income Fund.............................................................. 2
Government Fund..................................................................... 3
Municipal Bond Fund................................................................. 5
Money Market Fund................................................................... 6
REPURCHASE AGREEMENTS................................................................. 7
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS........................................ 7
FORWARD COMMITMENTS................................................................... 12
LOANS OF PORTFOLIO SECURITIES......................................................... 13
INVESTMENT RESTRICTIONS............................................................... 13
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 16
INVESTMENT ADVISORY AGREEMENT......................................................... 20
DISTRIBUTOR........................................................................... 22
PORTFOLIO TURNOVER.................................................................... 23
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 23
DETERMINATION OF NET ASSET VALUE...................................................... 26
PURCHASE AND REDEMPTION OF SHARES..................................................... 27
DISTRIBUTIONS AND TAXES............................................................... 29
OTHER INFORMATION..................................................................... 32
FINANCIAL STATEMENTS.................................................................. 36
APPENDIX 1............................................................................ 37
APPENDIX 2............................................................................ 39
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GENERAL INFORMATION
Van Kampen American Capital Asset Management, Inc. (the "Adviser") is a
subsidiary of Van Kampen American Capital, Inc. ("VKAC") which is a wholly owned
subsidiary of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is
controlled, through the ownership of a substantial majority of its common stock,
by the Clayton & Dubilier Private Equity Fund IV Limited Partnership (the "C&D
L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York private investment firm. The general partner
of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel,
Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than seven
percent of the common stock of VK/AC Holding and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding. The Adviser together with its predecessors has been in the
investment advisory business since 1926.
PFS Distributors (the "Distributor") is a subsidiary of PFS Distributors,
Inc., an affiliate of Primerica Financial Services, Inc. ("Primerica
Financial"). PFS Shareholder Services (the "Transfer Agent"), is a subsidiary of
PFS Services, Inc., an affiliate of Primerica Financial. Common Sense Custodial
Services, L.P. ("CSCS") is an affiliate of Primerica Financial Primerica
Financial is an indirect wholly owned subsidiary of Travelers. Travelers is
engaged primarily in the financial and service businesses.
As of July 31, 1995, no person was known to own beneficially or of record
as much as five percent of the outstanding shares of any Fund of the Trust
except as discussed herein. Van Kampen American Capital Trust Company, P.O. Box
944, Houston, Texas 77001-0944, holds of record as Custodian for certain
employee benefit plans and individual retirement accounts the following
percentages of the outstanding shares of the listed portfolios:
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Growth Fund.......................................................... 67.4%
Growth and Income Fund............................................... 57.9%
Government Fund...................................................... 44.7%
Money Market Fund.................................................... 18.5%
Municipal Bond Fund.................................................. 0%
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GOALS AND INVESTMENT POLICIES
The following disclosures supplement disclosures set forth under an
identical caption in the Prospectus and do not, standing alone, present a
complete and accurate explanation of the matters disclosed. Readers must refer
also to this caption in the Prospectus for a complete presentation of the
matters disclosed below.
GROWTH FUND
The Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks and options on common stocks.
The Fund may also engage in transactions involving stock index futures contracts
and options on such contracts. Any income received on such securities is
incidental to the goal of capital appreciation.
GROWTH AND INCOME FUND
The Fund seeks reasonable growth and income through investments in equity
securities including common and preferred stocks and securities convertible into
common and preferred stocks.
In general, the Fund intends to invest in securities that have yielded a
dividend or interest return to security holders within the past twelve months,
however, it may invest in non-income producing investments held for anticipated
increase in value. The Fund may also engage in transactions in options, futures
contracts, and options on futures.
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GOVERNMENT FUND
The Fund seeks to provide investors with a high current return consistent
with preservation of capital by investing in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The Fund
may also purchase and sell options and engage in transactions in interest rate
futures contracts and options on such contracts in order to hedge against
changes in interest rates.
The Fund seeks high current return consistent with preservation of capital.
The Fund intends to invest at least 80% of its assets in debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
Repurchase agreements may be entered into with domestic banks or broker-dealers
deemed creditworthy by the Advisers solely for purposes of investing the Fund's
cash reserves or when the Fund is in a temporary defensive posture. The Fund may
write covered or fully collateralized call options on U.S. Government securities
and enter into closing or offsetting purchase transactions with respect to
certain of such options. The Fund may also write secured put options and enter
into closing or offsetting purchase transactions with respect to such options.
The Fund may write both listed and over-the-counter options as described in the
Prospectus.
The Fund seeks to obtain a high current return from the following sources:
- interest paid on the Fund's portfolio securities;
- premiums earned upon the expiration of options written;
- net profits from closing transactions; and
- net gains from the sale of portfolio securities on the exercise of
options or otherwise.
The Fund is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect the
value of and yields on U.S. Government securities. Accordingly, there is no
assurance that the Fund's investment objective will be achieved.
MORTGAGE RELATED SECURITIES. The Government Fund may invest in
mortgage-related securities, including those representing an undivided ownership
interest in a pool of mortgage loans, e.g., GNMA, FNMA, FHLMC Certificates.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National Mortgage
Association ("GNMA") is a wholly owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities backed
by pools of mortgages.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid and owned on the mortgage pool net of fees paid to the
"issuer" and GNMA, regardless of whether or not the mortgagor actually makes the
payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FMHA"), or guaranteed by the Veterans Administration
("VA"). Once a pool of such mortgages is assembled and approved by GNMA, the
GNMA guarantee is backed by the full faith and credit of the U.S. Government.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before maturity of the mortgages in the pool. The Fund normally
will not distribute principal payments
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(whether regular or prepaid) to its shareholders. Rather, it will invest such
payments in additional mortgage-related securities of the types described above
or other U.S. Government securities. Interest received by the Fund will,
however, be distributed to shareholders. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.
As prepayment rates of the individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the 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.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather
than at par.
2. After issuance, Certificates usually trade in the secondary market
at a premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case
for traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12 year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of one percent more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a twelve-year life.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC") was
created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. FHLMC issues two types of mortgage
pass-through securities, mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. Like GNMA Certificates, PCs are assumed to
be prepaid fully in their twelfth year. FHLMC guarantees timely monthly payment
of interest of PCs and the ultimate payment of principle.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately 10 years.
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FNMA SECURITIES. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages insured by the
FHA. FNMA issues guarantee mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and the full return of principal. Like GNMA Certificates,
FNMA Certificates are assumed to be prepaid fully in their twelfth year.
Risk of foreclosure of the underlying mortgages is greater with FHLMC and
FNMA securities because, unlike GNMA securities, FHLMC and FNMA securities are
not guaranteed by the full faith and credit of the U.S. Government.
MUNICIPAL BOND FUND
The Fund seeks to provide investors as high a level of current income
exempt from federal income tax as is consistent with the preservation of
capital.
MUNICIPAL BONDS. "Municipal Bonds" include debt obligations issued to
obtain funds for various public purposes, including construction of a wide range
of public facilities, refunding of outstanding obligations and obtaining funds
for general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development obligations are
issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Bonds if the interest paid thereon is exempt from federal income tax.
Municipal Bonds also include short-term tax-exempt municipal obligations such as
tax anticipation notes, bond anticipation notes, revenue anticipation notes, and
variable rate demand notes.
The two principal classifications of Municipal Bonds are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of full faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations 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 from other
specific revenue sources such as the user of the facility being financed.
Industrial development bonds, including pollution control bonds, are revenue
bonds and do not constitute the pledge of the credit or taxing power of the
issuer of such bonds. The payment of the principal and interest on such
industrial revenue bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. The Fund's portfolio may also include "moral obligation" bonds which
are normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality which is the issuer of the bonds.
When the Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the trade.
Failure of the buyer or seller to do so may result in the Fund missing the
opportunity of obtaining a price considered to be advantageous.
On a temporary basis, due to market conditions, the Fund may invest in
Municipal Notes which include demand notes and short-term municipal obligations
(such as tax anticipation notes, revenue anticipation notes, construction loan
notes and short-term discount notes) and tax-exempt commercial paper, provided
that such obligations have the ratings described in the Prospectus. Demand notes
are obligations which normally have a stated maturity in excess of one year, but
permit any holder to demand payment of principal plus accrued interest upon a
specified number of days' notice. Frequently, such obligations are secured by
letters of credit or other credit support arrangement provided by banks. The
issuer of such notes normally has a corresponding right, after a given period,
to prepay at its discretion the outstanding principal of the note plus accrued
interest upon a specified number of days' notice to the noteholders. The
interest rate on a demand note may be based on a known lending rate, such as a
bank's prime rate, and may be adjusted when such rate changes, or the interest
rate on a demand note may be a market rate that is adjusted at specified
intervals. Participation interests in variable rate demand notes will be
purchased only if, in the opinion of counsel, interest income on such interest
will be tax-exempt when distributed as dividends to shareholders.
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Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the maturity of the obligation, and the rating of
the issue. The ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of the Municipal Bonds in
which the Fund invests to meet their obligations for the payment of interest and
principal when due. There are variations in the risks involved in holding
Municipal Bonds, both within a particular classification and among
classifications, depending on numerous factors. Furthermore, the rights of
holders of Municipal Bonds and the obligations of the issuers of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally, and such laws, if
any, which may be enacted by Congress or state legislatures imposing a
moratorium on the payment of principal and interest or imposing other
constraints or conditions on the payments of principal and interest on Municipal
Bonds.
TEMPORARY INVESTMENTS. The taxable securities in which the Municipal Bond
Fund may invest as temporary investments include U.S. Government securities,
domestic bank certificates of deposit and repurchase agreements.
U.S. Government securities include obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line or credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality, or (d)
the credit of the instrumentality. Such agencies or instrumentalities include,
but are not limited to, the Federal National Mortgage Association, the
Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration. The Fund may not invest in a certificate of deposit issued
by a commercial bank unless the bank is organized and operating in the United
States and has total assets of at least $500 million and is a member of the
Federal Deposit Insurance Corporation.
MONEY MARKET FUND
The Fund seeks protection of capital and high current income by investing
in money market instruments.
The Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing the Fund's securities pursuant to Rule 2a-7 under the Investment Company
Act of 1940 (the "1940 Act"), certain requirements of which are summarized
below.
In accordance with Rule 2a-7, the Fund is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Trustees to present minimal credit risks and which are rated
in one of the two highest rating categories for debt obligations by at least two
nationally recognized statistical rating organizations (or one rating
organization if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Trustees. The nationally recognized statistical rating
organizations currently rating instruments of the type the Fund may purchase are
Moody's Investors Service, Standard & Poor's Corporation, Fitch Investors
Services, Inc., Duff and Phelps, Inc. and IBCA Limited and IBCA Inc. See
Appendix hereto.
In addition, the Fund will not invest more than 5% of its total assets in
the securities (including the securities collateralizing a repurchase agreement)
of, or subject to puts issued by, a single issuer, except that (i) the Fund may
invest more than 5% of its total assets in a single issuer for a period of up to
three business days in certain limited circumstances, (ii) the Fund may invest
in obligations issued or guaranteed by the U.S. Government without any such
limitation, and (iii) the limitation with respect to puts does not apply to
unconditional puts if no more than 10% of the Fund's total assets is invested in
securities issued or guaranteed by the issuer of the unconditional put.
Investments in rated securities not rated in the highest category by at least
two rating organizations (or one rating organization if the instrument was rated
by only one such organization), and unrated securities not determined by the
Trustees to be comparable to those rated in the highest category, will be
limited to 5% of the Fund's total assets, with the investment in any one such
issuer being limited to no more than the greater of 1% of the Fund's total
assets or $1,000,000. As to each security,
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these percentages are measured at the time the Fund purchases the security.
There can be no assurance that the Fund will be able to maintain a stable net
asset value of $1.00 per share.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with broker-dealers or
domestic banks. The Trustees will review on a continuing basis those
institutions which enter into a repurchase agreement with the Fund. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, usually not more than seven days from
the date of purchase, thereby determining the yield during the purchaser's
holding period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered to be loans under the 1940 Act. The Fund will
make payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement is required to maintain the value of the underlying
securities marked to market daily at not less than the repurchase price. The
underlying securities (normally securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
(ALL FUNDS EXCEPT MONEY MARKET FUND)
SELLING CALL AND PUT OPTIONS
(GROWTH AND INCOME FUND, GROWTH FUND AND GOVERNMENT FUND)
PURPOSE. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund's current return can be expected to
fluctuate because premiums earned from writing options and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities also results in a higher
portfolio turnover.
SELLING OPTIONS. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Growth and Income Fund
and the Growth Fund sell call options only on a covered basis. The Government
Fund sells call options either on a covered basis, or for cross-hedging
purposes. A call option is covered if the Fund owns or has the right to acquire
the underlying securities subject to the call option at all times during the
option period. Thus, the Government Fund may sell options on U.S. Government
securities or forward commitments of such securities. An option is for
cross-hedging purposes (relative to Government Fund only) to hedge against a
security which the Fund owns or has the right to acquire. In such circumstances,
the Government Fund maintains in a segregated account with the Fund's Custodian,
cash or U.S. Government securities in an amount not less than the market value
of the underlying security, marked to market daily, while the option is
outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. A Fund sells put options only on a
secured basis, which means that, at all times during the option period, the Fund
would maintain in a segregated account with its Custodian cash, cash equivalents
or U.S. Government securities in an amount of not less than the exercise price
of the option, or will hold a put on the same underlying security at an equal or
greater exercise price. A Fund generally sells put options when the Adviser
wishes to purchase the underlying security for the Fund's portfolio at a price
lower than the current market price of the security.
CLOSING PURCHASE TRANSACTIONS AND OFFSETTING TRANSACTIONS. In order to
terminate its position as writer of a call or put option, a Fund may enter into
a "closing purchase transaction," which is the purchase of a call
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(put) on the same underlying security and having the same exercise price and
expiration date as the call (put) previously sold by the Fund. The Fund will
realize a gain (loss) if the premium plus commission paid in the closing
purchase transaction is less (greater) than the premium it received on the sale
of the option. A Fund would also realize a gain if an option it has sold lapses
unexercised.
A Fund may sell options that are listed on an exchange as well as options
that are traded over-the-counter. A Fund may close out its position as writer of
an option only if a liquid secondary market exists for options of that series,
but there is no assurance that such a market will exist, particularly in the
case of over-the-counter options, since they can be closed out only with the
other party to the transaction. Alternatively, a Fund may purchase an offsetting
option, which does not close out its position as a writer, but provides an asset
of equal value to its obligation under the option sold. If a Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
RISKS OF SELLING OPTIONS. By selling a call option, a Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the United States exchanges has established limitations governing
the maximum number of call or put options on the same underlying security
(whether or not covered) that may be written by a single investor, whether
acting alone or in concert with others, regardless of whether such options are
written on one or more accounts or through one or more brokers. An exchange may
order the liquidation of positions found to be in violation of those limits, and
it may impose other sanctions or restrictions. These position limits may
restrict the number of options the Fund may be able to write.
PURCHASING CALL AND PUT OPTIONS (GROWTH AND INCOME FUND, GROWTH FUND AND
GOVERNMENT FUND)
A Fund may purchase call options to protect (e.g., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options may be purchased for their leverage potential. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, a Fund can benefit from any significant
increase in the price of the underlying security to a greater extent than had it
invested the same amount in the security directly. However, because of the very
high volatility of option premiums, a Fund could bear a significant risk of
losing the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Conversely, put options may be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of a Fund's assets generally. Alternatively, put options may be purchased for
capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options. In any case, the purchase of
options for capital appreciation would increase the Fund's volatility by
increasing the impact of changes in the market price of the underlying
securities on the Fund's net asset value.
The Funds may purchase either listed or over-the-counter options.
OPTIONS ON STOCK INDEXES (GROWTH AND INCOME FUND AND GROWTH FUND)
Options on stock indices are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option,
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multiplied by a specified dollar multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. Options are currently traded on The Chicago Board
Options Exchange, the New York Stock Exchange, the American Stock Exchange and
other exchanges.
Gain or loss to a Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an Exchange, or it
may let the option expire unexercised.
FUTURES CONTRACTS (ALL FUNDS EXCEPT MONEY MARKET FUND)
The Trust may engage in transactions involving futures contracts and
related options in accordance with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Trust and its Funds is
exempt from registration as a "commodity pool".
TYPES OF CONTRACTS. An interest rate futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of a
specific type of debt security at a specified future time and at a specified
price. Although interest rate futures contracts call for delivery of specified
securities, in most cases the contracts are closed out (by an offsetting
purchase or sale) prior to actual delivery, with the difference between the
contract price and the offsetting price paid in cash.
A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index value at the close of the last trading day of the contract and the
price at which the futures contract is originally struck.
A stock index futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of cash equal to a specified dollar
amount times the difference between the stock index value at a specified time
and the price at which the futures contract is originally struck. A stock index
fluctuates with changes in the market values of the stocks included. No physical
delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in differences in
correlation of the futures contracts with movements in the value of the
securities being hedged.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto Stock
Exchange. Futures and futures options on the Nikkei Index are traded on the CME
and United States commodity exchanges may develop futures and futures options on
other indices of foreign securities. Futures and options on United States
devised index of foreign stocks are also being developed.
INITIAL AND VARIATION MARGIN. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, a Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is
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known as initial margin. The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transaction. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract, which is returned to the
Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.
For example, when a Fund purchases a futures contract and the price of the
underlying security or index rises, that position increases in value, and the
Fund receives from the broker a variation margin payment equal to that increase
in value. Conversely, where the Fund purchases a futures contract and the value
of the underlying security or index declines, the position is less valuable, and
the Fund is required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
FUTURES STRATEGIES. When a Fund anticipates a significant market or market
sector advance, the purchase of a futures contract affords a hedge against not
participating in the advance at a time when the Fund is not fully invested
("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. A Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
For example, if the Government Fund holds long-term U.S. Government
securities, and a rise in long-term interest rates is anticipated, it could, in
lieu of selling its portfolio securities, sell futures contracts for similar
long-term securities. If interest rates increased and the value of the Fund's
securities declined during the period the contracts were outstanding, the value
of the Fund's futures contracts should increase, thereby protecting the Fund by
preventing net asset value from declining as much as it otherwise would have.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
over-the-counter option purchased by the Government Fund, the Fund could
experience a loss of all or part of the value of the option. Transactions are
entered into by a Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
SPECIAL RISKS ASSOCIATED WITH FUTURES TRANSACTIONS. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the portfolio of
securities being hedged diverges from the securities upon which the futures
contract is based. If the price of the futures contract moves less than the
price of the securities being hedged, the hedge will not be fully effective, but
if the price of the securities being hedged moves in an unfavorable direction,
the Fund would be in a better position than if it had not tried to hedge.
However, if the price of the security being hedged moves in a favorable
direction, the hedge will partially offset this advantage. To compensate for the
imperfect correlation of movements of prices of a futures contract and the
securities being hedged, a Fund
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<PAGE> 40
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of the securities being hedged if the historical volatility of the
securities being hedged has been greater than the historical volatility of the
securities underlying the futures contract, or may buy or sell fewer futures
contracts if the historical volatility of the securities being hedged is less
than the historical volatility of the securities underlying the futures
contract. Nevertheless, the price of the futures contract may move less than the
price of the securities which are the subject of the hedge (or the value of
futures contracts and securities held by a Fund may decline simultaneously),
resulting in the hedge not being fully effective.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to initial margin depository and maintenance
requirements. Rather than meet additional margin deposit requirements, investors
may close futures contracts through offsetting transactions, which could distort
the normal relationship between the futures market and the securities underlying
the futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an Exchange or Board of Trade that
provides a market for such futures contracts. Although a Fund intends to
purchase or sell futures only on Exchanges and Boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, a Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged will not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability
correctly to predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in futures
contracts. In such cases, if the Fund has insufficient cash, it may have to sell
portfolio securities at a time when it is disadvantageous to do so in order to
meet the daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that a Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed 5% of the fair market value of a Fund's assets. Relative to the purchase
or sale of futures contracts by a Fund, an amount of cash, cash equivalents or
U.S. Government securities equal to the market value of the obligation under the
futures contracts (less any related margin deposits) will be maintained in a
segregated account with the Custodian.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS. Each of the Exchanges
has established limitations governing the maximum number of call or put options
on the same underlying security or futures contract (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more accounts or through
one or more brokers). Option positions of all investment companies advised by
the Adviser are combined for purposes of these limits. An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Fund may sell.
Although a Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most
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<PAGE> 41
U.S. futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit. It is possible that futures contract prices would
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses. In such event, and in the
event of adverse price movements, a Fund would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
A Fund pays commissions on futures contracts and options transactions.
OPTIONS ON FUTURES CONTRACTS (ALL FUNDS EXCEPT MONEY MARKET FUND)
A Fund may also purchase and sell options on futures contracts which are
traded on an Exchange. 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. As a seller of an option on a futures contract, a Fund is subject to
initial margin and maintenance requirements similar to those applicable to
futures contracts. In addition, net option premiums received by a Fund are
required to be included as initial margin deposits. When an option on a futures
contract is exercised, delivery of the futures position is accompanied by cash
representing the difference between the current market price of the futures
contract and the exercise price of the option. A Fund may purchase put options
on futures contracts in lieu of, and for the same purposes as, the sale of a
futures contract. The purchase of call options on futures contracts in intended
to serve the same purpose as the actual purchase of the futures contract.
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on stock index futures. The Advisers will not
purchase options on stock index futures on any Exchange unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risks in connection with options on futures transactions are no greater than
the risks in connection with stock index futures transactions. Compared to the
use of stock index futures, the purchase of options on stock index futures
involves less potential risk to the Growth Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However there
may be circumstances, such as when there is no movement in the level of the
index, when the use of an option on a stock index future would result in a loss
to the Fund when the use of a stock index future would not.
FORWARD COMMITMENTS (GOVERNMENT FUND ONLY)
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase continues. Since the
market value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of the Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to
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<PAGE> 42
sell continues. By entering into a Forward Commitment sale transaction, the Fund
forgoes or reduces the potential for both gain and loss in the security which is
being hedged by the Forward Commitment sale.
LOANS OF PORTFOLIO SECURITIES
Each of the Funds may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that cash equal to 100% of the
market value of the securities loaned is deposited by the borrower with the
particular Fund and is marked to market daily. While such securities are on
loan, the borrower is required to pay the Fund any income accruing thereon.
Furthermore, the Fund may invest the cash collateral in portfolio securities
thereby increasing the return to the Fund as well as increasing the market risk
to the Fund. A Fund will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its shares are
qualified for sale. However, should the Fund believe that lending securities is
in the best interests of the Fund's shareholders, it would consider withdrawing
its shares from sale in any such state.
Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. Each Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions which, may not be changed
with respect to any Fund without the approval of the holders of a majority of
the outstanding shares of such Fund. Such majority (as defined by the 1940 Act)
is the lesser of (i) 67% or more of the voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding voting securities. The percentage limitations need only be met at
the time the investment is made or after relevant action is taken. These
restrictions provide that a Fund shall not:
1. Make any investment in real estate, commodities or commodities
contracts, or warrants except that the Growth and Income Fund, the Growth
Fund, the Government Fund and the Municipal Bond Fund may engage in
transactions in futures and related options, the Government Fund may
purchase or sell securities which are secured by real estate, and the
Growth Fund may acquire warrants or other rights to subscribe to securities
of companies issuing such warrants or rights, or of parents or subsidiaries
of such companies, although the Growth Fund may not invest more than 5% of
its net assets in such securities valued at the lower of cost or market,
nor more than 2% of its net assets in such securities (valued on such
basis) which are not listed on the New York or American Stock Exchanges
(warrants and rights represent options, usually for a specified period of
time, to purchase a particular security at a specified price from the
issuer). Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitations;
2. Lend money except by the purchase of bonds or other debt
obligations of types commonly offered publicly or privately and purchased
by financial institutions, including investments in repurchase agreements.
A Fund will not invest in repurchase agreements maturing in more than seven
days (unless subject to a demand feature) if any such investment, together
with any illiquid securities (including securities which are subject to
legal or contractual restrictions on resale) held by the Fund, exceeds 10%
of the market or other fair value of its total net assets; provided,
however, that with respect to the Growth Fund and the Growth and Income
Fund, illiquid securities shall exclude shares of other open-end investment
companies owned by the Fund but include the Fund's pro rata portion of the
securities and other assets owned by any such company. See "Repurchase
Agreements";
3. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by a Fund of an
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initial or variation margin in connection with futures contracts or related
option transactions is not considered the purchase of a security on margin.
4. Invest in securities of any company if any officer or trustee of
the Trust or of the Adviser owns more than 1/2 of 1% of the outstanding
securities of such company, and such officers and trustees own more than 5%
of the outstanding securities of such issuer.
5. Invest in oil or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Growth Fund, and
the Growth and Income Fund, may invest in the securities of companies which
invest in or sponsor such programs.
6. Invest in companies for the purpose of acquiring control or
management thereof.
7. Underwrite securities of other companies, except insofar as a Fund
might be deemed to be an underwriter for purposes of the Securities Act of
1933 ("1933 Act") in the resale of any securities owned by the Fund;
8. Lend its portfolio securities in excess of 10% of its total assets,
both taken at market value provided that any loans shall be in accordance
with the guidelines established for such loans by the Trustees as described
under "Loans of Portfolio Securities", including the maintenance of
collateral from the borrower equal at all times to the current market value
of the securities loaned;
9. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except through
purchase in the open market in a transaction involving no commission or
profit to a sponsor or dealer (other than the customary brokers commission)
or as part of a merger, consolidation or other acquisition, except that the
Growth Fund and the Growth and Income Fund may acquire shares of other
open-end investment companies to the extent permitted by rule or order of
the SEC exempting them from the limitations imposed by Section 12(d)(1) of
the 1940 Act.
10. With respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer (except obligations of the U.S.
Government, its agencies or instrumentalities and repurchase agreements
secured thereby), or purchase more than 10% of the outstanding voting
securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies by the Growth
Fund, and the Growth and Income Fund, to the extent permitted by rule or
order of the SEC exempting them from the limitations imposed by Section
12(d)(1) of the 1940 Act;
11. Purchase a restricted security or a security for which market
quotations are not readily available if as a result of such purchase more
than 5% of the Fund's assets would be invested in such securities;
provided, however, that with respect to the Growth Fund and the Growth and
Income Fund, this limitation shall exclude shares of other open-end
investment companies owned by the Fund but include the Fund's pro rata
portion of the securities and other assets owned by any such company.
Illiquid securities include securities subject to legal or contractual
restrictions on resale, which include repurchase agreements which have a
maturity of longer than seven days. This policy does not apply to
restricted securities eligible for resale pursuant to Rule 144A under the
1933 Act which the Trustees or the Adviser under Board approved guidelines
may determine are liquid nor does it apply to other securities for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists.
12. Invest more than 25% of the value of its total assets in
securities of issuers in any particular industry; provided, however, that
with respect to the Growth Fund and the Growth and Income Fund, this
limitation shall exclude shares of other open-end investment companies
owned by the Fund but include the Fund's pro rata portion of the securities
and other assets owned by any such company. (This does not restrict any of
the Funds from investing in obligations of the U.S. Government and
repurchase agreements secured thereby, and, in the case of the Money Market
Fund, does not restrict investments in money market instruments of banks.);
13. Borrow in excess of 10% of the market or other fair value of its
total assets, or pledge its assets to an extent greater than 5% of the
market or other fair value of its total assets, provided that so long as
any borrowing exceeds 5% of the value of the Fund's total assets, the fund
shall not purchase portfolio
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securities. Any such borrowings shall be from banks and shall be undertaken
only as a temporary measure for extraordinary or emergency purposes.
Deposits in escrow in connection with the writing of covered call or
secured put options, or in connection with the purchase or sale of forward
contracts, futures contracts, foreign currency futures and related options,
are not deemed to be a pledge or other encumbrance;
14. Invest more than 5% of its assets in companies having a record
together with predecessors, of less than three years' continuous operation,
except that the Growth Fund and the Growth and Income Fund, may acquire
shares of other open-end investment companies to the extent permitted by
rule or order of the SEC exempting them from the limitations imposed by
Section 12(d)(1) of the 1940 Act.
15. Engage in option writing for speculative purposes or purchase call
or put options on securities if, as a result, more than 5% of its net
assets of the Fund would be invested in premiums on such options; or
16. Purchase any security issued by any company deriving more than 25%
of its gross revenues from the manufacture of alcohol or tobacco.
In addition to the fundamental policies which may only be changed by
shareholders, the Trust has made an undertaking with one state that the Growth
Fund shall not invest more than 5% of its total assets in special situations.
For purposes of this limitation, the Trust will consider a "special situation"
to include companies coming out of bankruptcy, companies in the process of
merger or reorganization or companies which in the opinion of management for
other reasons are in a severe state of flux. The Trust has made an undertaking
with another state that a Fund shall not acquire the securities of a closed-end
investment company if immediately following such acquisition the aggregate value
of all securities issued by closed-end investment companies owned by all Funds
shall exceed 10% of the value of the total assets of the acquiring Fund. When a
Fund invests in other investment companies, such investments may result in a
duplication of management and distribution fees and other operating expenses.
The Trust has also made an undertaking with that state that the Growth Fund,
Growth and Income Fund and Government Fund shall not invest in real estate
partnerships. The Trust has made an undertaking with certain states that at
least 30 days prior to any change by a Fund in its investment objective the Fund
will provide written notice to shareholders of such change and will waive any
fee if the shareholder redeems or exchanges the account. The Trust has
undertaken with a certain state that the Growth Fund and the Growth and Income
Fund limit its investments in restricted securities, unseasoned issuers and not
readily marketable securities to 15% of its total assets, provided, however,
that its investment in restricted securities will be limited to a maximum of 10%
of total assets.
The Trust has adopted additional investment restrictions, which may be
changed by the Trustees without a vote of shareholders, as follows:
The Trust shall not make short sales of securities unless at the time of
sale a Fund owns or has the right to acquire at no additional cost securities
identical to those sold short; provided that this prohibition does not apply to
the writing of options or the sale of forward contracts, futures, foreign
currency futures or related options.
FOREIGN INVESTMENTS. The Growth Fund, and the Growth, and Income Fund may
not invest in the securities of a foreign issuer if, at the time of acquisition,
more than 20% of the value of the Fund's total assets would be invested in such
securities.
FUTURES CONTRACTS AND OPTIONS. In addition, the Growth Fund and the Growth
and Income Fund may not write, purchase or sell puts, calls or combinations
thereof, except that each Fund may (a) write covered call options with respect
to any part or all of its portfolio securities, write secured put options, or
enter into closing purchase transactions with respect to such options, (b)
purchase and sell put options to the extent that the premiums paid for all such
options do not exceed 10% of its total assets and only if the Fund owns the
securities covered by the put option at the time of purchase, and (c) engage in
futures contracts and related options transactions as described herein.
The Government Fund may not write, purchase or sell puts, calls or
combinations thereof, except that the Fund may (a) write covered or fully
collateralized call options, write secured put options, and enter into
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<PAGE> 45
closing or offsetting purchase transactions with respect to such options, (b)
purchase and sell options to the extent that the premiums paid for all such
options owned at any time do not exceed 10% of its total assets, and (c) engage
in futures contracts and related options transactions as described herein.
The Municipal Bond Fund may engage in futures contracts and related options
as described herein.
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees and executive officers and their principal occupations for the
past five years are listed below.
TRUSTEES
DONALD M. CARLTON, Trustee. Radian Corporation, 8501 N. Mopac Blvd.,
Building No. 6, Austin, Texas 78759. Chief Executive Officer of Radian
Corporation (research and development); Director of The Hartford Steam Boiler
Inspection and Insurance Company (insurance/engineering services), Joy
Technologies, Inc. (manufacturer/servicer of coal mining equipment), and Medical
Polymers Technologies, Inc.(1)
Age: 58
A. BENTON COCANOUGHER, Trustee. Texas A & M University, 601 Blocker Bldg.,
College Station, Texas 77843-4113. Interim Senior Vice President and Dean of
College of Business Administration and Graduate School of Business of Texas A &
M University; Director of Randall's Food Markets, Inc.; formerly Senior Vice
President and Dean of the University of Houston.(1)
Age: 57
STEPHEN RANDOLPH GROSS, Trustee. 2625 Cumberland Parkway, Suite 400,
Atlanta, Georgia 30339. Managing Partner of Gross, Collins & Cress, P.C.
(accounting firm); Director of Charter Bank & Trust.(1)
Age: 47
NORMAN HACKERMAN, Trustee. The Robert A. Welch Foundation, 4605 Post Oak
Place, Suite 200, Houston, Texas 77027. Chairman of the Scientific Advisory
Board of The Robert A. Welch Foundation; Director of Scientific Measurement
Systems, Inc. (industrial tomography), Radian Corporation (research and
development), Fueltech, Inc. (combustion), Columbia Scientific Instruments, Inc.
(instrument manufacturing), Carbon Fuels Corp. (coal refinery), and American
General Series Portfolio Co. (mutual fund); President Emeritus of Rice
University, Houston, Texas; formerly Director of Electrosource, Inc. (lead
storage battery manufacturer), and Vista Chemical Co.(1)(2)
Age: 83
ROBERT D.H. HARVEY, Trustee. Nations Bank, 10 Light Street, P.O. Box 987,
Baltimore, Maryland 21203. Formerly Chairman of the Board, Chief Executive
Officer and Vice Chairman of the Board of Maryland National Bank, Baltimore,
Maryland (bank holding company).(1)
Age: 75
JEFFREY B. LANE,* Trustee. 1345 Avenue of the Americas, New York, New York
10105. President, Director and Member of the Executive Committee of Smith
Barney, Harris Upham International Incorporated; Vice Chairman and Director of
Smith Barney Inc.; Director and Vice Chairman of Smith Barney, Inc.; Director of
the Long Island Jewish Medical Center, and Woodmere Academy; formerly President
of Shearson Lehman Brothers, Inc.; formerly President and Director of Primerica
Holdings, Inc.
Age: 53
ALAN G. MERTEN, Trustee. Johnson Graduate School of Management, 303 Malott
Hall, Cornell University, Ithaca, New York 14853. The Anne and Elmer Lindseth
Dean of Johnson Graduate School of Management of Cornell University; Director of
Comshare, Inc. (information technology), and Tompkins County Trust Company,
Ithaca, New York.(1)
Age: 53
16
<PAGE> 46
STEVEN MULLER, Trustee. 1619 Massachusetts Avenue, N.W., Suite 711,
Washington, DC 20036. Chairman of The 21st Century Foundation (public affairs);
President Emeritus of The Johns Hopkins University; Director of Alex. Brown &
Sons, Inc., Beneficial Corp., and Millipore Corp. (bio-technology)(1)
Age: 67
F. ROBERT PAULSEN, Trustee. 2801 N. Indian Ruins, Tucson, Arizona 85715.
Dean Emeritus and Professor Emeritus of Higher Education of The University of
Arizona, Tucson, Arizona; Director of American General Series Portfolio Co.
(mutual fund). (1)(2)
Age: 73
R. RICHARDSON PETTIT, Trustee. Department of Finance, College of Business,
University of Houston, 4800 Calhoun, Houston, Texas 77204-6283. Duncan Professor
of Finance of the University of Houston; formerly Hanson Distinguished Professor
of Business of the University of Washington.(1)
Age: 53
DON G. POWELL,* Chairman of the Board, Trustee and President. 2800 Post Oak
Blvd., Houston, Texas 77056. Chairman, Chief Executive Officer and Director of
the Adviser; President, Chief Executive Officer and Director of VKAC and VK/AC
Holding. Director, Trustee or Managing General Partner of each of the Van Kampen
American Capital Funds and other open-end investment companies and closed-end
investment companies advised by the Adviser and its affiliates.(1)(2)(3)
Age: 55
ALAN B. SHEPARD, JR., Trustee. 1512 Bonifacio Road, P.O. Box 63, Pebble
Beach, California 93953-0063. President of Seven Fourteen Enterprises, Inc.
(investments); Partner of Houston Partners (venture capital); Director of
Kwik-Kopy Corporation; formerly Director of Shaklee Corporation (direct
sales).(1)(2)
Age: 71
MILLER UPTON, Trustee. 914 Tarrant Drive, Route 3, Box 85-A, Fontana,
Wisconsin 53125. Economist; Consultant; Director of American General Series
Portfolio Co. (mutual fund); formerly Director of Home Life Insurance Company of
New York, and Household International, Inc.(1)(2)
Age: 78
BENJAMIN N. WOODSON, Trustee. 2727 Allen Parkway, Suite 460, Houston, Texas
77019-2115. Consultant; formerly Partner of John L. Wortham and Son (insurance);
Director of Mitchell Energy and Development Corp.; formerly Chairman of the
Board and Chief Executive Officer of American General Corporation.(1)
Age: 87
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Trust by reason of his position with the Adviser. Mr. Lane
is an interested person of the Distributor, the investment subadviser to one
of the Common Sense II Funds, and the Trust by reason of his position with an
affiliate of The Travelers Inc.
OFFICERS
GERALD BAXTER, Vice President. 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0062. Vice President, Associate General Counsel and Secretary of
Primerica Financial Services. Formerly partner with Trotter, Smith & Jacobs.
Age: 43
STEPHEN L. BOYD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President -- Portfolio Manager of the Adviser.(3)
Age: 54
JAMES CONHEADY, Vice President. 388 Greenwich Street, New York, New York
10013. Managing Director of Smith Barney. Formerly, First Vice President of
Drexel Burnham.
Age: 59
17
<PAGE> 47
KENNETH S. DURHAM, Vice President. 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30199-0001. President of the Distributor; President and Director
of PFS Distributors, Inc.; President of PFS Investments Inc., ("PFS
Investments"); Vice President of the Transfer Agent; Vice President of PFS
Services, Inc.; Director of PFS Asset Management, Inc.; formerly Marketing
Manager of PFS Distributors, Inc.
Age: 52
HUEY P. FALGOUT, JR. Assistant Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Assistant Secretary of the Adviser. Formerly
associate with Johnson and Gibbs.(3)
Age: 31
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Secretary of the
Adviser.(3)
Age: 41
JAMES A. GILLIGAN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President-Portfolio Manager of the Adviser. Formerly Security
Analyst of the Adviser.(3)
Age: 37
DAVID C. JOHNSON, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Vice President of the Adviser and an agent of Van Kampen
American Capital Investment Advisory Corp., an affiliate of the Adviser.
Age: 42
GARY M. LEWIS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President -- Portfolio Manager of the Adviser.(3)
Age: 41
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant Controller.(3)
Age: 35
DENNIS J. MCDONNELL, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. President, Chief Operating Officer and a Director of the
Adviser. Director of VK/AC Holding and VKAC.(3)
Age: 53
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(3)
Age: 49
RONALD A. NYBERG, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Executive Vice President, General Counsel and Secretary of VKAC.
Executive Vice President and a Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.(3)
Age: 42
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income and
Director of the Adviser.(3)
Age: 48
GREGORY PITTS, Vice President. 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30190-0062. Senior Vice President of PFS Shareholder Services.
Age: 32
JOHN R. REYNOLDSON, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Portfolio Manager of the Adviser.(3)
Age: 42
18
<PAGE> 48
JEFFREY RUSSELL, Vice President. 388 Greenwich Street, New York, New York
10013. Managing Director of Smith Barney. Formerly, Vice President of Drexel
Burnham.
Age: 37
ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
the Adviser; Executive Vice President of VKAC.(3)
Age: 53
DAVID R. TROTH, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of the Adviser.(3)
Age: 61
D. RICHARD WILLIAMS, Vice President. 3120 Breckinridge Blvd., Duluth,
Georgia 30199-0001. Chief Executive Officer and General Manager of the
Distributor; President, General Manager, and Chief Executive Officer of the
Transfer Agent; President of CSCS; Chief Financial Officer and Treasurer of
Primerica Financial; Director, Chief Executive Officer and Executive Committee
Member of PFS Investments Inc.; Director and Chief Executive Officer of PFS
Distributors, Inc.; President Chief Executive Officer and Director of PFS Asset
Management, Inc. and PFS Services, Inc.; President and Director of PFS Custodial
Services, Inc.; Vice Chairman, Executive Committee Member, Investment Committee
Member, Co-Chief Executive Officer, Chief Financial Officer and Director of
Primerica Life Insurance Company.
Age: 38
J. DAVID WISE, Assistant Secretary. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President, Associate General Counsel and Assistant Secretary of the
Adviser.(3)
Age: 51
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. President and Senior Vice President of the Adviser; President and Chief
Operating Officer of Van Kampen American Capital Services, Inc.; Executive Vice
President and Chief Operating Officer of Van Kampen American Capital Trust
Company; Executive Vice President of Van Kampen American Capital Shareholder
Services, Inc.(3)
Age: 50
---------------
(1) A director of American Capital Bond Fund, Inc., American Capital
Convertible Securities, Inc. and American Capital Income Trust, closed-end
investment companies advised by the Adviser.
(2) Managing General Partner of American Capital Exchange Fund, an open-end
investment company advised by the Adviser.
(3) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.
The trustees and officers of the Trust as a group own less than one percent
of the outstanding shares of the Trust. The trustees who are not affiliated with
the Adviser or Distributor initially will be compensated by the Trust at the
annual rate of $19,480 plus a fee of $1,299 per day for each Board meeting
attended. During the fiscal period ended October 31, 1994, the Trustees who were
not affiliated with the Adviser received as a group $129,554, $66,512, $46,460,
$34,392, and $30,688 in Trustees' fees from Growth Fund, Growth and Income Fund,
Government Fund, Municipal Bond Fund and Money Market Fund, respectively, in
addition to certain out-of-pocket expenses.
Additional information regarding compensation paid by the Funds and the
related mutual funds for which the Trustees serve as directors or trustees noted
above is set forth below. The compensation shown for the Funds is for the fiscal
year ended October 31, 1994, while the total compensation shown for the Funds
and other related mutual funds is for the calendar year ended December 31, 1994.
Messrs. Lane and Powell are not compensated for their service as Trustees,
because of their affiliation with the Distributor and the Adviser, respectively.
19
<PAGE> 49
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL(1)
RETIREMENT COMPENSATION
AGGREGATE COMPENSATION BENEFITS FROM REGISTRANT
FROM REGISTRANT ACCRUED AS AND FUND
----------------------------------------------- PART OF FUND COMPLEX PAID
NAME OF PERSON G G/I GVT MB MM EXPENSES TO DIRECTORS
------------------------- ------- ------ ------ ------ ------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Donald M. Carlton.... $ 9,720 $4,426 $3,148 $2,195 $2,006 N/A $38,000
Dr. A. Benton
Cocanougher............ 12,410 5,770 4,163 2,935 2,716 N/A 38,000
Stephen Randolph Gross... 13,784 6,470 4,603 3,245 2,996 N/A 42,000
Dr. Norman Hackerman..... 9,720 4,426 3,148 2,195 2,006 N/A 47,000
Robert D. H. Harvey...... 11,094 5,126 3,588 2,505 2,286 N/A 42,000
Dr. Alan G. Merten....... 11,720 5,460 3,943 2,780 2,576 N/A 36,000
Dr. Steven Muller........ 9,720 4,426 3,148 2,195 2,006 N/A 38,000
Dr. F. Robert Paulsen.... 13,955 6,548 4,658 3,284 3,031 N/A 52,000
Dr. R. Richardson
Pettit................. 12,410 5,770 4,163 2,935 2,716 N/A 38,000
Alan B. Shepard, Jr...... 13,285 6,238 4,433 3,129 2,891 N/A 48,250
Miller Upton............. 9,720 4,426 3,148 2,195 2,006 N/A 47,000
Benjamin N. Woodson...... 9,720 4,426 3,148 2,195 2,006 N/A 38,000
</TABLE>
---------------
(1) Reflects thirteen investment companies in the fund complex. Amounts
reflected are for the calendar year ended December 31, 1994.
Legend:
<TABLE>
<S> <C>
G = Growth Fund
G/I = Growth and Income Fund
GVT = Government Fund
MB = Municipal Bond Fund
MM = Money Market Fund
</TABLE>
INVESTMENT ADVISORY AGREEMENT
The Trust and the Adviser are parties to a separate Investment Advisory
Agreement, for each Fund dated December 20, 1994 (each, an "Advisory Agreement"
and together, the "Advisory Agreements"). Under the Advisory Agreements, the
Trust retains the Adviser to manage the investment of its assets and to place
orders for the purchase and sale of its portfolio securities. The Adviser is
responsible for obtaining and evaluating economic, statistical, and financial
data and for formulating and implementing investment programs in furtherance of
each Fund's investment objectives. The Adviser also furnishes at no cost to the
Trust (except as noted herein) the services of sufficient executive and clerical
personnel for the Trust as are necessary to prepare registration statements,
prospectuses, shareholder reports, and notices and proxy solicitation materials.
In addition, the Adviser furnishes at no cost to the Trust the services of a
President of the Trust, one or more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Fund. The costs of such accounting
services include the salaries and overhead expenses of a Treasurer or other
principal financial officer and the personnel operating under his direction. The
services are provided at cost which is allocated among all investment companies
advised or subadvised by the Adviser. The Trust also pays transfer agency fees,
custodian fees, legal fees, the costs of reports to shareholders and all other
ordinary expenses not specifically assumed by the Adviser.
The Trust retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under the
relevant Advisory Agreement, the Trust pays the Adviser an annual fee for the
Growth and Income Fund and the Growth Fund calculated separately for each Fund,
at the rate of 0.65% of the first $1 billion of the Fund's average daily net
assets; 0.60% of the next $1 billion of the
20
<PAGE> 50
Fund's average daily net assets; 0.55% of the next $1 billion of the Fund's
average daily net assets; 0.50% of the next $1 billion of the Fund's average
daily net assets; and 0.45% of the Fund's average daily net assets in excess of
$4 billion. The Trust pays the Adviser an annual fee for the Government Fund at
the rate of 0.60% of the first $1 billion of the Fund's average daily net
assets; 0.55% of the next $1 billion of the Fund's average daily net assets;
0.50% of the next $1 billion of the Fund's average daily net assets; 0.45% of
the next $1 billion of the Fund's average daily net assets; 0.40% of the next $1
billion of the Fund's average daily net assets; and 0.35% of the Fund's average
daily net assets in excess of $5 billion. The Trust pays the Adviser an annual
fee for the Money Market Fund at the rate of 0.50% of the first $2 billion of
the Fund's average daily net assets; 0.475% of the next $2 billion of the Fund's
average daily net assets; and 0.45% of the Fund's average daily net assets in
excess of $4 billion. The Trust pays the Adviser an annual fee for the Municipal
Bond Fund at the rate of 0.60% of the first $1 billion of the Fund's average
daily net assets; 0.55% of the next $1 billion of the Fund's average daily net
assets; 0.50% of the next $1 billion of the Fund's average daily net assets; and
0.45% of the Fund's average daily net assets in excess of $3 billion.
The average daily net assets of each Fund are determined by taking the
average of all of the determinations of net asset value of such Fund for each
business day during a given calendar month. Such fee is payable for each
calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any direct
or indirect majority owned subsidiary of VKAC in connection with the purchase
and sale of portfolio investments of the Trust, less any direct expenses
incurred by such person in connection with the purchase and sale of portfolio
investments of the Trust, less any direct expense incurred by the Adviser or
such person under common control with the Adviser in connection with obtaining
such payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Trust's benefit, and to advise
the Trustees of any other commissions, fees, brokerage or similar payments which
may be possible under applicable laws for the Adviser or any direct or indirect
majority owned subsidiary of VKAC to receive in connection with the Trust's
portfolio transactions or other arrangements which may benefit the Trust.
The following table shows expenses paid under the relevant investment
advisory agreement during the periods ended October 31, 1992, 1993 and 1994:
<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
OCTOBER 31, 1992
Accounting Services................... $ 163,784 $ 93,394 $ 66,407 $ 70,515 $ 48,280
Gross Advisory Fees................... 9,378,000 3,542,235 1,377,297 300,065 389,646
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- -- (464,111)
OCTOBER 31, 1993
Accounting Services................... $ 245,804 $ 127,908 $ 93,300 $ 87,585 $ 61,162
Gross Advisory Fees................... 11,859,114 4,286,890 1,980,457 462,361 329,080
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- (66,000) (486,724)
OCTOBER 31, 1994
Accounting Services................... $ 257,665 $ 122,188 $ 98,937 $ 95,639 $ 59,296
Gross Advisory Fees................... 13,176,814 4,599,033 2,122,662 639,343 282,897
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- -- (475,398)
</TABLE>
The Advisory Agreements also provide that, in the event the ordinary
business expenses of the Trust, calculated separately for each Fund, for any
fiscal year should exceed the most restrictive expense limitation applicable in
the states where the Trust's shares are qualified for sale, unless waived, the
compensation due the Adviser will be reduced by the amount of such excess and
that, if a reduction in and refund of the advisory fee
21
<PAGE> 51
is insufficient, the Adviser will pay the Trust monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses do not include (1) interest and taxes, (2) brokerage
commissions and (3) certain litigation and indemnification expenses as described
in the Advisory Agreements. The Advisory Agreements also provide that the
Adviser shall not be liable to the Trust for any actions or omissions if it
acted in good faith without negligence or misconduct.
Each Advisory Agreement has an initial term of two years and thereafter
with respect to each Fund may be continued from year to year if specifically
approved at least annually (a)(i) by the Trustees or (ii) by vote of a majority
of the Fund's outstanding voting securities, and (b) by the affirmative vote of
a majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreements provide that they shall terminate automatically
if assigned and that they may be terminated without penalty by either party on
60 days' written notice.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets. The Trust has received from California (the state with the
most restrictive expense limitation) a waiver, effective retroactive to the
inception of the Trust, which allows each Fund to exclude shareholder service
costs from the calculation of the expense limitation.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to a written agreement, dated December 15, 1988 for the Funds
("Underwriting Agreement"). The Distributor has entered into a selling agreement
with PFS Investments giving PFS Investments the exclusive right to sell shares
of each Fund of the Trust on behalf of the Distributor. The Distributor's
obligation is an agency or "best efforts" arrangement under which the
Distributor is required to take and pay only for such shares of each Fund as may
be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Underwriting Agreement is renewable from year to year if
approved (a) by the Trustees or by a vote of a majority of the Trust's
outstanding voting securities, and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Agreement or interested persons of any party
by votes cast in person at a meeting called for such purpose. The Underwriting
Agreement provides that it will terminate if assigned, and that it may be
terminated without penalty by either party on 60 days' written notice.
The following table shows commissions paid, amounts retained by the
Distributor and amounts received by PFS Investments under a predecessor
Underwriting Agreement during the periods ended October 31, 1992, 1993 and 1994:
<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
OCTOBER 31, 1992
Total Underwriting
Commissions................... $30,250,895 $8,845,022 $5,508,146 $1,068,546 *
Amount Retained By
Distributor................... 5,235,207 1,508,633 804,176 76,381 *
Amount Received By PFS
Investments................... 25,015,688 7,336,389 4,703,970 992,165 *
OCTOBER 31, 1993
Total Underwriting
Commissions................... $31,727,768 $8,782,190 $5,678,658 $1,573,390 *
Amount Retained By
Distributor................... 5,573,955 1,521,976 839,178 178,528 *
Amount Received By PFS
Investments................... 26,153,813 7,260,214 4,839,480 1,394,862 *
OCTOBER 31, 1994
Total Underwriting
Commissions................... $27,792,315 $7,234,018 $3,530,139 $1,718,186 *
Amount Retained By
Distributor................... 4,911,391 1,262,647 516,793 197,479 *
Amount Received By PFS
Investments................... 22,880,924 5,971,371 3,013,346 1,520,707 *
</TABLE>
---------------
* Not Applicable.
22
<PAGE> 52
The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising. The Trust pays all
expenses attributable to the registrations of its shares under federal and state
blue sky laws, including registration and filing fees, the cost of preparation
of the prospectuses, related legal and auditing expenses, and the cost of
printing prospectuses for current shareholders.
PORTFOLIO TURNOVER
The portfolio turnover rate may vary greatly from year to year as well as
within a year. Each Fund's portfolio turnover rate for prior years is shown
under the "Financial Highlights" in the Prospectus.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Trust and for the placement of its portfolio business and the negotiation of any
commissions paid on such transactions. It is the policy of the Adviser to seek
the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Trust may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. From time
to time the Fund may place brokerage transactions with affiliated persons of the
Adviser. In selecting broker/dealers and in negotiating commissions, the Adviser
considers the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. When more than one firm is
believed to meet these criteria, preference may be given to firms which also
provide research services to the Trust or the Adviser.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody), and (d)
furnishing other products or services that assist the Adviser in fulfilling
their investment-decision making responsibilities.
Pursuant to provisions of the relevant Advisory Agreement, the Trustees
have authorized the Adviser to cause the Trust to incur brokerage commissions in
an amount higher than the lowest available rate in return for research services
provided to the Adviser. The Adviser is of the opinion that the continued
receipt of supplemental investment research services from dealers is essential
to its provision of high quality portfolio management services to the Trust. The
Adviser undertakes that such higher commissions will not be paid by the Trust
unless (a) the Adviser determines in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms of
the Adviser's overall responsibilities with respect to the accounts as to which
it exercises investment discretion, (b) such payment is made in compliance with
the provisions of Section 28(e) and other applicable state and federal laws, and
(c) in the opinion of the Adviser, the total commissions paid by the Trust are
reasonable in relation to the expected benefits to the Trust over the long term.
The investment advisory fees paid by the Trust under the Advisory Agreements are
not reduced as a result of the Adviser's receipt of research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Trust as a factor in the selection of firms to execute portfolio
transactions for the Trust.
23
<PAGE> 53
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Trust effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Trust. In the opinion of the Adviser, the
benefits from research services to the Funds of the Trust cannot be measured
separately. Because the volume and nature of the trading activities of the
accounts are not uniform, the amount of commissions in excess of the lowest
available rate paid by each account for brokerage and research services will
vary. However, in the opinion of the Adviser, such costs to the Trust will not
be disproportionate to the benefits received by the Trust on a continuing basis.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Trust and
other accounts that the Adviser may establish in the future. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Trust. In making such allocations among the Trust and other
advisory accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and opinions of the persons responsible
for recommending the investment.
The following table summarizes for each Fund the total brokerage
commissions paid, the amount of commissions paid to brokers selected primarily
on the basis of research services provided to the Adviser and the value of these
specific transactions.
<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
-------------- ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
1992
Total Brokerage Commission......... $ 5,492,762 $ 627,887 $ 80,115 $ -- $ --
Commissions for Research
Services......................... 787,306 187,799 -- -- --
Value of Research Transactions..... 753,698,425 136,084,797 -- -- --
1993
Total Brokerage Commissions........ 8,686,133 930,176 117,279 -- --
Commissions for Research
Services......................... 2,438,199 394,229 -- -- --
Value of Research Transactions..... 3,176,926,784 500,523,383 -- -- --
1994
Total Brokerage Commissions........ 8,521,566 1,845,028 94,887 -- --
Commissions for Research
Services......................... 2,509,260 539,629 -- -- --
Value of Research Transactions..... 1,715,386,926 350,246,609 -- -- --
</TABLE>
The Funds may from time to time place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction. The Funds
(except Growth Fund) conducted no affiliated brokerage transactions with
Jefferies prior to the end of the last fiscal year.
The Funds paid the following commissions to these brokers during the
periods shown:
Commissions Paid:
<TABLE>
<CAPTION>
SMITH DAIN RAUSCHER
FISCAL 1992 COMMISSIONS JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth........................................ $ 9,471 $112,518 -- $ 700 --
Growth & Income............................... -- 33,157 -- 1,400 --
Government.................................... -- 16,609 -- -- --
Municipal Bond................................ -- -- -- -- --
Money Market.................................. -- -- -- -- --
</TABLE>
(Table continued on following page)
24
<PAGE> 54
<TABLE>
<CAPTION>
SMITH DAIN RAUSCHER
FISCAL 1992 PERCENTAGES JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commissions with affiliates to total
commissions
Growth...................................... .17% 2.05% -- .01% --
Growth & Income............................. -- 5.28% -- .22% --
Government.................................. -- 20.73% -- -- --
Municipal Bond.............................. -- -- -- -- --
Money Market................................ -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH SMITH DAIN RAUSCHER
AFFILIATES TO TOTAL TRANSACTIONS JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth........................................ .09% 5.99% -- .01% --
Growth & Income............................... -- 13.81% -- .12% --
Government.................................... -- 20.61% -- -- --
Municipal Bond................................ -- -- -- -- --
Money Market.................................. -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
ROBINSON SMITH DAIN RAUSCHER
FISCAL 1993 COMMISSIONS HUMPHREY JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Growth.............................. $ 4,354 -- $163,304 -- -- --
Growth & Income..................... 2,023 -- 96,883 -- -- --
Government.......................... -- -- 21,696 -- -- --
Municipal Bond...................... -- -- -- -- -- --
Money Market........................ -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
ROBINSON SMITH DAIN RAUSCHER
FISCAL 1993 PERCENTAGES HUMPHREY JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Growth.............................. .05% -- 1.88% -- -- --
Growth & Income..................... .22% -- 10.42% -- -- --
Government.......................... -- -- 18.50% -- -- --
Municipal Bond...................... -- -- -- -- -- --
Money Market........................ -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH ROBINSON SMITH DAIN RAUSCHER
AFFILIATES TO TOTAL TRANSACTIONS HUMPHREY JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
------------------------------------ -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Growth.............................. .05% -- 6.61% -- -- --
Growth & Income..................... .25% -- 20.87% -- -- --
Government.......................... -- -- 17.37% -- -- --
Municipal Bond...................... -- -- -- -- -- --
Money Market........................ -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1994 COMMISSIONS HUMPHREY BARNEY
------------------------------------ -------- --------
<S> <C> <C>
Growth.............................. $17,369 $259,504
Growth & Income..................... 1,673 102,408
Government.......................... -- 14,718
Municipal Bond...................... -- --
Money Market........................ -- --
</TABLE>
<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1994 PERCENTAGES HUMPHREY BARNEY
------------------------------------ -------- --------
<S> <C> <C>
Commissions with affiliates to total
commissions
Growth............................ .20% 3.05%
Growth & Income................... .09% 5.55%
Government........................ -- 15.51%
Municipal Bond.................... -- --
</TABLE>
25
<PAGE> 55
<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH ROBINSON SMITH
AFFILIATES TO TOTAL TRANSACTIONS HUMPHREY BARNEY
------------------------------------ -------- --------
<S> <C> <C>
Growth.............................. .13% 10.14%
Growth & Income..................... .06% 13.44%
Government.......................... -- 16.67%
Municipal Bond...................... -- --
Money Market........................ -- --
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined each day the
New York Stock Exchange (the "Exchange") is open. The Exchange is currently
closed on weekends and on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
GROWTH FUND AND GROWTH AND INCOME FUND NET ASSET VALUATION
The net asset value of each Fund is computed by (i) valuing securities
listed or traded on a national securities exchange at the last reported sales
price, or if there has been no sale that day at the last reported bid price,
using prices as of the close of trading on the Exchange, (ii) valuing unlisted
securities for which over-the-counter market quotations are readily available at
the most recent bid price as supplied by the National Association of Securities
Dealers Automated Quotations (NASDAQ) or by broker-dealers, and (iii) valuing
any securities for which market quotations are not readily available, and any
other assets at fair value as determined in good faith by the Trustees. Options
on stocks, options on stock indexes and stock index futures contracts and
options thereon, which are traded on exchanges, are valued at their last sales
or settlement price as of the close of such exchanges, or, if no sales are
reported, at the mean between the last reported bid and asked prices. Debt
securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern trading generally or in a particular country
or countries may not take place on all business days in New York. Furthermore,
trading takes place on all business days in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days in
New York and on which the Funds' net asset values are not calculated and on
which the Trust does not effect sales, redemptions and repurchases of its
shares. There may be significant variations in the net asset value of Fund
shares on days when net asset value is not calculated and on which shareholders
cannot redeem on account of changes in prices of stocks traded in foreign stock
markets.
GOVERNMENT FUND NET ASSET VALUATION
U.S. Government securities are traded in the over-the-counter market and
are valued at the last available bid price. Such valuations are based on
quotations of one of more dealers that make markets in the securities as
obtained from such dealers or from a pricing service. Options and interest rate
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sales or settlement price as of the close of such exchanges, or,
if no sales are reported, at the mean between the last reported bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees. Such
valuations and procedures will be reviewed periodically by the Trustees.
MUNICIPAL BOND FUND NET ASSET VALUATION
Municipal Bonds owned by the Fund are valued by an independent pricing
service ("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of
26
<PAGE> 56
the bid side of the market, these investments are valued at such quoted bid
prices (as obtained by the Service from dealers in such securities). Other
investments are carried at fair value as determined by the Service, based on
methods which include consideration of: yields or prices of municipal bonds of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. The Service may employ electronic data
processing techniques and/or a matrix system to determine valuations. Any assets
which are not valued by the Service would be valued at fair value using methods
determined in good faith by the Trustees.
MONEY MARKET FUND NET ASSET VALUATION
The valuation of the Fund's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at its
cost and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price that the Fund would receive if
it sold the instrument.
The Fund's use of the amortized cost method of valuing its portfolio
securities is permitted by a rule adopted by the Securities and Exchange
Commission ("SEC"). Under this rule, the Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of thirteen months or less and invest only in securities
determined by the Adviser to be of eligible quality with minimal credit risks.
The Trustees have established procedures reasonably designed, taking into
account current market conditions and the Fund's investment objective, to
stabilize the net asset value per share for purposes of sales and redemptions at
$1.00. These procedures include review by the Trustees, at such intervals as it
deems appropriate, to determine the extent, if any, to which the net asset value
per share calculated by using available market quotations deviates from $1.00
per share based on amortized cost. In the event such deviation should exceed
four tenths of one percent, the Trustees are required to promptly consider what
action, if any, should be initiated. If the Trustees believe that the extent of
any deviation from a $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing shareholders, it will take
such steps as it considers appropriate to eliminate or reduce these consequences
to the extent reasonably practicable. Such steps may include selling portfolio
securities prior to maturity; shortening the average maturity of the portfolio;
withholding or reducing dividends; suspending sales of new shares; or utilizing
a net asset value per share determined by using available market quotations.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Trust are offered continuously, and may be purchased on any
business day, through PFS Investments. The offering price for the Government
Fund, the Growth Fund, the Growth and Income Fund and the Municipal Bond Fund,
the is the net asset value per share next determined after an order is received
(see "Determination of Net Asset Value"), plus a sales charge as shown in the
Prospectus under "Sales Charge Tables." Shares of the Money Market Fund are
offered at net asset value without a sales charge.
INVESTMENTS BY MAIL
A Shareholder Investment Account may be opened by completing the
application included in the Prospectus and forwarding the application, through
PFS Investments to the Transfer Agent at 3100 Breckinridge Boulevard, Bldg. 200,
Duluth, Georgia 30199-0062. The account is opened only upon acceptance of the
application by the Transfer Agent. The minimum initial investment of $250 or
more in the form of a check payable to the Trust, must accompany the
application. This minimum may be waived by the Distributor for plans involving
continuing investments. Subsequent investments of $25 or more may be mailed
directly to the Transfer Agent. All such investments (except purchase of shares
of the Money Market Fund) are made at the public offering price of the Fund's
shares next computed following receipt of payment by the Transfer
27
<PAGE> 57
Agent. Confirmations of the opening of an account and of all subsequent
transactions in the account are forwarded by the Transfer Agent to the
shareholder.
In processing applications and investments, the Transfer Agent acts as
agent for the investor and for PFS Investments and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If the Transfer
Agent ceases to act as such, a successor company named by the Trust will act in
the same capacity so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales load reflected in the sales charge table as shown in the
Prospectus under "Sales Charge Tables" applies to purchases of Growth Fund's and
Growth and Income Fund's shares where the aggregate investment is $10,000 or
more, to purchases of Government Fund's shares where the aggregate investment is
$25,000 or more, to purchases of Municipal Bond Fund's shares where the
aggregate investment is $100,000 or more. An aggregate investment includes all
shares of all of the above Funds and shares of other Common Sense Funds (except
the Money Market Fund) previously purchased and still owned, plus the shares
being purchased. The current offering price is used to determine the value of
all such shares. If, for example, any purchaser has previously purchased and
still holds shares of one of the above Funds having a current value of $7,500,
and that person purchases $7,500 of additional shares of Growth Fund or Growth
and Income Fund, the sales charge applicable to the $7,500 purchase would be the
sales charge normally applicable to purchases of $10,000 or more. The same
reduction is applicable to purchases under a Letter of Intent as described in
the next paragraph. PFS Investments must notify the Distributor at the time an
order is placed for a purchase which would qualify for the reduced charge on the
basis of previous purchases. Similar notification must be given in writing when
such an order is placed by mail. The reduced sales charge will not be applied if
such notification is not furnished at the time of the order. The reduced sales
charge will also not be applied unless the records of the Distributor or the
Transfer Agent confirm the investor's representations concerning his holdings.
LETTER OF INTENT
A Letter of Intent applies to purchases of all Funds except the Money
Market Fund. When an investor submits a Letter of Intent to attain an investment
goal within a 13-month period, the Transfer Agent escrows shares totaling five
percent of the dollar amount of the Letter of Intent in the name of the
investor. The Letter of Intent does not obligate the investor to purchase the
indicated amount. In the event the Letter of Intent goal is not achieved within
the 13-month period, the investor is required to pay the difference between the
sales charge otherwise applicable to the purchases made during this period and
the sales charge actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrow
shares to obtain such difference. If the goal is exceeded in an amount which
qualifies for a lower sales charge, a price adjustment is made at the end of the
13-month period by refunding to the investor the amount of excess sales
commissions, if any, paid during the 13-month period.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Exchange Privilege" in the
Prospectus:
By use of the exchange privilege, the investor authorizes PFS Shareholder
Services (the "Transfer Agent") to act on written exchange instructions from any
person representing himself to be the investor or the agent of the investor and
believed by the Transfer Agent to be genuine. The Transfer Agent's records of
such instructions are binding.
Shareholders of any of the Funds in the Trust have an exchange privilege
whereby they may exchange all or part of their shares for shares of any other
Funds in the Trust as described in the Prospectus. For purposes of determining
the sales charge rate previously paid, all sales charges paid on the exchanged
security and on any security previously exchanged for such security or for any
of its predecessors shall be included. If the exchanged security was acquired
through reinvestment, that security is deemed to have been sold with a sales
charge rate equal to the rate previously paid on the security on which the
dividend or distribution was paid. If a
28
<PAGE> 58
shareholder exchanges less than all of his securities, the security upon which
the highest sales charge rate was previously paid is deemed exchanged first.
Exchange requests received on a business day prior to the time shares of a
Fund involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in a Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the Funds involved in the request are priced will be processed on the
next business day in the manner described above.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
is closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended and the payment therefor may be
postponed for more than seven days during any period when (a) the New York Stock
Exchange is closed for other than customary weekends or holidays; (b) trading on
the New York Stock Exchange is restricted; (c) an emergency exists as a result
of which disposal by the Trust of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Trust to fairly
determine the value of its net assets; or (d) the SEC, by order, so permits.
DISTRIBUTIONS AND TAXES
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code ("Code"). By so qualifying, a Fund
will not be subject to federal income taxes on amounts paid by it as dividends
and distributions to shareholders. If any Fund were to fail to qualify as a
regulated investment company under the Code, all of its income (without
deduction for income dividends or capital gain distributions paid to
shareholders) would be subject to tax at corporate rates. Each Fund expects to
be treated as a separate entity for purposes of determining federal tax
treatment.
The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Bonds to pass through to its investors,
tax-exempt, net Municipal Bond interest income. In order for the Municipal Bond
Fund to be eligible to pay exempt-interest dividends during any taxable year, at
the close of each fiscal quarter, at least 50% of the aggregate value of the
Fund's assets must consist of exempt-interest obligations. In addition, the Fund
must distribute at least (i) 90% of the excess of its exempt-interest income
over certain disallowed deductions, and (ii) 90% of its "investment company
taxable net income" (i.e., its ordinary taxable income and the excess, if any,
of its net short-term capital gains over any net long-term capital losses)
recognized by the Fund during the taxable year (the "Distribution
Requirements").
Not later than 60 days after the close of its taxable year, the Municipal
Bond Fund will notify its shareholders of the portion of the dividends paid by
the Fund to the shareholders for the taxable year which constitutes exempt
interest dividends. The aggregate amount of dividends so designated cannot
exceed, however, the excess of the amount of interest exempt from tax under
Section 103 of the Code received by the Fund during the year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the Code. Since the
percentage of dividends which are "exempt-interest" dividends is determined on
an average annual method for the fiscal year, the percentage of income
designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax-exempt during
the period covered by the dividend.
Although exempt-interest dividends generally may be treated by the
Municipal Bond Fund's shareholders as items of interest excluded from their
gross income, each shareholder is advised to consult his or her tax adviser with
respect to whether exempt-interest dividends retain this exclusion if the
shareholder should be treated as a "substantial user" or a "related person" with
respect to any of the tax-exempt obligations held by the Fund. "Substantial
user" is defined under U.S. Treasury Regulations to include a non-exempt person
who regularly uses in his trade or business a part of any facilities financed
with the tax-exempt obligations and whose gross revenues derived from such
facilities exceed five percent of the total revenues derived from the
29
<PAGE> 59
facilities by all users, or who occupies more than five percent of the usable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Municipal Bond Fund is not deductible for federal income tax
purposes if the Fund distributes exempt-interest dividends during the
shareholder's taxable year. If a shareholder receives an exempt-interest
dividend with respect to any shares and such shares are held for six months or
less, any short-term capital loss on the sale or exchange of the shares will be
disallowed to the extent of the amount of such exempt-interest dividend.
If, during any taxable year, the Municipal Bond Fund realizes net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) from the sale or other disposition of Municipal Bonds or other assets,
the Fund will have no tax liability with respect to such gains if they are
distributed to shareholders. Distributions designated as capital gains dividends
are taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held his or her shares. Not later than 60 days after the close
of the Fund's taxable year, the Fund will send to its shareholders a written
notice designating the amount of any distributions made during the year which
constitute capital gain.
While the Municipal Bond Fund expects that a major portion of its
investment income will constitute tax-exempt interest, a portion may consist of
"investment company taxable income" and "net capital gains". As pointed out
above, the Fund will be subject to tax for any year on its undistributed
investment company taxable income and net capital gains.
A capital gain dividend received after the purchase of the shares of any
one of the Funds in the Trust reduces the net asset value of the shares by the
amount of the distribution and will be subject to income taxes. A loss on the
sale of shares held for less than six months (to the extent not disallowed on
account of the receipt of exempt-interest dividends) attributable to a capital
gain dividend is treated as a long-term capital loss for Federal income tax
purposes.
Each Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least (1) 98% of its
ordinary taxable income for the twelve months ended December 31, plus (2) 98% of
its capital gain net income for the twelve months ended October 31 of such year.
Each Fund intends to distribute sufficient amounts to avoid liability for the
excise tax.
The Tax Reform Act added a provision that, for years beginning after
December 31, 1989, 75% of the excess of a corporation's adjusted current
earnings (generally, earning and profits, with adjustments) over its other
alternative minimum taxable income is an item of tax preference for
corporations. All tax-exempt interest is included in the definition of "adjusted
current earnings" so a portion of such interest is included in computing the
alternative minimum tax on corporations. For shareholders that are financial
institutions, the Tax Reform Act eliminates their ability to deduct interest
payments to the extent allocated on a pro rata basis to the purchase of Fund
shares.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income paid by the Emerging Growth Fund, the
Global Equity Fund, the Growth Fund and the Growth and Income Fund qualify for
the 70% dividends received deduction for corporations. To qualify for the
dividends received deduction, a corporate shareholder must hold the shares on
which the dividend is paid for more than 45 days.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year
are considered taxable income to shareholders on December 31 even though paid in
the next year.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such dividends and distributions from short-term capital gains are not
eligible for the dividends received deduction referred to above. Any loss on the
sale of Fund shares held for less than six months is treated as a long-term
capital loss to the extent of any long-term
30
<PAGE> 60
capital gain distribution paid on such shares, subject to any exception that may
be provided by IRS regulations for losses incurred under certain systematic
withdrawal plans. All dividends and distributions are taxable to the shareholder
whether or not reinvested in shares. Shareholders are notified annually by the
Fund as to the federal tax status of dividends and distributions paid by the
Fund.
If shares of each Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING. The Trust is required to withhold and remit to the
United States Treasury 31% of (i) reportable taxable dividends and distributions
and (ii) the proceeds of any redemptions of Trust shares with respect to any
shareholder who is not exempt from withholding and who fails to furnish the
Trust with a correct taxpayer identification number, who fails to report fully
dividend or interest income or who fails to certify to the Trust that he has
provided a correct taxpayer identification number and that he is not subject to
withholding. (An individual's taxpayer identification number is his or her
social security number.) The 31% "Back-up withholding tax" is not an additional
tax and may be credited against a taxpayer's regular federal income tax
liability.
The Code includes special rules applicable to certain listed options
(excluding equity options as defined in the Code), futures contracts, and
options on futures contracts which the Growth Fund, the Growth and Income Fund,
the Global Equity Fund, the Emerging Growth Fund, the Government Fund and the
Municipal Bond Fund may write, purchase or sell. Such options and contracts are
classified as Section 1256 contracts under the Code. The character of gain or
loss resulting from the sale, disposition, closing out, expiration or other
termination of Section 1256 contracts is generally treated as long-term capital
gain or loss to the extent of 60 percent thereof and short-term capital gain or
loss to the extent of 40 percent thereof ("60/40 gain or loss"). Such contracts,
when held by the Fund at the end of a fiscal year, generally are required to be
treated as sold at market value on the last day of such fiscal year for federal
income tax purposes ("marked-to-market"). Over-the-counter options are not
classified as Section 1256 contracts and are not subject to the marked-to-market
rule or to 60/40 gain or loss treatment. Any gains or losses recognized by the
Government Fund from transactions in over-the-counter options generally
constitute short-term capital gains or losses. If over-the-counter call options
written, or over-the-counter put options purchased, by the Government Fund are
exercised, the gain or loss realized on the sale of the underlying securities
may be either short-term or long-term, depending on the holding period of the
securities. In determining the amount of gain or loss, the sales proceeds are
reduced by the premium paid for over-the-counter puts or increased by the
premium received for over-the-counter calls.
Certain of the Growth Fund's, the Growth and Income Fund's, the Government
Fund's and the Municipal Bond Fund's transactions in options, futures contracts,
and options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle in which at least one (but not
all) of the positions are Section 1256 contracts is a "mixed straddle" under the
Code if certain conditions are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which
31
<PAGE> 61
may postpone recognition for tax purposes of losses where a position is sold and
a new offsetting position is acquired within a prescribed period and (iii)
"short sale" rules which may terminate the holding period of securities owned by
the Fund when offsetting positions are established and which may convert certain
losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
The Municipal Bond Fund may acquire an option to "put" specified portfolio
securities to banks or municipal bond dealers from whom the securities are
purchased. See "Stand-By Commitments," in the Prospectus. The Fund has been
advised by its legal counsel that it will be treated for federal income tax
purposes as the owner of the Municipal Securities acquired subject to the put;
and the interest on the Municipal Securities will be tax-exempt to the Fund.
Counsel has pointed out that although the Internal Revenue Service has issued a
favorable published ruling on a similar but not identical situation, it could
reach a different conclusion from that of counsel. Counsel has also advised the
Fund that the Internal Revenue Service presently will not ordinarily issue
private letter rulings regarding the ownership of securities subject to stand-by
commitments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
OTHER INFORMATION
PRIOR PERFORMANCE INFORMATION
The Growth Fund's, the Growth and Income Fund's and the Government Fund's
average annual total return (computed in the manner described in the Prospectus)
for the one-year, five-year and eight-year periods ended April 30, 1995 was
-0.37%, 9.99% and 8.17%; 2.43%, 9.33% and 7.70%; and -0.68%, 7.13%, and 6.61%,
respectively. The Municipal Bond Fund's average annual total return computed in
the manner described in the Prospectus for approximately the one-year, five-year
and six-year-and-nine-months periods ended April 30, 1995 was 1.06%, 6.79% and
6.85%. The Money Market Fund's average annual total return computed in the
manner described in the Prospectus for approximately the one-year, five-year and
seven-year-and-four-months periods ended April 30, 1995 was 4.22%, 4.05% and
5.24%, respectively. These results are based on historical earnings and asset
value fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objectives
and policies as well as the risks incurred in the Fund's investment practices.
The Government Fund's and the Municipal Bond Fund's annualized current
yield for the 30-day period ending April 30, 1995 was 6.07% and 4.81%,
respectively. The Municipal Bond Fund's tax equivalent yield for the 30-day
period ending April 30, 1995 was 7.51%. The Fund's yield is not fixed and will
fluctuate in response to prevailing interest rates and the market value of
portfolio securities, and as a function of the type of securities owned by the
Fund, portfolio maturity and the Fund's expenses.
The Money Market Fund's annualized current yield, on a subsidized basis,
for the seven-day period ending April 30, 1995 was 5.21%. The Fund's compound
effective yield for the same period was 5.35%. On a non-subsidized basis, the
annualized current yield for the same period was 4.82% with a compound effective
yield of 4.94%.
To increase the Fund's yield the Adviser, for an indefinite period has
agreed to absorb a certain amount of the future ordinary business expenses of
the Money Market Fund. The Adviser may stop absorbing these expenses at any time
without prior notice.
The yield of the Fund is its net income expressed in annualized terms. The
SEC requires by rule that a yield quotation set forth in an advertisement for a
"money market" fund be computed by a standardized
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<PAGE> 62
method based on a historical seven calendar day period. The standardized yield
is computed by determining the net change (exclusive of realized gains and
losses and unrealized appreciation and depreciation) in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base period return,
and multiplying the base period return by 365/7. The determination of net change
in account value reflects the value of additional shares purchased with
dividends from the original share, dividends declared on both the original share
and such additional shares, and all fees that are charged to all shareholder
accounts, in proportion to the length of the base period and the Fund's average
account size. The Fund may also calculate its effective yield by compounding the
unannualized base period return (calculated as described above) by adding 1 to
the base period return, raising the sum to a power equal to 365 divided by 7,
and subtracting 1.
The yield quoted at any time represents the amount being earned on a
current basis for the indicated period and is a function of the types of
instruments in the Fund, their quality and length of maturity, and the Fund's
operating expenses. The length of maturity for the Fund is the average dollar
weighted maturity of the Fund. This means that the Fund has an average maturity
of a stated number of days for all of its issues. The calculation is weighted by
the relative value of the investment.
The yield fluctuates daily as the income earned on the investments of the
Fund fluctuates. Accordingly, there is no assurance that the yield quoted on any
given occasion will remain in effect for any period of time. It should also be
emphasized that the Fund is an open-end investment company and that there is no
guarantee that the net asset value will remain constant. A shareholder's
investment in the Fund is not insured. Investors comparing results of the Fund
with investment results and yields from other sources such as banks or savings
and loan associations should understand this distinction.
Other funds of the money market type as well as banks and savings and loan
associations may calculate their yield on a different basis, and the yield
quoted by the Fund could vary upwards or downwards if another method of
calculation or base period were used.
The Funds may illustrate in advertising materials the use of a Payroll
Deduction Plan as a convenient way for business owners to help their employees
set up either IRA or voluntary mutual fund accounts. The Funds may illustrate in
advertising materials retirement planning through employee contributions and/or
salary reductions. Such advertising material will illustrate that employees may
have the opportunity to save for retirement and reduce taxes by electing to
defer a portion of their salary into a special mutual fund IRA account. The
Funds may illustrate in advertising materials that Uniform Gift to Minors Act
accounts may be used as a vehicle for saving for a child's financial future.
Such illustrations will include statements to the effect that upon reaching the
age of majority, such custodial accounts become the child's property.
SHAREHOLDER SERVICES
UNIFORM GIFTS TO MINORS ACT. The Trust recognizes the importance to a child
of establishing a savings and investment plan early in life for education and
other purposes when the child becomes older. The advantages of regular
investment with interest or earnings compounding over a number of years are
great. In addition, taxes on these earnings are assessed against the income of
the child rather than the donor, usually at a lower bracket.
Investors wishing to establish a UGMA account should call the Trust for an
application. Individuals desiring to open an account under UGMA are also advised
to consult with a tax adviser before establishing the account.
INDIVIDUAL RETIREMENT ACCOUNT. Any individual who has compensation or
earned income from employment or self-employment and who is under age 70 1/2 may
establish an IRA. The limitation on the maximum annual contribution to an IRA is
the lesser of 100% of compensation or $2,000. An IRA may also be established for
a spouse who has no compensation (or who elects to be treated as having no
compensation), and the limitation on the maximum annual contributions to the two
IRAs is the lesser of 100% of compensation or $2,250.
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<PAGE> 63
Under the Tax Reform Act of 1986, whether contributions to an IRA are
deductible for federal income tax purposes depends on whether an individual (or
his/her spouse) is a participant in an employer-sponsored plan and on the
adjusted gross income of the individual.
In the case of an individual who is a participant in an employer-sponsored
plan, no deduction is available for IRA contributions if his adjusted gross
income reaches certain levels ($35,000 for a single individual, $50,000 for
married individuals filing jointly and $10,000 for married individuals filing
separately) and the deduction is phased out ratably if his adjusted gross income
falls within certain ranges ($25,000 - $35,000 for a single individual,
$40,000 - $50,000 for married individuals filing jointly and $0 - $10,000 for
married individuals filing separately). IRA contributions, up to the annual
limit, remain fully deductible for all single individuals with less than $25,000
of annual adjusted gross income and all married individuals with less than
$40,000 of annual adjusted gross income. Individuals who are disqualified from
making deductible IRA contributions can make non-deductible contributions to
their IRAs, subject to the same limitation on maximum annual contribution
discussed above.
In addition, any individual, regardless of age, may establish a rollover
IRA to receive an eligible rollover distribution from an employer-sponsored
plan.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP) AND SALARY REDUCTION SIMPLIFIED
EMPLOYEE PENSION PLAN (SARSEP). A SEP/SARSEP is a means for an employer to
provide retirement contributions to IRAs for all employees, without the
complicated reporting and record keeping involved in a qualified plan. Employees
covered by a SEP/SARSEP can use the same IRA to receive their own allowable IRA
contribution.
SECTION 403(B)(7) PLAN. Employees of certain exempt organizations and
schools can have a portion of their compensation set aside, and income taxes
attributable to such portion deferred, in a Section 403(b)(7) plan. Teachers,
school administrators, ministers, employees of hospitals, libraries, community
chests, funds, foundations, and many others may be eligible. The employer must
be an organization described in Section 501(c)(3) of the Internal Revenue Code
and must be exempt from tax under Section 501(a) of the Code. In addition, any
employee of most public educational institutions is eligible if his employer is
a state or a political subdivision of a state, or any agency or instrumentality
of either. The employee is not taxed on the amount set aside or the earnings
thereon until the funds are withdrawn, normally at retirement.
CUSTODY OF ASSETS
All securities owned by the Trust and all cash, including proceeds from the
sale of shares of the Trust and of securities in the Trust's investment
portfolio, are held by State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, as Custodian.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants whose selection is
ratified annually by shareholders or the Trustees.
INDEPENDENT AUDITORS
Ernst & Young LLP, 1221 McKinney, Suite 2400, Houston, Texas 77010, the
independent auditors for the Trust, perform annual examinations of the Trust's
financial statements.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY
Under the laws of certain states, including Massachusetts, where the Trust
was organized, and Texas, where the Trust's principal office is located,
shareholders of a Massachusetts business trust may, under certain circumstances,
be held personally liable as partners for the obligations of the Trust. However,
the risk of a shareholder incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. The Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Trust or
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<PAGE> 64
Trustees. The Declaration of Trust provides for indemnification out of Trust
property to any shareholder held personally liable for the obligations of the
Trust and also provides for the Trust to reimburse such shareholder for all
legal and other expenses reasonably incurred in connection with any such claim
or liability.
Under the Declaration of Trust, the Trustees or Officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust will
provide indemnification to its Trustees and Officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
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<PAGE> 65
FINANCIAL STATEMENTS
The attached financial statements in the form of the Annual and Semi-Annual
Report to Shareholders including the related report of Independent Auditors on
such financial statements are hereby included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
OCTOBER APRIL
31, 30,
1994 1995
------ ------
<S> <C> <C>
GROWTH FUND
Net Asset Value and redemption price per share
(Net assets divided by shares outstanding)......................... $15.31 $15.10
Offering price per share (100/91.5 of per share net asset value)..... $16.73 $16.50
GROWTH AND INCOME FUND
Net Asset Value and redemption price per share
(Net assets divided by shares outstanding)......................... $15.77 $15.22
Offering price per share (100/91.5 of per share net asset value...... $17.23 $16.63
GOVERNMENT FUND
Net Asset Value and redemption price per share
(Net assets divided by shares outstanding)......................... $ 9.99 $10.34
Offering price per share (100/93.25 of per share
(Net asset value).................................................. $10.71 $11.09
MUNICIPAL BOND FUND
Net Asset Value and redemption price per share
(Net assets divided by shares outstanding)......................... $12.89 $13.34
Offering price per share (100/95.25 of per share
(Net asset value).................................................. $13.53 $14.01
MONEY MARKET FUND
Net Asset Value, redemption price and offering price per share
(Net assets divided by shares outstanding)......................... $ 1.00 $ 1.00
</TABLE>
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APPENDIX 1
(Commercial Paper, Bond and Other Short- and Long-Term Ratings)
Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's"), Fitch Investors Service, Inc. ("Fitch"),
Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc. ("IBCA");
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily will established industries,
high rates of return of funds employed, conservative well established
industries, high rates of return of funds employed, conservative capitalization
structures with moderate reliance on debt and ample asset protection, broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a strong
capacity for repayment of short-term promissory obligations. This ordinarily
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff,
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest and, in the majority of instances, differ only in small
degrees from issues rated AAA.
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds are rated Aa by Moody's are judged by Moody's 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 Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2
and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in
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<PAGE> 67
the higher end of this rating category, the modifier 2 indicates a mid-range
ranking, and the modifier 3 indicates a ranking in the lower end of the rating
category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds
rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Rating and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.
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<PAGE> 68
APPENDIX 2
MUNICIPAL BOND RATINGS
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE ("MOODY'S") MUNICIPAL BOND RATINGS
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.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be 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 both 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 of other terms of the contract over any long period of time may be
small.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a midrange ranking;
and a modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk but having protection . . . and not
distinctly or predominantly speculative."
Beginning on February 5, 1985, Moody's started new rating categories for
variable rate demand obligations ("VRDO's"). VRDO's receive two ratings. The
first rating, depending on the maturity of the VRDO, is assigned either a bond
or MIG rating which represents an evaluation of the risk associated with
scheduled principal and interest payments. The second rating, designated as
"VMIG," represents an
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<PAGE> 69
evaluation of the degree of risk associated with the demand feature. The new
VRDO's demand feature ratings and symbols are:
VMIG 1: strong protection by established cash flows, superior liquidity
support, demonstrated access to the market for refinancing.
VMIG 2: ample margins of protection, high quality.
VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well
established.
VMIG 4: adequate quality, not predominantly speculative but there is
risk.
DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers.
The first two are described below:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("S&P") MUNICIPAL DEBT RATINGS
A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources S&P considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
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 they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
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<PAGE> 70
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 for
debt in higher-rated categories.
BB,B Debt rated "BB" and "B" is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that S&P does not rate a
particular type of obligation as a matter of policy.
A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. The
highest category is "A" which is further defined with the designation of 1, 2
and 3 to indicate the relative degree of safety. The first two categories are
described below:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer and obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
S&P may continue to rate note issues with a maturity greater than three
years in accordance with the same rating scale currently employed for municipal
bond ratings.
S&P assigns dual ratings to all long-term debt issues that have a demand or
put feature. The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses the demand feature alone.
Long-term debt rating symbols are used for the long-term maturity and commercial
paper rating symbols are used for the put option (for example, AAA/A-1+). For
demand notes, S&P's note rating symbols are used with the commercial paper
symbols (for example, SP-1+/a-1+).
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<PAGE> 71
Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split rated
securities (i.e., different ratings by Moody's and S&P) and dual rated
securities as described above.
Subsequent to its purchase by the Fund, an issue of Municipal Bonds or a
Temporary Investment may cease to be rated or its rating may be reduced, causing
more than 20% of the Fund's assets invested in Municipal Bonds to be invested in
low or non-rated bonds. This would not require the elimination of such
obligation from the Fund's portfolio, but the Adviser will consider such an
event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by S&P or
Moody's for Municipal Bonds or Temporary Investment may change as a result of
changes in such organizations, or changes in their rating systems, the Fund will
attempt to use comparable ratings as standards for its investments in Municipal
Bonds or Temporary Investments in accordance with the investment policies
contained herein.
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<PAGE> 72
LOGO AUGUST 18, 1995
Common Sense(R) Trust (the "Trust") is a diversified open-end
management investment company which offers shares in ten separate Portfolios,
five of which are described in this Prospectus. The goals of such Portfolios
are as follows:
Common Sense(R) II Emerging Growth Fund (the "Emerging Growth II
Fund") seeks capital appreciation by investing in a portfolio of securities
consisting principally of common stocks of small and medium sized companies
considered by Van Kampen American Capital Asset Management, Inc. (the
"Adviser") to be emerging growth companies.
Common Sense(R) II International Equity Fund (the "International
Equity II Fund") seeks total return on its assets from growth of capital
and income by investing at least 65% of its assets in a diversified
portfolio of equity securities of established non-United States issuers.
Common Sense(R) II Growth Fund (the "Growth II Fund") seeks capital
appreciation by investing in a portfolio of securities consisting
principally of common stocks and options on common stocks. Any income
realized on its investments will be purely incidental to its goal of
capital appreciation.
Common Sense(R) II Growth and Income Fund (the "Growth and Income II
Fund") seeks reasonable growth and income by investing principally in a
portfolio of equity securities that provide dividend or interest income,
including common and preferred stocks and securities convertible into
common or preferred stocks.
Common Sense(R) II Government Fund (the "Government II Fund") seeks
high current return consistent with preservation of capital by investing in
debt obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities.
In seeking their respective goals, each Fund may engage in portfolio
management strategies and techniques involving options, futures contracts
and options on futures. See "Goals and Investment Policies."
There is no assurance that each Fund will be successful in achieving
its goals.
EACH FUND, EXCEPT THE INTERNATIONAL EQUITY FUND, WILL NOT PURCHASE ANY
SECURITIES ISSUED BY COMPANIES PRIMARILY ENGAGED IN THE MANUFACTURE OF
ALCOHOL OR TOBACCO.
This Prospectus tells investors briefly the information they should
know before investing in a Fund. Investors should read and retain this
Prospectus for future reference.
A Statement of Additional Information dated the same date as this
Prospectus has been filed with the Securities and Exchange Commission
("SEC") and contains further information about the Funds. A copy of the
Statement of Additional Information may be obtained without charge by
writing PFS Distributors, 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0001. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus. Please call Customer
Service at (800) 544-5445 for information on the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE
COMMISSION OR STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CST-II
<PAGE> 73
--------------------------------------------------------------------------------
COMMON SENSE(R) TRUST
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
CUSTODIAN: DISTRIBUTOR:
State Street Bank and Trust Company PFS Distributors
225 Franklin Street 3100 Breckinridge Blvd., Bldg. 200
Boston, Massachusetts 02110 Duluth, Georgia 30199-0001
TRANSFER AGENT: INVESTMENT SUBADVISER:
PFS Shareholder Services (International Equity II Fund)
3100 Breckinridge Blvd., Bldg. 200 Smith Barney Mutual Funds Management Inc.
Duluth, Georgia 30199-0062 388 Greenwich Street
(800) 544-5445 New York, New York 10013
(800) 544-7278 Spanish-speaking Representatives
(800) 824-1721 TDD Service for Hearing Impaired
INVESTMENT ADVISER:
Van Kampen American Capital Asset Management,
Inc.
2800 Post Oak Blvd.
Houston, Texas 77056
</TABLE>
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary.................... 2
Expense Synopsis...................... 5
Financial Highlights.................. 7
Multiple Pricing System............... 8
Introduction.......................... 9
Goals and Investment Policies......... 9
Emerging Growth II Fund............. 9
International Equity II Fund........ 10
Growth II Fund...................... 11
Growth and Income II Fund........... 11
Government II Fund.................. 12
Investment Practices and Risks........ 14
The Trust and Its Management.......... 20
Purchase of Shares.................... 21
Distribution Plans.................... 25
Shareholder Services.................. 26
Redemption of Shares.................. 28
Dividends, Distributions and Taxes.... 29
Performance Information............... 30
Additional Information................ 31
</TABLE>
--------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS SUMMARY
Shares Offered.............. Shares of beneficial interest in five Portfolios:
the Emerging Growth II Fund, the International
Equity II Fund, the Growth II Fund, the Growth and
Income II Fund and the Government II Fund.
Type of Company............. Diversified, open-end management investment
company.
Goals....................... The Emerging Growth II Fund seeks capital
appreciation; the International Equity II Fund
seeks total return on its assets from growth of
capital and income; the Growth II Fund seeks
capital appreciation; the Growth and Income II Fund
seeks reasonable growth and income; and the
Government II Fund seeks high current return
consistent with preservation of capital. There is,
however, no assurance that each Fund will be
successful in achieving its goals.
--------------------------------------------------------------------------------
2
<PAGE> 74
Investment Policies and
Risks....................... The Emerging Growth II Fund invests at least 65% of
its total assets in common stocks of small and
medium sized companies (less than $2 billion of
market capitalization or annual sales), both
domestic and foreign, considered by the Adviser to
be emerging growth companies. The companies in
which the Fund invests may offer greater
opportunities for growth of capital than larger,
more established companies, but investments in such
companies may involve special risks. See "Goals and
Investment Policies -- Emerging Growth II Fund" and
"Investment Practices and Risks -- Foreign
Securities." The use of options, futures contracts
and related options may include additional risks.
See "Investment Practices and Risks -- Options,
Futures Contracts and Related Options" and the
Statement of Additional Information for a
discussion of risk factors relating to options and
futures strategies.
The International Equity II Fund invests at least
65% of its assets in a diversified portfolio of
equity securities of established non-United States
issuers. Investing in equity securities of
non-United States issuers may subject the Fund to
risks of foreign, political, economic and legal
conditions and developments. See "Goals and
Investment Policies -- International Equity II
Fund," "Investment Practices and Risks -- Options,
Futures Contracts and Related Options, Currency
Transactions, Interest Rate Transactions and Market
Index Transactions" and the Statement of Additional
Information, for a discussion of risk factors
relating to these strategies.
The Growth II Fund invests principally in common
stocks that the Adviser believes provide unusually
attractive growth opportunities and options on such
common stocks. Any income from these investments
will be incidental to the capital appreciation
goal. The Fund may use portfolio management
techniques and strategies involving options,
futures contracts and options on futures. The
utilization of options, futures contracts and
options on futures contracts may involve greater
than ordinary investment risks and the likelihood
of more volatile price fluctuation. See "Goals and
Investment Policies -- Growth II Fund," "Investment
Practices and Risks -- Using Options, Futures
Contracts and Related Options," and the Statement
of Additional Information, for a discussion of risk
factors relating to options and futures strategies.
The Growth and Income II Fund invests principally
in common and preferred stocks, and in securities
convertible into common and preferred stocks, that
have provided dividend or interest income to their
security holders during the past twelve months. The
Fund may use portfolio management techniques and
strategies involving options, futures contracts and
options on futures. The utilization of options,
futures contracts and options on futures contracts
may involve greater than ordinary investment risks
and the likelihood of more volatile price
fluctuation. See "Goals and Investment
Policies -- Growth and Income II Fund," "Investment
Practices and Risks -- Using Options, Futures
Contracts and Related Options," and the Statement
of Additional Information, for a discussion of risk
factors relating to options and futures strategies.
The Government II Fund invests in debt securities
issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Fund may sell
and purchase options on U.S. Government securities;
and purchase and sell interest rate futures
contracts and options on such contracts since such
transactions are entered into for bona fide hedging
purposes. The market prices of debt securities,
including U.S. Government securities, generally
fluctuate with changes in interest rates so that
the Fund's net asset value can be expected to
decrease as interest rates rise. See "Goals and
Investment Policies -- Government II Fund." The
Fund may also purchase or sell U.S. Government
securities on a forward commitment basis. See
"Investment Practices and Risks -- Options, Futures
Contracts and Related Options" and "-- Forward
Commitments" and the Statement of Additional
Information, for a discussion on forward
commitments and risk factors relating to options
and futures strategies.
3
<PAGE> 75
Under certain market conditions, all Funds may
experience a high rate of portfolio turnover.
Higher portfolio turnover involves correspondingly
greater brokerage commissions and other transaction
costs. See "Investment Practices and Risks --
Portfolio Turnover."
Investment Adviser.......... Van Kampen American Capital Asset Management, Inc.
(the "Adviser"), serves as investment adviser to
the Trust. Smith Barney Mutual Funds Management
Inc. (the "Subadviser") provides advisory services
to the Adviser with respect to the International
Equity II Fund. See "The Trust and Its Management."
Distributor................. PFS Distributors (the "Distributor").
Multiple Pricing System..... Each Fund offers two classes of shares to the
general public, each with its own sales charge
structure: Class A shares and Class B shares. Each
class has distinct advantages and disadvantages for
different investors, and investors may choose the
class of shares that best suits their circumstances
and objectives. See "Multiple Pricing System --
Factors for Consideration." Each class of shares
represents an interest in the same portfolio of
investments of a Fund. The per share dividends on
Class B shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing
System." For information on redeeming shares see
"Redemption of Shares."
Class A Shares.............. Class A shares of the Emerging Growth II Fund, the
International Equity II Fund, the Growth II Fund
and the Growth and Income II Fund are offered at
net asset value per share plus a maximum initial
sales charge of 5.50% of the offering price. Class
A shares of the Government II Fund are offered at
net asset value per share plus a maximum initial
sales charge of 4.75% of the offering price. Each
Fund pays an annual service fee at the rate of
0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of
Shares -- Class A Shares" and "Distribution Plans."
Class B Shares.............. Class B shares of the Emerging Growth II Fund, the
International Equity II Fund, the Growth II Fund
and the Growth and Income II Fund are offered at
net asset value per share and are subject to a
maximum contingent deferred sales charge of 5% of
redemption proceeds during the first year,
declining each year thereafter to 0% after the
fifth year. Class B shares of the Government II
Fund are offered at net asset value per share and
are subject to a maximum contingent deferred sales
charge of 4% of redemption proceeds during the
first and second year, declining each year
thereafter to 0% after the fifth year. See
"Redemption of Shares." Each Fund pays a combined
annual distribution fee and service fee at the rate
of 1% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares --
Class B Shares" and "Distribution Plans." Class B
shares will convert automatically to Class A shares
six years after the shareholder's order to purchase
was accepted. See "Multiple Pricing
System -- Conversion Feature."
Dividends and
Distributions............... The Emerging Growth II Fund, the International
Equity II Fund and the Growth II Fund may declare
and pay dividends and capital gain distributions
annually. The Growth and Income II Fund may declare
and pay dividends quarterly and capital gain
distributions annually. With respect to the
Government II Fund, income dividends are declared
each business day and paid monthly; any net
short-term or long-term capital gains are
distributed at least annually. All dividends and
distributions are automatically reinvested in
shares of a Fund at net asset value per share
(without a sales charge) unless payment in cash is
requested. See "Dividends, Distributions and
Taxes."
4
<PAGE> 76
--------------------------------------------------------------------------------
EXPENSE SYNOPSIS
--------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
<TABLE>
<CAPTION>
EMERGING GROWTH II INTERNATIONAL EQUITY II GROWTH II
------------------------------------------ ------------------------------------------ --------------
CLASS A SHARES CLASS B SHARES CLASS A SHARES CLASS B SHARES CLASS A SHARES
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge
imposed on purchases
(as a percentage of
offering price)...... 5.50%(a) None 5.50%(a) None 5.50%(a)
Sales charge imposed
on dividend
reinvestments........ None None None None None
Deferred sales charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever
is lower)............ None 5% during the first None 5% during the first None
year, 4% during the year, 4% during the
second year, 3% during second year, 3% during
the third year, 2.5% the third year, 2.5%
during the fourth during the fourth
year, 1.5% during the year, 1.5% during the
fifth year and 0% after fifth year and 0% after
the fifth year(c) the fifth year(c)
Exchange fee.......... $ 5.00* $5.00 $ 5.00* $5.00 $ 5.00*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management fees....... .00%(k) .00%(k) .00%(i) .00%(i) .08%(j)
Rule 12b-1 fees(d).... .25% 1.00%(f) .25% 1.00%(f) .25%
Other expenses(e)..... 2.50%(k) 2.50%(k) 3.86% 3.85% 2.42%
Total fund operating
expenses............. 2.75%(k) 3.50%(k) 4.11%(i) 4.85%(i) 2.75%(j)
----------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH II GROWTH AND INCOME II GOVERNMENT II
-------------- ------------------------------------------ --------------
CLASS B SHARES CLASS A SHARES CLASS B SHARES CLASS A SHARES
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTIO
Maximum sales charge
imposed on purchases
(as a percentage of
offering price)...... None 5.50%(a) None 4.75%(b)
Sales charge imposed
on dividend
reinvestments........ None None None None
Deferred sales charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever
is lower)............ 5% during the first None 5% during the first None
year, 4% during the year, 4% during the
second year, 3% during second year, 3% during
the third year, 2.5% the third year, 2.5%
during the fourth during the fourth
year, 1.5% during the year, 1.5% during the
fifth year and 0% after fifth year and 0% after
the fifth year(c) the fifth year(c)
Exchange fee.......... $5.00 $ 5.00* $5.00 $ 5.00*
ANNUAL FUND OPERATING
(as a percentage of a
assets)
Management fees....... .08%(j) .40%(h) .40%(h) .35%(g)
Rule 12b-1 fees(d).... 1.00%(f) .25% 1.00%(f) .25%
Other expenses(e)..... 2.42% 2.10%(h) 2.10%(h) 2.15%
Total fund operating
expenses............. 3.50%(j) 2.75%(h) 3.50%(h) 2.75%(g)
----------------------
<CAPTION>
CLASS B SHARES
----------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge
imposed on purchases
(as a percentage of
offering price)...... None
Sales charge imposed
on dividend
reinvestments........ None
Deferred sales charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever
is lower)............ 4% during the first
and second year, 3%
during the third year,
2.5% during the fourth
year, 1.5% during the
fifth year and 0% after
the fifth year and 0%
after the fifth year(c)
Exchange fee.......... $5.00
ANNUAL FUND OPERATING
(as a percentage of a
assets)
Management fees....... .35%(g)
Rule 12b-1 fees(d).... 1.00%(f)
Other expenses(e)..... 2.15%
Total fund operating
expenses............. 3.50%(g)
----------------------
</TABLE>
(a) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares."
(b) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(c) See "Purchase of Shares -- Class B Shares."
(d) .25% for Class A shares, and 1% for Class B shares. See "Distribution
Plans."
(e) See "The Trust and Its Management."
(f) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
(g) After expense reimbursement. In the absence of expense reimbursement,
management fees for both Class A and Class B would be .60% and total fund
operating expenses would be 3.00% for Class A and 3.75% for Class B.
(h) After expense reimbursement. In the absence of expense reimbursement,
management fees for both Class A and B would be .65% and total fund
operating expenses would be 3.00% for Class A and 3.75% for Class B.
(i) After expense reimbursement. In the absence of expense reimbursement,
management fees for both Class A and B would be 1.00%, other expenses would
be 4.73% for Class A and 4.72% for Class B, and total fund operating
expenses would be 5.98% for Class A and 6.72% for Class B.
(j) After expense reimbursement. In the absence of expense reimbursement,
management fees for both Class A and Class B would be .65% and total fund
operating expenses would be 3.32% for Class A and 4.07% for Class B.
(k) After expense reimbursement. In the absence of expense reimbursement,
management fees for both Class A and Class B would be .65%, other expenses
would be 4.77% for both Class A and Class B, and total fund operating
expenses would be 5.67% for Class A and 6.42% for Class B.
* An investor may have to pay the excess, if any, of the sales load rate
applicable to the Fund being acquired over the sales load rate, if any,
previously paid. The exchange fee is not charged in certain circumstances.
See "Shareholder Services -- Systematic Exchanges."
5
<PAGE> 77
--------------------------------------------------------------------------------
EXPENSE SYNOPSIS -- CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH
II
---------
CUMULATIVE
EMERGING GROWTH II INTERNATIONAL EQUITY II EXPENSES
------------------------ ------------------------ PAID
FOR THE
CUMULATIVE EXPENSES PAID CUMULATIVE EXPENSES PAID PERIOD
FOR THE PERIOD OF: FOR THE PERIOD OF: OF:
EXAMPLE 1 YEAR 3 YEARS 1 YEAR 3 YEARS 1 YEAR
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
An investor would pay the following expenses on
a $1,000 investment including, for Class A
shares, the maximum front-end sales charge of
$55.00 for Emerging Growth II, International
Equity II, Growth II and Growth and Income
II, and $47.50 for Government II, and for
Class B shares, a contingent deferred sales
charge assuming (1) an operating expense
ratio of 2.75%, 4.11%, 2.75%, 2.75% and 2.75%
for Emerging Growth II, International Equity
II, Growth II, Growth and Income II and
Government II, respectively, for Class A
shares, and 3.50%, 4.85%, 3.50%, 3.50% and
3.50% for Emerging Growth II, International
Equity II, Growth II, Growth and Income II
and Government II, respectively, for Class B
shares, (2) a 5% annual return throughout the
period and (3) redemption at the end of the
period:
Class A.................................... $ 81 $ 136 $ 94 $ 173 $ 81
Class B.................................... $ 86 $ 139 $ 99 $ 176 $ 86
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of the period:
Class A.................................... $ 81 $ 136 $ 94 $ 173 $ 81
Class B.................................... $ 35 $ 107 $ 49 $ 146 $ 35
<CAPTION> GROWTH II
---------
CUMULATIVE
EXPENSES GROWTH AND INCOME II GOVERNMENT II
PAID -------------------------- --------------------------
FOR THE
PERIOD CUMULATIVE EXPENSES PAID CUMULATIVE EXPENSES PAID
OF: FOR THE PERIOD OF: FOR THE PERIOD OF:
EXAMPLE 3 YEARS 1 YEAR 3 YEARS 1 YEAR 3 YEARS
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
An investor would pay the following expenses on
a $1,000 investment including, for Class A
shares, the maximum front-end sales charge of
$55.00 for Emerging Growth II, International
Equity II, Growth II and Growth and Income
II, and $47.50 for Government II, and for
Class B shares, a contingent deferred sales
charge assuming (1) an operating expense
ratio of 2.75%, 4.11%, 2.75%, 2.75% and 2.75%
for Emerging Growth II, International Equity
II, Growth II, Growth and Income II and
Government II, respectively, for Class A
shares, and 3.50%, 4.85%, 3.50%, 3.50% and
3.50% for Emerging Growth II, International
Equity II, Growth II, Growth and Income II
and Government II, respectively, for Class B
shares, (2) a 5% annual return throughout the
period and (3) redemption at the end of the
period:
Class A.................................... $ 136 $ 81 $ 136 $ 74 $ 129
Class B.................................... $ 139 $ 86 $ 139 $ 76 $ 139
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of the period:
Class A.................................... $ 136 $ 81 $ 136 $ 74 $ 129
Class B.................................... $ 107 $ 35 $ 107 $ 35 $ 107
</TABLE>
--------------------------------------------------------------------------------
The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in any Fund will
bear directly or indirectly. Expenses are based on estimated amounts for the
current fiscal year on an annualized basis. See "Purchase of Shares," "The Trust
and Its Management" and "Redemption of Shares." The example is included to
provide a means for the investor to compare expense levels of funds with
different fee structures over varying investment periods. To facilitate such
comparison, all funds are required to utilize a five percent annual return
assumption. This assumption is unrelated to a Fund's prior performance and is
not a projection of future performance. With respect to the Emerging Growth II
Fund and the International Equity II Fund, "Other Expenses" are based on
estimated amounts for the current fiscal year. The example should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.
6
<PAGE> 78
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
(For a share of beneficial interest outstanding throughout the period)
The following information for the period May 3, 1994 through October 31,
1994 has been audited by the Trust's independent auditors, Ernst & Young LLP,
whose report thereon was unqualified. The information presented below for the
period ended April 30, 1995 is unaudited. This summary should be read in
conjunction with the related financial statements and notes thereto included in
the Statement of Additional Information.
<TABLE>
<CAPTION>
GOVERNMENT
GROWTH II GROWTH & INCOME II II
--------------------------------------- ---------------------------------------- --------
CLASS A CLASS B CLASS A CLASS B CLASS A
----------------- ----------------- ----------------- ------------------ --------
SIX SIX SIX SIX SIX
MONTHS MAY 3, MONTHS MAY 3, MONTHS MAY 3, MONTHS MAY 3, MONTHS
ENDED 1994(1) ENDED 1994(1) ENDED 1994(1) ENDED 1994(1) ENDED
APRIL THROUGH APRIL THROUGH APRIL THROUGH APRIL THROUGH APRIL
30, OCTOBER 31, 30, OCTOBER 31, 30, OCTOBER 31, 30, OCTOBER 31, 30,
1995 1994(2) 1995 1994(2) 1995 1994(2) 1995 1994(2) 1995
------ ------ ------ ------ ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE(2)
Net asset value, beginning of
period..................... $11.89 $11.81 $11.85 $11.81 $11.71 $11.81 $11.70 $ 11.81 $11.54
------ ------ ------ ------ ------ ------ ------ ------- --------
INCOME FROM INVESTMENT
OPERATIONS
Investment income............ .10 .29 .07 .28 .11 .42 .18 .42 .49
Expenses..................... (.11) (.29) (.10) (.32) (.08) (.21) (.18) (.25) (.16)
------ ------ ------ ------ ------ ------ ------ ------- --------
Net investment income
(loss)..................... (.01) 0 (.03) (.04) .03 .21 .00 .17 .33
Net realized and unrealized
gains or losses on
securities................. .81 .08 .78 .08 .885 (.26) .864 (.251) .3396
------ ------ ------ ------ ------ ------ ------ ------- --------
Total from investment
operations................. .80 .08 .75 .04 .915 (.05) .864 (.081) .6696
------ ------ ------ ------ ------ ------ ------ ------- --------
DIVIDENDS FROM NET INVESTMENT
INCOME..................... -- -- -- -- (.095)(5) (.05) (.054)(5) (.029) .(3396)(4)
------ ------ ------ ------ ------ ------ ------ ------- --------
Net asset value, end of
period..................... $12.69 $11.89 $12.60 $11.85 $12.53 $11.71 $12.51 $ 11.70 $11.87
======= ======= ======= ======= ======= ======= ======= ======== =========
TOTAL RETURN(3).............. 6.64% .76% 6.24% .42% 7.88% (.42%) 7.43% (.68%) 5.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)................. $ 11.2 $ 4.4 $ 17.0 $ 5.8 $ 7.0 $ 3.5 $ 9.0 $ 3.6 $ 6.4
Ratios to average net assets
(annualized)
Expenses................... 2.78% 4.89% 3.52% 5.79% 2.77% 3.37% 3.53% 4.42% 2.78%
Expenses, without expense
reimbursement............ 3.61% -- 4.36% -- 3.20% 3.40% 3.95% 4.45% 3.15%
Net investment income
(loss)................... (.28%) (.05%) (1.04%) (.78%) .89% 3.38% .12% 3.00% 5.59%
Net investment income,
without expense
reimbursement............ (1.11%) -- (1.87%) -- .47% 3.35% (.31%) 2.97% 5.22%
Portfolio turnover rate...... 97% 151% 97% 151% 61% 215% 61% 215% 14%
<CAPTION>
INTERNATIONAL
GOVERNMENT II EMERGING GROWTH II EQUITY II
------------ CLASS B ------------------- -------------------
CLASS A -------------------- CLASS A CLASS B CLASS A CLASS B
------------ SIX -------- ------- ------- -------
MAY 3, MONTHS MAY 3, FEBRUARY 21, FEBRUARY 21, FEBRUARY 21, FEBRUARY 21,
1994(1) ENDED 1994(1) 1995(1) 1995(1) 1995(1) 1995(1)
THROUGH APRIL THROUGH THROUGH THROUGH THROUGH THROUGH
OCTOBER 31, 30, OCTOBER 31, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1994(2) 1995 1994(2) 1995(2) 1995(2) 1995(2) 1995(2)
------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE(2)
Net asset value, beginning of
period..................... $11.91 $11.54 $11.91 $11.81 $11.81 $11.81 $11.81
------ -------- ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Investment income............ .38 .50 .38 .07 .05 .10 .06
Expenses..................... (.15) (.21) (.18) (.08) (.06) (.08) (.02)
------ -------- ------ ------ ------ ------ ------
Net investment income
(loss)..................... .23 .29 .20 (.01) (.01) .02 .04
Net realized and unrealized
gains or losses on
securities................. (.40) .3406 (.41) .60 .59 .86 .83
------ -------- ------ ------ ------ ------ ------
Total from investment
operations................. (.17) .6306 (.21) .59 .58 .88 .87
------ -------- ------ ------ ------ ------ ------
DIVIDENDS FROM NET INVESTMENT
INCOME..................... (.20) .(3006)(4) (.16) -- -- -- --
------ -------- ------ ------ ------ ------ ------
Net asset value, end of
period..................... $11.54 $11.87 $11.54 $12.40 $12.39 $12.69 $12.68
======= ========= ======= ======= ======= ======= =======
TOTAL RETURN(3).............. (1.53%) 5.61% (1.83%) 5.00% 4.91% 7.45% 7.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)................. $ 4.6 $ 5.3 $ 2.8 $ 2.5 $ 1.1 $ 2.9 $ 0.4
Ratios to average net assets
(annualized)
Expenses................... 2.32% 3.52% 3.25% 2.92% 2.89% 2.87% 1.03%
Expenses, without expense
reimbursement............ -- 3.89% -- 6.84% 6.82% 7.33% 5.49%
Net investment income
(loss)................... 3.54% 4.84% 3.49% (.22%) (.50%) .82% 1.89%
Net investment income,
without expense
reimbursement............ -- 4.47% -- (4.15%) (4.43%) (3.64%) (2.57%)
Portfolio turnover rate...... 155% 14% 155% 12% 12% 0% 0%
</TABLE>
(1) Commencement of operations.
(2) Based on average month-end shares outstanding.
(3) Total return for periods of less than one year have not been annualized.
Total return does not consider the effect of sales charges.
(4) Includes $.0114 and $.0105 per share for Class A and Class B, respectively,
in excess of net investment income.
(5) Includes $.044 and $.047 per share for Class A and Class B, respectively, in
excess of net investment income.
7
<PAGE> 79
--------------------------------------------------------------------------------
MULTIPLE PRICING SYSTEM
--------------------------------------------------------------------------------
The Multiple Pricing System permits an investor to choose the method of
purchasing shares of each Fund that is most beneficial given the amount of the
purchase and the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares of the Emerging Growth II Fund, the
International Equity II Fund, the Growth II Fund and the Growth and Income II
Fund are sold at net asset value plus an initial maximum sales charge of up to
5.50% of the offering price. Class A shares of the Government II Fund are sold
at net asset value plus an initial maximum sales charge of up to 4.75% of the
offering price. Class A shares of each Fund are subject to an ongoing service
fee at an annual rate of 0.25% of each Fund's aggregate average daily net assets
attributable to the Class A shares. Certain purchases of Class A shares qualify
for reduced initial sales charges. See "Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares of each Fund are sold at net asset value and
are subject to a contingent deferred sales charge if they are redeemed within
five years of purchase. Class B shares of each Fund are subject to an ongoing
service fee at an annual rate of 0.25% of each Fund's aggregate average daily
net assets attributable to the Class B shares and an ongoing distribution fee at
an annual rate of 0.75% of each Fund's aggregate average daily net assets
attributable to the Class B shares. The ongoing distribution fee paid by Class B
shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
B Shares." Class B shares of each Fund will automatically convert to Class A
shares six years after the shareholder's order to purchase was accepted. See
"Conversion Feature" herein for discussion on applicability of the conversion
feature to Class B shares.
CONVERSION FEATURE. Class B shares of each Fund will automatically convert
to Class A shares six years after the shares were purchased and will no longer
be subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares of each Fund that have been outstanding for a
period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares as the case
may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased of each Fund
through the reinvestment of dividends and distributions paid on Class B shares
in a shareholder's Fund account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's Fund account
(other than those in the sub-account) convert to Class A, an equal pro rata
portion of the Class B shares in the sub-account will also convert to Class A.
The conversion of Class B shares to Class A shares is subject to an opinion
of counsel or a private letter ruling to the effect that (i) the assessment of
the distribution fee and incremental transfer agency costs, if any, with respect
to Class B shares does not result in a Fund's dividends or distributions
constituting "preferential dividends" under the Internal Revenue Code, as
amended (the "Code"), and (ii) the conversion of shares does not constitute a
taxable event under federal income tax law. The conversion of Class B shares may
be suspended if such an opinion or private letter ruling is no longer available.
In that event, no further conversions of Class B shares would occur, and shares
might continue to be subject to the distribution fee for an indefinite period
which may extend beyond the period ending six years after the shareholder's
order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in each Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares prior to conversion would be less than the initial sales charge on
Class A shares purchased at the same time, and to what extent such differential
would be offset by the higher dividends per share on Class A shares. To assist
investors in making this determination, the table under the caption "Expense
Synopsis" sets forth examples of the charges applicable to each class of shares.
In this regard, Class A shares may be more beneficial to the investor who
qualifies for reduced initial sales charges, as described herein under "Purchase
of Shares -- Class A Shares." For these reasons, the Distributor will reject any
order of $250,000 or more for Class B shares.
Class A shares of each Fund are not subject to an ongoing distribution fee
and, accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors in
Class A shares do not have all their funds invested initially and, therefore,
initially own fewer shares. Other investors might determine that it is more
advantageous to purchase Class B shares and have all their funds invested
initially, although remaining subject to ongoing distribution fees and, for a
five-year period being subject to a contingent deferred sales charge. Ongoing
distribution fees on Class B shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
There can, of course, be no assurance as to the return, if any, which will be
realized on such additional funds.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start
and/or prefer not to pay redemption charges. Class B shares may be appropriate
for investors who wish to avoid a front-end sales charge and/or put 100% of
their investment dollars to work immediately.
For example, assuming an investor who is not otherwise eligible for a
quantity discount invests $10,000 in the Emerging Growth II Fund, the
International Equity II Fund, the Growth II Fund or the Growth and Income II
Fund and the average annual total return on that investment is five percent per
year before operating expenses, an investment originally made in Class B shares
will tend to have a higher value upon liquidation than an investment originally
made in Class A shares. As mentioned above, Class A shares may be appropriate
for investors who qualify for reduced initial sales charges. If that same
investor makes the same investment in the Government II Fund, and experiences
the same return, the relative performance of
8
<PAGE> 80
Class A and Class B shares is expected to be substantially similar over the
years. Please note, however, that with different rates of total return or when
quantity discounts are applicable, results may differ.
The distribution expenses incurred by the Distributor in connection with
the sale of the shares of each Fund will be reimbursed, in the case of Class A
shares, from the proceeds of the initial sales charge and, in the case of Class
B shares, from the proceeds of the ongoing distribution fee and any contingent
deferred sales charge incurred upon redemption within five years, of purchase.
Sales personnel of PFS Investments Inc. ("PFS Investments") distributing each
Fund's shares may receive differing compensation for selling Class A or Class B
shares of such Fund. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES OF EACH FUND ARE THE SAME AS THOSE OF THE INITIAL
SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."
GENERAL. Dividends paid by each Fund with respect to Class A and Class B
shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne by the respective class. See
"Dividends, Distributions and Taxes." Shares of a Fund may be exchanged, subject
to certain limitations, for shares of the same class of the other Funds offered
in this Prospectus. See "Shareholder Services -- Exchange Privilege."
The Trustees of the Trust have determined that currently no conflict of
interest exists between the classes of shares of each Fund. On an ongoing basis,
the Trustees, pursuant to their fiduciary duties under the Investment Company
Act of 1940 (the "1940 Act") and state laws, will seek to ensure that no such
conflict arises.
ADDITIONAL INFORMATION. In addition to the five Portfolios described in
this Prospectus, the Trust offers shares in five Portfolios through other
prospectuses. Three of the Portfolios have goals and investment policies like
three of the Funds described in this Prospectus -- Common Sense Growth Fund,
Common Sense Growth and Income Fund and Common Sense Government Fund ("Common
Sense Funds"). Shares of such Common Sense Funds are offered at net asset value
per share plus a maximum initial sales charge of 8.50% for the Growth Fund and
the Growth and Income Fund and 6.75% for the Government Fund. Shares of such
Common Sense Funds are not subject to any service fee, distribution fee or
contingent deferred sales charge. The investment performance of the Common Sense
Funds may be expected to differ from the investment performance of the Funds
described in this Prospectus. A prospectus of the Common Sense Funds may be
obtained from the Distributor or PFS Investments.
--------------------------------------------------------------------------------
INTRODUCTION
--------------------------------------------------------------------------------
The Trust is a duly organized Massachusetts business trust with ten
separate Portfolios, five of which are described in this Prospectus -- the
Emerging Growth II Fund, the International Equity II Fund, the Growth II Fund,
the Growth and Income II Fund and the Government II Fund. Each Fund has separate
assets and liabilities and a separate net asset value per share. Shares of a
Fund represent an interest only in the assets of that Fund. Since market risks
are inherent in all securities to varying degrees, assurance cannot be given
that the goal of any of the Funds will be met.
--------------------------------------------------------------------------------
GOALS AND INVESTMENT POLICIES
--------------------------------------------------------------------------------
Although each Fund of the Trust has a different goal which it pursues
through separate investment policies described below, each Fund, except the
International Equity Fund, will not purchase any securities issued by any
company primarily engaged in the manufacture of alcohol or tobacco. The
differences in goals and investment policies among the Funds can be expected to
affect the return of each Fund and the degree of market and financial risk to
which each Fund is subject. The goals and investment policies, the percentage
limitations, and the kinds of securities in which each Fund may invest are
generally not fundamental policies and may be changed by the Trustees, unless
expressly governed by those limitations as described under "Investment Practices
and Risks" which can be changed only by action of the shareholders. If there is
a change in the goal of any Fund, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs.
EMERGING GROWTH II FUND
The Emerging Growth II Fund seeks to provide capital appreciation for its
shareholders; any ordinary income received from portfolio securities is entirely
incidental. There can, of course, be no assurance that the objective of capital
appreciation will be realized; therefore, full consideration should be given to
the risks inherent in the investment techniques that the Adviser may use to
achieve such objective.
Under normal conditions, the Fund invests at least 65% of its total assets
in common stocks of small and medium sized companies, both domestic and foreign,
in the early stages of their life cycle that the Adviser believes have the
potential to become major enterprises. Investments in such companies may offer
greater opportunities for growth of capital than larger, more established
companies, but also may involve certain special risks. Emerging growth companies
often have limited product lines, markets, or financial resources, and they may
be dependent upon one or a few key people for management. The securities of such
companies may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. While the Fund will invest primarily in common stocks, to a limited
extent, it may invest in other securities such as preferred stocks, convertible
securities and warrants.
9
<PAGE> 81
The Fund does not limit its investment to any single group or type of
security. The Fund may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.
The Fund's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The Fund
may invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
The Fund attempts to reduce overall exposure to risk from declines in securities
prices by spreading its investments over many different companies in a variety
of industries. There is, however, no assurance that the Fund will be successful
in achieving its objective.
The Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. Such investments may be increased by the Fund up to 100% of its
assets, when deemed appropriate by the Adviser for temporary defensive purposes.
Short-term investments may include repurchase agreements with banks or
broker-dealers. See "Investment Practices and Risks -- Repurchase Agreements."
The Fund may invest up to 20% of its total assets in securities of foreign
issuers. See "Investment Practices and Risks -- Securities of Foreign Issuers."
INTERNATIONAL EQUITY II FUND
The International Equity II Fund seeks to provide a total return on its
assets from growth of capital and income. The Fund seeks to achieve its
objective by investing at least 65% of its assets in a diversified portfolio of
equity securities of established non-United States issuers.
Under normal market conditions, the Fund invests at least 65% of its total
assets in a diversified portfolio of equity securities consisting of dividend
and non-dividend paying common stock, preferred stock, convertible debt and
rights and warrants to such securities and up to 35% of the Fund's assets in
bonds, notes and debt securities (consisting of securities issued in the
Eurocurrency markets or obligations of the United States or foreign governments
and their political subdivisions) of established non-United States issuers.
Investments may be made for capital appreciation or for income or any
combination of both for the purpose of achieving a higher overall return than
might otherwise be obtained solely from investing for growth of capital or for
income. There is no limitation on the percentage or amount of the Fund's assets
which may be invested for growth or income and, therefore, from time to time the
investment emphasis may be placed solely or primarily on growth of capital or
solely or primarily on income.
In seeking to achieve its objective, the Fund presently expects to invest
its assets primarily in common stocks of established non-United States companies
which in the opinion of the Subadviser have potential for growth of capital.
However, there is no requirement that the Fund invest exclusively in common
stocks or other equity securities and, if deemed advisable, the Fund may invest
up to 35% of its assets in bonds, notes and other debt securities (including
securities issued in the Eurocurrency markets or obligations of the United
States or foreign governments and their political subdivisions). The Fund may
invest in debt securities rated A or higher by Moody's Investors Services, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") or other nationally
recognized statistical rating agency or in nonrated securities considered by the
Subadviser to be of comparable quality. When the Subadviser believes that the
return on debt securities will equal or exceed the return on common stocks, the
Fund may, in seeking its objective of total return, substantially increase its
holdings (up to a maximum of 35% of its assets) in such debt securities. In
determining whether the Fund will be invested for capital appreciation or for
income or any combination of both, the Subadviser regularly analyzes a broad
range of international equity and fixed income markets in order to assess the
degree of risk and level of return that can be expected from each market.
In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal.
The Fund will generally invest its assets broadly among countries and will
normally have represented in the portfolio business activities in not less than
three different foreign countries. Except as stated below, the Fund will invest
at least 65% of its assets in companies organized or governments located in any
area of the world other than the United States, such as the Far East (e.g.
Japan, Hong Kong, Singapore, Malaysia), Western Europe (e.g., United Kingdom,
Germany, The Netherlands, France, Italy, Switzerland), Eastern Europe (e.g.,
Hungary, Poland, The Czech Republic and the countries of the former Soviet
Union), Central and South America (e.g., Mexico, Chile and Venezuela),
Australia, Canada and such other areas and countries as the Subadviser may
determine from time to time. However, under unusual economic or market
conditions as determined by the Subadviser, for defensive purposes the Fund may
temporarily invest all or a major portion of its assets in U.S. Government
securities or in United States currency denominated debt issues of foreign
governments or agencies. To the extent the Fund's assets are invested for
temporary defensive purposes, such assets will not be invested in a manner
designed to achieve the Fund's investment objective.
In determining the appropriate distribution of investments among various
countries and geographic regions, the Subadviser ordinarily considers the
following factors; prospects for relative economic growth between countries;
expected levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the range of individual
investment opportunities available to international investors. In the future, if
any other relevant factors arise they will also be considered. In analyzing
companies for investment, the Subadviser ordinarily looks for one or more of the
following characteristics: an above-average earnings growth per share; high
return on invested capital; healthy balance sheet; sound financial and
accounting policies and overall financial strength; strong competitive
advantages; effective research and product development and marketing; efficient
service; pricing flexibility; strength of management; and general operating
characteristics which will enable the company to compete successfully in its
10
<PAGE> 82
market place. Ordinarily, the Subadviser will not view a company as being
sufficiently well established to be considered for inclusion in the Fund's
portfolio's unless the company, together with any predecessors, has been
operating for at least three fiscal years.
It is expected that portfolio securities will ordinarily be traded on a
stock exchange or other market in the country in which the issuer is principally
based, but may also be traded on markets in other countries including, in many
cases, the United States securities exchanges and over-the-counter markets.
To the extent that the Fund's assets are not otherwise invested as
described above, the assets may be held in cash, in any currency, or invested in
United States as well as foreign high quality money market instruments and
equivalents.
GROWTH II FUND
The Growth II Fund seeks capital appreciation through investments in common
stocks and options on common stocks.
Portfolio securities are selected by the Adviser using an investment
research process blending traditional security analysis and quantitative
security selection techniques. Such process includes focusing on securities of
companies that the Adviser believes either: (1) experienced above-average and
consistent long-term growth of earnings and have excellent prospects for
outstanding future growth in earnings; (2) are presently experiencing or
expected to have a material increase in profits and sales; (3) are undervalued
either in that such securities are selling at prices that do not reflect the
current market value of its securities and there is reason to expect realization
of this potential in the form of increased equity values or that the potential
improving prospects of the security is not reflected in the price of the
security; (4) will experience a fundamental change in structure that potentially
may result in higher earnings; or (5) will produce new products, new services or
new processes. The Fund may invest in options and other securities that have
above average volatility of price movement. Because prices of common stocks,
options and other investments fluctuate, the value of an investment in the Fund
will vary based upon the Fund's investment performance. The Fund attempts to
reduce overall exposure to risk from declines in securities prices by spreading
its investments over many different companies in a variety of industries and by
using stock index options and stock index futures and options thereon, as
discussed in the Statement of Additional Information. There is no assurance that
the Fund will be successful in achieving its goal.
The Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets the Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. Such
investments may be increased by the Fund, up to 100% of its assets, when deemed
appropriate by the Advisers for temporary defensive purposes. A description of
the ratings of commercial paper and bonds is contained in the Appendix to the
Statement of Additional Information. Short-term investments may include
repurchase agreements with banks or broker-dealers. See "Investment Practices
and Risks -- Repurchase Agreements."
Certain policies of the Fund, such as purchasing and selling options on
stocks, purchasing options on stock indices and purchasing stock index futures
contracts and options thereon inherently involve greater than ordinary
investment risk and the likelihood of more volatile price fluctuations. Options,
futures contracts and related options are described in "Investment Practices and
Risks -- Options, Futures Contracts and Related Options" and the Statement of
Additional Information. The Fund may also invest up to 20% of its total assets
in securities of foreign issuers and in investment companies. See "Investment
Practices and Risks -- Securities of Foreign Issuers" and "Investment in
Investment Companies." Since the Fund may take substantial risks in seeking its
goal of capital appreciation, it is not suitable for investors unable or
unwilling to assume such risks.
GROWTH AND INCOME II FUND
The Growth and Income II Fund seeks reasonable growth and income through
investments in equity securities including common and preferred stocks and
securities convertible into common and preferred stocks.
Portfolio securities are selected by the Adviser using an investment
research process blending traditional security analysis and quantitative
security selection techniques. Such process includes focusing on securities of
companies that the Adviser believes either: (1) experienced above-average and
consistent long-term growth of earnings and have excellent prospects for
outstanding future growth in earnings; (2) are presently experiencing or
expected to have a material increase in profits and sales; (3) are undervalued
either in that such securities are selling at prices that do not reflect the
current market value of its securities and there is reason to expect realization
of this potential in the form of increased equity values or that the potential
improving prospects of the security is not reflected in the price of the
security; (4) will experience a fundamental change in structure that potentially
may result in higher earnings; or (5) will produce new products, new services or
new processes. In general, the Fund intends to invest primarily in securities
that have yielded a dividend or interest income to security holders within the
past twelve months; however, it may invest in non-income producing investments
held for anticipated increase in value. There is no assurance that the Fund will
be successful in achieving its goal.
Convertible securities rank senior to common stocks in a corporation's
capital structure. They are consequently of higher quality and entail less risk
than the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as fixed income security. The Fund may purchase
convertible securities rated Ba or lower by Moody's or BB or lower by S&P or in
non-rated securities considered by the Adviser to be of comparable quality.
Although the Fund selects these securities primarily on the basis of their
equity characteristics, investors should be aware that debt securities rated in
these categories are considered high risk securities; the rating agencies
consider them speculative, and payment of interest and principal is not
considered well assured. To the extent that such convertible securities are
acquired by the Fund there is a greater risk as to the timely payment of the
principal of, and timely payment of interest or dividends on, such securities
than in the case of higher rated convertible securities.
11
<PAGE> 83
Although the portfolio turnover rate will not be considered a limiting
factor, the Fund does not intend to engage in trading directed at realizing
short-term profits. Nevertheless, changes in the portfolio will be made promptly
when determined to be advisable by reason of developments not foreseen at the
time of the investment decision, and usually without reference to the length of
time the security has been held.
The Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets the Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. Such
investments may be increased by the Fund, up to 100% of its assets, when deemed
appropriate by the Adviser for temporary defensive purposes. Short-term
investments may include repurchase agreements with banks or broker-dealers. See
"Investment Practices and Risks -- Repurchase Agreements." The Fund may also
invest up to 20% of its total assets in securities of foreign issuers and in
investment companies. See "Investment Practices and Risks -- Securities of
Foreign Issuers" and "Investment in Investment Companies." The Fund may engage
in portfolio management strategies and techniques involving options, futures
contracts and options on futures. Options, futures contracts and related options
are described in "Investment Practices and Risks -- Options, Futures Contracts
and Related Options" and the Statement of Additional Information.
GOVERNMENT II FUND
The goal of the Government II Fund is to seek to provide investors with a
high current return consistent with preservation of capital. The Fund invests
primarily in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. In order to hedge against changes in interest
rates, the Fund may purchase or sell options on U.S. Government securities and
engage in transactions involving interest rate futures contracts and options on
such contracts. See "Investment Practices and Risks -- Options, Futures
Contracts and Related Options" and the Statement of Additional Information for
further discussion. The Fund may invest in repurchase agreements fully
collateralized by U.S. Government securities. The Fund may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices and Risks -- Repurchase Agreements" and "Forward Commitments." The
Fund is not designed for investors seeking long-term capital appreciation.
Shares of the Fund are not insured or guaranteed by the U.S. Government, its
agencies or instrumentalities or by any other person or entity. There is no
assurance that the Fund will be successful in achieving its goal.
The Fund may also engage in transactions involving obligations issued or
guaranteed 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. Government,
(b) the right of the issuer to borrow an amount limited to a specific line of
credit from the U.S. Government, (c) discretionary authority of the U.S.
Government agency or instrumentality, or (d) the credit of the instrumentality.
Agencies and instrumentalities include but are not limited to: Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association. The Fund expects in any event that at all times at least 80% of its
assets will be invested in U.S. Government securities.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities include: (1) U.S. Treasury obligations, which differ in their
interest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturity of one to ten years), and
U.S. Treasury bonds (generally maturities of greater than ten years), including
the principal components or the interest components issued by the U.S.
Government under the Separate Trading of Registered Interest and Principal of
Securities program (i.e., "STRIPS"), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, including government guaranteed
mortgage-related securities, some of which are backed by the full faith and
credit of the U.S. Treasury, some of which are supported by the right of the
issue to borrow from the U.S. Government and some of which are backed only by
the credit of the issuer itself.
Mortgage loans made by banks, savings and loan institutions, and other
lenders are often assembled into pools, which are issued or guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this Prospectus calls
"mortgage-related securities."
Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned corporate instrumentality
of the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and
privately-owned corporation, and FHLMC, a federal corporation, are
instrumentalities of the United States. The securities and guarantees of FNMA
and FHLMC are not backed, directly or indirectly, by the full faith and credit
of the United States. Although the Secretary of the Treasury of the United
States has discretionary authority to lend FNMA up to $2.25 billion outstanding
at any time, neither the United States nor any agency thereof is obligated to
finance FNMA's or FHLMC's operations or to assist FNMA or FHLMC in any other
manner. Securities of FNMA and FHLMC include those issued in principal only or
interest only components.
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. Thus, the securityholders frequently receive prepayments of principal,
in addition to the principal which is part of the regular monthly payment. A
borrower is more likely to prepay a mortgage which bears a relatively high rate
of interest. This means that in times of declining interest rates, some of the
Fund's higher yielding securities might be converted to cash, and the Fund will
be forced to accept lower interest rates when that cash is used to purchase
additional securities. The increased likelihood of prepayment when interest
rates decline also limits market price appreciation of mortgage-related
securities. If the Fund buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a loss to the Fund of up to
the amount of the premium paid since only timely payment of principal and
interest is guaranteed.
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In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of approximately four
to six years. Duration is a measure of the expected life of a debt security that
was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a debt security's yield, coupon interest
payments, final maturity and call features into one measure.
Duration is an objective computation which allows an investment manager to
make certain predictions regarding how the value of a portfolio will respond to
changes in interest rate levels. Generally, larger measures of duration
correspond to larger expected price changes in securities and portfolios. For
example, a portfolio consisting entirely of treasury notes with a remaining
maturity of five years would have a duration of about 4.5 years. A one percent
change in interest rate levels should impact the securities prices and portfolio
net asset value inversely to the change in direction in interest rates, by about
4.5%. A portfolio consisting entirely of treasury notes with a remaining
maturity of ten years would have a duration of about 7.5 years. Here, a one
percent change in interest rate levels should impact the securities prices and
portfolio net asset value inversely to the change in direction in interest
rates, by about seven to eight percent. This example, is intended for
demonstration purposes only; however, and is not intended to approximate how the
Fund's portfolio will respond to changes in interest rates. The Fund's
investment portfolio may include securities with differing maturities and
quality levels and the interest rates on those instruments may not all change by
the same amount at the same time as rates rise or fall generally in the
marketplace. Also, the treasury securities described in the example cannot be
retired prior to maturity, while some of the securities in the Fund's portfolio
can. These factors among others can cause the Fund's investment portfolio to
respond somewhat differently to changes in interest rates than shown in the
example.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest, the shorter the
maturity or the higher the yield-to-maturity of a debt security, the shorter its
duration.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
At October 31, 1994, the average maturity of the debt securities owned by the
Fund, as adjusted for investments in options, futures contracts and related
options, was approximately 4.80 years and the duration of the portfolio was
approximately 3.84 years. In these and other similar situations, the Adviser
will use more sophisticated analytical techniques that incorporate the economic
life of a security into the determination of its interest rate exposure. The
duration is likely to vary from time to time as the Adviser pursues its strategy
of striving to maintain an active balance between seeking to maximize income and
endeavoring to maintain the value of the Fund's capital. Thus, the objective of
providing high current return consistent with preservation of capital is
tempered by seeking to avoid undue market risk and thus provide reasonable total
return as well as high distributed return. There is, of course, no assurance
that the Adviser will be successful in achieving such results for the Fund.
The Fund generally purchases debt securities at a premium over the
principal or face value in order to obtain higher current income. The amount of
any premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Fund's net asset value. Any such decline is realized for accounting purposes
as a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.
The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Fund reduces its potential
for capital appreciation on debt securities if interest rates decline. Thus if
market prices of debt securities increase, the Fund receives less total return
from its optioned positions than it would have received if the options had not
been sold. The purpose of selling options is intended to improve the Fund's
total return and not to "enhance" monthly distributions. During periods when the
Fund has capital loss carry forwards any capital gains generated from such
transactions will be retained in the Fund. See "Investment Practices and
Risks -- Options, Futures Contracts and Related Options," "Dividends,
Distributions and Taxes" and the Statement of Additional Information for further
discussion.
The purchase and sale of options may result in a high portfolio turnover
rate. See "Investment Practices and Risks -- Portfolio Turnover."
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INVESTMENT PRACTICES AND RISKS
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REPURCHASE AGREEMENTS (ALL FUNDS). Each Fund may enter into repurchase
agreements with broker-dealers or domestic banks. A repurchase agreement is a
short-term investment in which the purchaser (e.g., the Fund) acquires ownership
of a debt security and the seller agrees to repurchase the obligation at a
future time and set price, thereby determining the yield during the purchaser's
holding period. Repurchase agreements involve certain risks in the event of a
default by the other party. No Fund will invest in repurchase agreements
maturing in more than seven days if any such investment, together with any other
illiquid securities held by such Fund, exceeds in the case of the Growth II
Fund, the Growth and Income II Fund and the Government II Fund, 10% of the value
of the Fund's net assets and, in the case of the Emerging Growth II Fund and the
International Equity II Fund, 15% of the value of the Fund's net assets. The
International Equity II Fund may enter into repurchase agreements of up to 25%
of its assets but the Fund currently does not expect that it will enter into
repurchase agreements on more than 5% of its assets. See the Statement of
Additional Information.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for a Fund than would be
available to the Funds investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that account.
ADJUSTING INVESTMENT EXPOSURE. The Funds can use various techniques to
increase or decrease their exposure to changing security prices, interest rates,
commodity prices, or other factors that affect security values. These techniques
may involve derivative securities such as options, futures contracts, swaps, and
forward commitments, all as discussed more fully below.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS (ALL FUNDS). The Funds
expect to utilize options, futures contracts and options thereon in several
different ways, depending upon the status of a Fund's portfolio and the
Adviser's or, in the case of the International Equity II Fund, the Subadviser's,
expectations concerning the securities markets.
For example, in times of stable or rising security prices, a Fund generally
seeks to obtain maximum exposure to the securities markets, i.e., to be "fully
invested." Nevertheless, even when a Fund is fully invested, prudent management
requires that at least a small portion of assets be available as cash to honor
redemption requests and for other short-term needs. A Fund may also have cash on
hand that has not yet been invested. The portion of a Fund's assets that is
invested in cash equivalents does not fluctuate with security market prices, so
that, in times of rising market prices, a Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
futures contracts, however, a Fund can compensate for the cash portion of its
assets and obtain equivalent performance to investing 100% of its assets in
equity securities.
If the Adviser or, in the case of the International Equity II Fund, the
Subadviser, forecasts a market decline, a Fund may take a defensive position,
reducing its exposure to the securities markets by increasing its cash position.
By selling futures contracts instead of portfolio securities, a similar result
can be achieved to the extent that the performance of the futures contracts
correlates to the performance of a Fund's portfolio securities. Sale of futures
contracts could frequently be accomplished more rapidly and at less cost than
the actual sale of securities. Once the desired hedged position has been
effected, a Fund could then liquidate securities in a more deliberate manner,
reducing its futures position simultaneously to maintain the desired balance, or
it could maintain the hedged position.
As an alternative to selling futures contracts, a Fund can purchase puts
(or futures puts) to hedge the portfolio's risk in a declining market. Since the
value of a put increases as the index declines below a specified level, the
portfolio's value is protected against a market decline to the degree the
performance of the index correlates with the performance of a Fund's investment
portfolio. If the market remains stable or advances, a Fund can refrain from
exercising the put and its portfolio will participate in the advance, having
incurred only the premium cost for the put.
In many cases, a Fund could achieve results similar to those available from
options and futures contracts without investing in the options and futures
markets. For example, instead of hedging portfolio securities it owned with
options and futures contracts, the Fund could sell the securities and invest the
proceeds in money market instruments. In other cases, however, the options and
futures markets provide investment or risk management opportunities that are not
available from direct investments in securities. In addition, some strategies
can be implemented with greater ease and at lower cost by utilizing the options
and futures markets.
The International Equity II Fund may enter into futures contracts and
options on futures contracts for non-hedging purposes, subject to applicable
law. Such transactions may be considered a form of speculation.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS (ALL
FUNDS). The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities. While
utilization of options, futures contracts and similar instruments may be
advantageous to a Fund, if the Adviser or, in the case of the International
Equity II Fund, the Subadviser, is not successful in employing such instruments
in managing a Fund's investments, a Fund's performance will be worse than if a
Fund did not make such investments. In addition, a Fund would pay commissions
and other costs in connection with such investments, which may increase a Fund's
expenses and reduce its return.
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Each Fund may write or purchase options in privately negotiated
transactions ("OTC Options") as well as listed options. OTC Options can be
closed out only by agreement with the other party to the transaction. Any OTC
Option purchased by a Fund will be considered an illiquid security. Any OTC
Option written by a Fund will be with a qualified dealer pursuant to an
agreement under which the Fund may repurchase the option at a formula price.
Such options will be considered illiquid to the extent that the formula price
exceeds the intrinsic value of the option. Each Fund other than the
International Equity II Fund may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceed five
percent of the fair market value of the Fund's assets. The International Equity
II Fund may enter into transactions in futures contracts and options on futures
contracts only (i) for bona fide hedging purposes (as defined in the regulations
of the Commodity Futures Trading Commission (the "CFTC")), or (ii) for
non-hedging purposes provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In order to prevent leverage in connection with the purchase of
futures contracts thereon by the Fund, an amount of cash, cash equivalents or
liquid high grade debt securities equal to the market value of the obligation
under the futures contracts (less any related margin deposits) will be
maintained in a segregated account with the Custodian. The Growth II Fund, the
Growth and Income II Fund and the Government II Fund may not invest more than
10% of their net assets in illiquid securities and repurchase agreements which
have a maturity of longer than seven days; the Emerging Growth II Fund and the
International Equity II Fund are limited to 15% of their net assets. The
successful use of futures and options is dependent upon the ability of the
Adviser or Subadviser to predict changes in interest rates. The daily deposit
requirements in futures contracts create an ongoing greater potential financial
risk than do options purchase transactions, where the exposure is limited to the
cost of the premium for the option. Transactions in futures and options on
futures for non-hedging purposes involve greater risks and could result in
losses which are not offset by gains on other portfolio assets. A more complete
discussion of the potential risks involved in transactions involving options or
futures contracts and related options, is contained in the Statement of
Additional Information.
SPECIAL RISKS ASSOCIATED WITH FUTURES TRANSACTIONS (ALL FUNDS). There are
several risks connected with the use of futures contracts as a hedging device.
These include the risk of imperfect correlation between movements in the price
of the futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
CURRENCY TRANSACTIONS (INTERNATIONAL EQUITY II FUND). In order to protect
the dollar equivalent value of its portfolio securities against declines
resulting from currency value fluctuations and changes in interest rate or other
market changes, the Fund may enter into the following hedging transactions:
forward foreign currency contracts, interest rate and currency swaps and various
futures contracts and related options contracts. The Fund will enter into
various currency transactions, i.e., forward foreign currency contracts,
currency swaps, foreign currency or currency index futures contracts and put and
call options on such contracts or on currencies. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency for a
set price at a future date. A currency swap is an arrangement whereby each party
exchanges one currency for another on a particular date and agrees to reverse
the exchange on a later date at a specific exchange rate. Forward foreign
currency contracts and currency swaps are established in the interbank market
conducted directly between currency traders (usually large commercial banks or
other financial institutions) on behalf of their customers. Futures contracts
are similar to forward contracts except that they are traded on an organized
exchange and the obligations thereunder may be offset by taking an equal but
opposite position to the original contract, with profit or loss determined by
the relative prices between the opening and offsetting positions. Each Fund may
enter into these currency contracts and swaps in primarily the following
circumstances to "lock in" the U.S. dollar equivalent price of a security the
Fund is contemplating to buy or sell that is denominated in a non-U.S. currency;
or to protect against a decline against the U.S. dollar of the currency of a
particular country to which the Fund has exposure. The Fund may seek to achieve
the same economic result by using from time to time for such hedging a currency
different from the one of the given portfolio security as long as, in the view
of the Subadviser, such currency is essentially correlated to the currency of
the relevant portfolio security based on historic and expected exchange rate
patterns.
INTEREST RATE TRANSACTIONS (INTERNATIONAL EQUITY II FUND). The Fund will
enter into various interest rate transactions (i.e., futures contracts in
various financial instruments and interest rate related indices, put and call
options on such futures contracts and on such financial instruments and interest
rate swaps). The Fund will enter into these transactions primarily to "lock-in"
a return or spread on a particular investment or portion of its portfolio and to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitment to pay or receive interest
(e.g., an exchange of floating rate payments for fixed rate payments). The Fund
will not enter into an interest rate swap transaction in which its interest
commitment is greater or measured differently than the interest receivable on
specific portfolio securities. Interest rate swaps may be combined with currency
swaps to take advantage of rate differentials in different markets on the same
or similar securities.
MARKET INDEX TRANSACTIONS (INTERNATIONAL EQUITY II FUND). The Fund may
enter into various market index contracts (i.e., index futures contracts on
particular non-U.S. securities markets or industry segments and related put and
call options). These contracts are used primarily to protect the value of the
Fund's securities against a decline in a particular market or industry in which
it is invested.
POTENTIAL RISKS OF CURRENCY TRANSACTIONS, INTEREST RATE TRANSACTIONS AND
MARKET INDEX TRANSACTIONS (INTERNATIONAL EQUITY II FUND). The Fund will engage
in these transactions primarily as a means to hedge risks associated with
management of its portfolio. All of the foregoing transactions present certain
risks. In particular, the variable degree of correlation between price movements
of futures contracts and dollar equivalent price movements in the currency or
security being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Fund's securities. In addition, these
instruments may not be liquid in all circumstances and are generally closed out
by entering into offsetting transactions rather than by disposing of the Fund's
obligations. As a result, in volatile markets, the Fund may not be able to close
out a transaction without incurring losses. Although the contemplated use of
these contracts should tend to minimize the risk of loss due to a decline in the
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value of the hedged currency or security, at the same time they tend to limit
any potential gain which might result from an increase in the value of such
currency or security.
With respect to interest rate swaps, the Fund recognizes that such
arrangements are relatively illiquid and will include the principal amount of
the obligations owed to it under a swap as an illiquid security for purposes of
the Fund's investment restrictions except to the extent a third party (such as a
large commercial bank) has guaranteed the Fund's ability to offset the swap at
any time.
FORWARD COMMITMENTS (GOVERNMENT II FUND). The Fund may purchase or sell
U.S. Government securities on a "when-issued" or "delayed delivery" basis
("Forward Commitments"). These transactions occur when securities are purchased
or sold by the Fund with payment and delivery taking place in the future,
frequently a month or more after such transactions. The price is fixed on the
date of the commitment, and the seller continues to accrue interest on the
securities covered by the Forward Commitment until delivery and payment take
place. At the time of settlement, the market value of the securities may be more
or less than the purchase or sale price.
The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or before
the settlement date in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction; should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure.
The Fund maintains a segregated account (which is marked to market daily)
of cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase or sell continues.
SECURITIES OF FOREIGN ISSUERS (ALL FUNDS EXCEPT GOVERNMENT II FUND). The
International Equity II Fund invests at least 65% of its total assets in the
equity securities of foreign issuers and the Emerging Growth II Fund, the Growth
II Fund and the Growth and Income II Fund may invest up to 20% of the value of
their total assets in securities of foreign governments and companies of
developed and emerging markets countries.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Since each Fund may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of investments in the portfolio and the accrued
income and unrealized appreciation or depreciation of investments. Changes in
foreign currency rates relative to the U.S. dollar will affect the U.S. dollar
value of the Fund's assets denominated in that currency and the Fund's yield on
such assets.
Each Fund may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR, and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. Each Fund may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by the Fund may be subject to foreign withholding taxes, which
would reduce the Fund's total return on such investments and the amounts
available for distributions by the Fund to its shareholders. See "Dividends,
Distributions and Taxes." Foreign financial markets, while growing in volume,
have, for the most part, substantially less volume than United States markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. The foreign markets
also have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when assets
of the Fund are not invested and no return is earned thereon. The inability of
each Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage commissions,
are generally higher than with transactions in United States securities. In
addition, each Fund will incur cost in connection with conversions between
various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the United States. These risks may be intensified in the case
of investments in developing or emerging markets. In many developing markets,
there is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States. The foreign securities markets of many of the countries in which the
Fund may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the United States.
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The Emerging Growth II Fund, the International Equity II Fund, the Growth
II Fund and the Growth and Income II Fund may invest in the securities of
developing countries. A developing country generally is considered to be a
country that is in the initial stages of its industrialization cycle. Investing
in the equity and fixed-income markets of developing countries involves exposure
to economic structures that are generally less diverse and mature, and to
political systems that can be expected to have less stability, than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of the more mature
economies of developed countries; however, such markets often have provided
higher rates of return to investors.
One or more of the risks discussed above could affect adversely the economy
of a developing market or a Fund's investments in such a market. In Eastern
Europe, for example, upon the accession to power of Communist regimes in the
past, the governments of a number of Eastern European countries expropriated a
large amount of property. The claims of many property owners against those
governments were never finally settled. There can be no assurance that any
investments that the Fund might make in such emerging markets would not be
expropriated, nationalized or otherwise confiscated at some time in the future.
In such an event, the Fund could lose its entire investment in the market
involved. Moreover, changes in the leadership or policies of such markets could
halt the expansion or reverse the liberalization of foreign investment policies
now occurring in certain of these markets and adversely affect existing
investment opportunities.
LOANS OF PORTFOLIO SECURITIES (ALL FUNDS). Each Fund may lend portfolio
securities to unaffiliated brokers, dealers and financial institutions provided
that (a) immediately after any such loan, the value of the securities loaned
does not exceed 10% of the total value of that Fund's assets (15% in the case of
the Emerging Growth II Fund and the International Equity II Fund), and (b) any
securities loan is collateralized in accordance with applicable regulatory
requirements. The Adviser believes the risk of loss on such transactions is
slight, because, if a borrower was to default for any reason, the collateral
should satisfy the obligation. See the Statement of Additional Information.
RESTRICTED SECURITIES (EMERGING GROWTH II FUND, INTERNATIONAL EQUITY II
FUND, GROWTH II FUND AND GROWTH AND INCOME II FUND). The Growth II Fund and the
Growth and Income II Fund may each invest up to 10% of their net assets and the
Emerging Growth II Fund and the International Equity II Fund may each invest up
to 15% of their net assets in restricted securities and other illiquid assets.
As used herein, restricted securities are those that have been sold in the
United States without registration under the Securities Act of 1933 and are thus
subject to restrictions on resale. Excluded from the limitation, however, are
any restricted securities which are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 and which have been determined to be liquid by
the Trustees or by the Adviser pursuant to board-approved guidelines. The
determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. Since it is not possible to
predict with assurance how the markets for restricted securities sold and
offered under Rule 144A will develop, the Trustees will carefully monitor each
Fund's investment in these securities focusing on such factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in each Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. These difficulties and delays could
result in a Fund's inability to realize a favorable price upon disposition of
restricted securities, and in some cases might make disposition of such
securities at the time desired by the Fund impossible. Since market quotations
are not readily available for restricted securities, such securities will be
valued by a method that the Trustees believe accurately reflects fair value.
Notwithstanding the foregoing, due to various state regulations, the
Emerging Growth II Fund and the International Equity II Fund will not invest
more than 10% of each Fund's net assets in restricted securities; restricted
securities eligible for resale pursuant to Rule 144A are not included within
this limitation. In the event that the Funds' shares cease to be qualified under
the laws of such states or if such regulations are amended or otherwise cease to
be operative, the Funds would not be subject to this 10% restriction.
PORTFOLIO TURNOVER (ALL FUNDS). Each Fund may purchase or sell securities
without regard to the length of time the security has been held and thus may
experience a high rate of portfolio turnover. A 100% turnover rate would occur,
for example, if all the securities in a portfolio were replaced in a period of
one year. Under certain market conditions, the Growth II Fund and the Government
II Fund may experience a high rate of portfolio turnover. This may occur, for
example, if the Fund writes a substantial number of covered call options and the
market prices of the underlying securities appreciate. The rate of portfolio
turnover is not a limiting factor when the Adviser or, in the case of the
International Equity II Fund, the Subadviser, deems it desirable to purchase or
sell securities or to engage in options transactions. The annual turnover rates
of the Growth II Fund and the Government II Fund are not expected to exceed
400%, and the annual turnover rates of the Emerging Growth II Fund, the Growth
and Income II Fund and the International Equity II Fund are not expected to
exceed 100%. High portfolio turnover involves correspondingly greater
transaction costs, including any brokerage commissions, which are borne directly
by the respective Fund and may increase the recognition of short-term, rather
than long-term, capital gains. See "Dividends, Distributions and Taxes."
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES (ALL FUNDS). The Adviser or,
in the case of the International Equity II Fund, the Subadviser, is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Trust and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuing basis. Orders may be directed to any broker including, to the
extent and in the manner permitted by applicable law, Smith Barney, Inc. ("Smith
Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey"). Smith Barney and
Robinson Humphrey may be considered affiliated persons of the Distributor's
parent, The Travelers Inc. ("Travelers"). In order for Smith Barney and Robinson
Humphrey to effect any such transaction, the commissions, fees or other
remuneration received by Smith Barney and Robinson Humphrey must be reasonable
and fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities,
futures or options on futures being purchased or sold on an exchange during a
comparable period of time. This standard would allow Smith Barney and Robinson
Humphrey to receive no more than the remuneration that would be expected to be
received by an unaffiliated broker in a commensurate arms-length transaction.
Furthermore, the Trustees of the Trust, including a majority of the Trustees who
are
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not "interested" Trustees, has adopted procedures that are reasonably designed
to provide that any commissions, fees or other remuneration paid to Smith Barney
and Robinson Humphrey are consistent with the foregoing standard. Brokerage
transactions with Smith Barney and Robinson Humphrey are also subject to such
fiduciary standards as may be imposed upon Smith Barney and Robinson Humphrey by
applicable law. U.S. Government securities in which the Trust invests are traded
in the over-the-counter market. Such securities are generally traded on a net
basis with a dealer acting as principal for its own account without a stated
commission, although the prices of the securities usually include a profit to
the dealer. It is the policy of the Trust to seek to obtain the best net results
taking into account such factors as price (including the applicable dealer
spread), the size, type and difficulty of the transaction involved, the firm's
general execution and operational facilities, the firm's risk in positioning the
securities involved, and the provision of supplemental investment research by
the firm. While the Trust seeks reasonably competitive spreads, the Trust will
not necessarily be paying the lowest spread available. Brokerage commissions are
paid on transactions in listed options, futures contracts and options thereon.
The Adviser and, in the case of the International Equity II Fund, the
Subadviser, is authorized to place portfolio transactions with broker-dealers
participating in the distribution of shares of the Trust if it reasonably
believes that the quality of the execution and any commission are comparable to
that available from other qualified firms. The Adviser and, in the case of the
International Equity II Fund, the Subadviser, is authorized to pay higher
commissions to brokerage firms that provide it with investment and research
information than to firms which do not provide such service if they determine
that such commissions are reasonable in relation to the overall services
provided. The information received may be used by the Adviser in managing the
assets of other advisory accounts managed by the Adviser as well as in the
management of the assets of the Trust.
INVESTMENT IN INVESTMENT COMPANIES (INTERNATIONAL EQUITY II FUND, GROWTH II
FUND AND GROWTH AND INCOME II FUND). The International Equity II Fund, the
Growth II Fund and the Growth and Income II Fund may invest in a separate
investment company, Van Kampen American Capital Small Capitalization Fund
("Small Cap Fund"), that invests in a broad selection of small capitalization
securities. The shares of the Small Cap Fund are available only to investment
companies advised by the Adviser. The Adviser believes that the use of the Small
Cap Fund provides the Funds with the most effective exposure to the performance
of the small capitalization sector of the stock market while at the same time
minimizing costs. The Adviser charges no advisory fee for managing the Small Cap
Fund, nor are there any sales load or other charges associated with distribution
of its shares. Other expenses incurred by the Small Cap Fund are borne by it,
and thus indirectly by the Funds and the American Capital funds that invest in
it. With respect to such other expenses, the Adviser anticipates that the
efficiencies resulting from use of the Small Cap Fund will result in cost
savings for the Funds and the Van Kampen American Capital funds that invest in
the Small Cap Fund. In large part, these savings will be attributable to the
fact that administrative actions that would have to be performed multiple times
if each Fund held its own portfolio of small capitalization stocks will need to
be performed only once. The Adviser expects that the Small Cap Fund will
experience trading costs that will be substantially less than the trading costs
that would be incurred if small capitalization stocks were purchased separately
for the Funds and the Van Kampen American Capital funds.
The securities of small and medium sized companies that the Small Cap Fund
may invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies.
Each Fund will be deemed to own a pro rata portion of each investment of
the Small Cap Fund. For example, if a Fund's investment in the Small Cap Fund
were $10 million, and the Small Cap Fund had five percent of its assets invested
in the electronics industry, the Fund would be considered to have an investment
of $500,000 in the electronics industry. There is no separate limit on the
portion of its assets a Fund may invest in Small Cap Funds.
SHORT SALES AGAINST THE BOX (EMERGING GROWTH II FUND, INTERNATIONAL EQUITY
II FUND, GROWTH II FUND AND GROWTH AND INCOME II FUND). Each Fund may from time
to time make short sales of securities it owns or has the right to acquire
through conversion or exchange of other securities it owns. A short sale is
"against the box" to the extent that the Fund contemporaneously owns or has the
right to obtain at no added cost securities identical to those sold short. In a
short sale, the Fund does not immediately deliver the securities sold and does
not receive the proceeds from the sale. The Fund is said to have a short
position in the securities sold until it delivers the securities sold, at which
time it receives the proceeds of the sale. The Fund may not make short sales or
maintain a short position if to do so would cause more than 25% of its total
assets, taken at market value, to be held as collateral for such sales.
To secure its obligation to deliver the securities sold short, the Fund
will deposit in escrow in a separate account with its Custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short. However, the Fund
will not purchase and deliver new securities to satisfy its short order if such
purchase and sale would cause the Fund to derive more than 30% of its gross
income from the sale of securities held for less than three months.
LEVERAGE (INTERNATIONAL EQUITY II FUND). The Fund may borrow from banks, on
a secured or unsecured basis, up to 25% of the value of its assets. If the Fund
borrows and uses the proceeds to make additional investments, income and
appreciation from such investments will improve its performance if they exceed
the associated borrowing costs but impair its performance if they are less than
such borrowing costs. This speculative factor is known as "leverage."
Leverage creates an opportunity for increased returns to shareholders of
the Fund but, at the same time, creates special risk considerations. For
example, leverage may exaggerate changes in the net asset value of the Fund's
shares and in the Fund's yield. Although the principal or stated value of such
borrowings will be fixed, the Fund's assets may change in value during the time
the borrowing is outstanding. Leverage will create interest or
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<PAGE> 90
dividend expenses for the Fund which can exceed the income from the assets
retained. To the extent the income or other gain derived from securities
purchased with borrowed funds exceed the interest or dividends the Fund will
have to pay in respect thereof, the Fund's net income or other gain will be
greater than if leverage had not been used. Conversely, if the income or other
gain from the incremental assets is not sufficient to cover the cost of
leverage, the net income or other gain of the Fund will be less than if leverage
had not been used. If the amount of income from the incremental securities is
insufficient to cover the cost of borrowing, securities might have to be
liquidated to obtain required funds. Depending on market or other conditions,
such liquidations could be disadvantageous to the Fund.
INVESTMENT RESTRICTIONS
RESTRICTIONS APPLICABLE TO ALL OF THE FUNDS. Each Fund has adopted a number
of investment restrictions which may not be changed without the approval of the
holders of a majority (as defined by the 1940 Act) of the shares of such Fund.
The percentage limitations need only be met at the time the investment is made
or other relevant action taken. These restrictions provide, among other things,
that a Fund may not:
1. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured thereby), or
purchase more than 10% of the outstanding voting securities of any one issuer.
Neither limitation shall apply to the acquisition of shares of other open-end
investment companies by the Emerging Growth II Fund, the International Equity II
Fund, the Growth II Fund and the Growth and Income II Fund to the extent
permitted by rule or order of the SEC exempting them from the limitations
imposed by Section 12(d)(1) of the 1940 Act;
2. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry; provided, however, that with respect to the
Emerging Growth II Fund, the International Equity II Fund, the Growth II Fund
and the Growth and Income II Fund, this limitation shall exclude shares of other
open-end investment companies owned by the Fund but include the Fund's pro rata
portion of the securities and other assets owned by any such company (This does
not restrict any of the Funds from investing in obligations of the U.S.
Government and repurchase agreements secured thereby.);
3. With respect to all Funds other than the Emerging Growth II Fund and the
International Equity II Fund, borrow in excess of 10% of the market or other
fair value of its total assets, or pledge its assets to an extent greater than
5% of the market or other fair value of its total assets, provided that so long
as any borrowing exceeds 5% of the value of the Fund's total assets, the Fund
shall not purchase portfolio securities. Any such borrowings shall be from banks
and shall be undertaken only as a temporary measure for extraordinary or
emergency purposes. With respect to the Emerging Growth II Fund, borrow money
except temporarily from banks to facilitate payment of redemption requests and
then only in amounts not exceeding 33 1/3% of its net assets, or pledge more
than 10% of its net assets in connection with permissible borrowings or purchase
additional securities when money borrowed exceeds 5% of its net assets. With
respect to the International Equity II Fund, borrow money from banks on a
secured or unsecured basis, in excess of 25% of the value of its total assets.
(See "Leverage".) Deposits in escrow in connection with the writing of covered
call or secured put options, or in connection with the purchase or sale of
forward contracts, futures contracts, foreign currency futures and related
options, are not deemed to be a pledge or other encumbrance. This restriction
shall not prevent the International Equity II Fund from entering into reverse
repurchase agreements, provided that reverse repurchase agreements and any
transactions constituting borrowing by the Fund may not exceed 33 1/3% of the
Fund's total assets. The International Equity II Fund may not mortgage or pledge
its assets except to secure borrowings permitted under this restriction;
4. Make any investment in real estate, commodities or commodities
contracts, except that each Fund may engage in transactions in forward
commitments, futures contracts, foreign currency futures and related options and
may purchase or sell securities which are secured by real estate or interests
therein; or issued by companies, including real estate investment trusts, which
invest in real estate or interests therein; and the International Equity II Fund
may engage in currency transactions;
5. Lend money except by the purchase of bonds or other debt obligations of
types commonly offered publicly or privately and purchased by financial
institutions, including investments in repurchase agreements. A Fund will not
invest in repurchase agreements maturing in more than seven days (unless subject
to a demand feature) if any such investment, together with any illiquid
securities (including securities which are subject to legal or contractual
restrictions on resale) held by the Fund, exceeds 10% (or in the case of the
Emerging Growth II Fund and the International Equity II Fund, 15%) of the market
or other fair value of its total net assets; provided, however, that with
respect to the Emerging Growth II Fund, the International Equity II Fund, the
Growth II Fund and the Growth and Income II Fund, illiquid securities shall
exclude shares of other open-end investment companies owned by the Fund but
include the Fund's pro rata portion of the securities and other assets owned by
any such company. See "Investment Practices and Risks -- Repurchase Agreements";
6. Underwrite securities of other companies, except insofar as a Fund might
be deemed to be an underwriter for purposes of the Securities Act of 1933 in the
resale of any securities owned by the Fund; and
7. Lend its portfolio securities in excess of 10% (15% in the case of the
Emerging Growth II Fund and the International Equity II Fund) of its total
assets, both taken at market value provided that any loans shall be in
accordance with the guidelines established for such loans by the Trustees as
described under "Loans of Portfolio Securities," including the maintenance of
collateral from the borrower equal at all times to the current market value of
the securities loaned.
The Emerging Growth II Fund retains the right to invest up to 25% of the
value of its total assets in one company, but intends to do so only if a
particular company is believed to afford better than average prospects in market
appreciation at a time when general business conditions and trends in the market
as a whole are considered to make greater diversification less desirable.
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In addition to the foregoing, the Trust has adopted additional investment
restrictions, which may be changed by the Trustees without a vote of
shareholders, as follows:
FOREIGN INVESTMENTS FOR FUNDS OTHER THAN THE INTERNATIONAL EQUITY II
FUND. The Emerging Growth II Fund, the Growth II Fund and the Growth and Income
II Fund may not invest in the securities of a foreign issuer if, at the time of
acquisition, more than 20% of the value of a Fund's total assets would be
invested in such securities.
FUTURES CONTRACTS AND OPTIONS. In addition, the Growth and Income II Fund
and the Growth II Fund may not write, purchase or sell puts, calls or
combinations thereof, except that each Fund may (a) write covered call options
with respect to any part or all of its portfolio securities, write secured put
options, or enter into closing purchase transactions with respect to such
options, (b) purchase and sell put and call options to the extent that the
premiums paid for all such options do not exceed 10% of its total assets and
only if the Fund owns the securities covered by the put option at the time of
purchase, and (c) engage in futures contracts and related options transactions
as described in the Statement of Additional Information. The Emerging Growth II
Fund, the International Equity II Fund, the Growth II Fund and the Growth and
Income II Fund may purchase put and call options which are purchased on an
exchange or over-the-counter in other markets, or currencies and, as developed
from time to time, various futures contracts on market indices and other
instruments. Purchasing options may increase investment flexibility and improve
total return, but also risks loss of the option premium if an asset the Fund has
the option to buy declines in value.
The Government II Fund may not write, purchase or sell puts, calls or
combinations thereof, except that the Fund may (a) write covered or fully
collateralized call options, write secured put options, and enter into closing
or offsetting purchase transactions with respect to such options, (b) purchase
and sell options to the extent that the premiums paid for all such options owned
at any time do not exceed 10% of its total assets, and (c) engage in futures
contracts and related options transactions as described in the Statement of
Additional Information.
ALCOHOL OR TOBACCO. Each Fund, except the International Equity II Fund, may
not purchase any security issued by any company deriving more than 25% of its
gross revenues from the manufacture of alcohol or tobacco.
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THE TRUST AND ITS MANAGEMENT
--------------------------------------------------------------------------------
The Trust is a diversified, open-end management investment company,
generally known as a mutual fund, organized as a Massachusetts business trust on
January 29, 1987. A mutual fund provides, for those who have similar investment
goals, a practical and convenient way to invest in a diversified portfolio of
securities by combining their resources in an effort to achieve such goals.
The Trustees have the responsibility for overseeing the affairs of the
Trust. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines
the investment of the Trust's assets, provides administrative services and
manages the Trust's business and affairs. The Adviser is a wholly owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and nearly $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc.
is controlled, through the ownership of a substantial majority of its common
stock, by The Clayton & Dubilier Private Equity Fund IV Limited Partnership (the
"C&D L.P.") a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York private investment firm. The general partner
of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel,
Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own in the aggregate, not more than seven
percent of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 11% of the
common stock of VK/AC Holding, Inc. Presently, and after giving effect to the
exercise of such options, no officer or trustee of the Trust owns or would own
five percent or more of the common stock of VK/AC Holding, Inc. The Adviser,
2800 Post Oak Boulevard, Houston, Texas 77056, together with its predecessors,
has been in the investment advisory business since 1926.
The Subadviser is located at 388 Greenwich Street, New York, New York
10013. The Subadviser is an indirect wholly owned subsidiary of Travelers Group
Inc. ("Travelers"), a financial services holding company engaged through its
subsidiaries principally in three business segments -- investment services,
consumer finance services and insurance services. The Subadviser was formed in
1968. As of January 31, 1995, the Subadviser had aggregate assets under
management of approximately $55 billion. The Subadviser is located at 388
Greenwich Street, New York, New York 10013.
The Trust retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under
separate investment advisory agreements with each Fund other than the Emerging
Growth II Fund and the International Equity II Fund dated December 20, 1994, the
Trust pays the Adviser an annual fee for the Growth II Fund and the Growth and
Income II Fund, calculated separately for each Fund at the following rates:
0.65% of the first $1 billion of the Fund's average daily net assets; 0.60% of
the next $1 billion of the Fund's average daily net assets; 0.55% of the next $1
billion of the Fund's average daily net assets; 0.50% of the next $1 billion of
the Fund's average daily net assets; and 0.45% of the Fund's average daily net
assets in excess of $4 billion. The Trust pays the Adviser an annual fee for the
Government II Fund of 0.60% of the first $1 billion of the Fund's average daily
net assets; 0.55% of the next $1 billion of the Fund's average daily net assets;
0.50% of the next $1 billion of the Fund's average daily net assets; 0.45% of
the next $1 billion of the Fund's average daily net assets; 0.40% of the next $1
billion of the Fund's
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<PAGE> 92
average daily net assets; and 0.35% of the Fund's average daily net assets in
excess of $5 billion. The fee is computed daily and payable monthly with respect
to each Fund. With respect to the Emerging Growth II Fund and the International
Equity II Fund, each Fund has entered into an investment advisory agreement with
the Adviser dated February 21, 1995. The Trust pays the Adviser an annual fee
for the Emerging Growth II Fund at the following rates: 0.65% of the first $1
billion of the Fund's average daily net assets; 0.60% of the next $1 billion of
the Fund's average daily net assets; 0.55% of the next $1 billion of the Fund's
average daily net assets; 0.50% of the next $1 billion of the Fund's average
daily net assets; and 0.45% of the Fund's average daily net assets in excess of
$4 billion. The Trust pays the Adviser an annual fee for the International
Equity II Fund at the rate of 1.00% of the Fund's average daily net assets. This
fee is higher than that charged by most other mutual funds but the Trust
believes it is justified by the special international nature of the Fund and is
not necessarily higher than the fees charged by certain mutual funds with
investment objectives and policies similar to those of the Fund. Each of the
investment advisory agreements described above is referred to in this Prospectus
as an "Advisory Agreement" and together, as the "Advisory Agreements." The
Adviser has entered into a subadvisory agreement dated February 21, 1995 (the
"Subadvisory Agreement") with the Subadviser to assist it in performing its
investment advisory functions with respect to the International Equity II Fund.
Pursuant to the Subadvisory Agreement, the Subadviser receives on an annual
basis 50% of the compensation received by the Adviser from the International
Equity II Fund.
Under the Advisory Agreement with the International Equity II Fund, the
Adviser is responsible for furnishing or causing to be furnished to the Fund
advice and assistance with respect to the acquisition, holding or disposal of
investments and recommendations with respect to other aspects and affairs of the
International Equity II Fund, bookkeeping, accounting and administrative
services, office space and equipment, and the services of the officers and
employees of the Fund. Pursuant to the Subadvisory Agreement, the Subadviser is
responsible for the day to day operations and investment decisions for the
International Equity II Fund and is authorized, in its discretion and without
prior consultation with the Adviser, to: (a) manage the Fund's assets in
accordance with its investment objective and policies; (b) make investment
decisions; (c) place purchase and sale orders for portfolio transactions; and
(d) employ professional portfolio managers and securities analysts who provide
research services.
Under each of the foregoing Advisory Agreements, the Trust also reimburses
the Adviser for the actual cost of the Trust's accounting services, which
include maintaining its financial books and records and calculating the daily
net asset value of each Fund. Operating expenses paid by the Trust include
transfer agency fees, distribution fees, service fees, custodian fees, legal and
auditing fees, trustees' fees, the cost of registration of its shares under
federal laws and state blue sky laws, the cost of reports and proxies to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser or any other party.
The Adviser and, in the case of the International Equity II Fund, the
Subadviser may, from time to time, agree to waive their respective investment
advisory fees or any portion thereof or elect to reimburse a Fund for ordinary
business expenses in excess of an agreed upon amount.
Stephen Boyd has been primarily responsible for the day-to-day management
of Growth II Fund's investment portfolio since its inception. Mr. Boyd is Vice
President of the Trust and Senior Vice President -- Portfolio Manager of the
Adviser. Mr. Boyd was formerly Investment Vice President of the Adviser, from
May, 1989 to July 1990; Senior Vice President of the Adviser from July, 1990 to
July, 1991. James Gilligan has been primarily responsible for the day-to-day
management of Growth and Income II Fund's investment portfolio since July 11,
1994. Mr. Gilligan is Vice President of the Trust and Vice
President -- Portfolio Manager of the Adviser since March, 1990. Prior to that
time he was a securities analyst with the Adviser. John Reynoldson has been
primarily responsible for the day-to-day management of Government II Fund's
investment portfolio since its inception. Mr. Reynoldson is Vice President of
the Trust and Senior Vice President -- Portfolio Manager of the Adviser. Mr.
Reynoldson was formerly Investment Vice President of the Adviser from January,
1988 to July, 1991. Gary M. Lewis is primarily responsible for the day-to-day
management of the Emerging Growth II Fund's investment portfolio since its
inception in February 1995. Mr. Lewis is Vice President of the Trust and has
been Vice President -- Portfolio Manager of the Adviser since December 1987.
The International Equity II Fund is co-managed by Jeffrey Russell and James
Conheady of the Subadviser. Mr. Russell and Mr. Conheady, Managing Directors of
Smith Barney, are members of the international equity team and each is a Vice
President of the Trust. Together, Messrs. Conheady and Russell currently manage
in excess of $1.5 billion of global equity assets for other investment companies
and managed accounts. Prior to joining Smith Barney in February 1990, Mr.
Conheady was a First Vice President and Mr. Russell was Vice President of Drexel
Burnham.
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PURCHASE OF SHARES
--------------------------------------------------------------------------------
GENERAL
Each Fund offers two classes of shares to the general public. Class A
shares are sold with an initial sales charge; Class B shares are sold without an
initial sales charge and are subject to a contingent deferred sales charge upon
certain redemptions. See "Multiple Pricing System" for a discussion of factors
to consider in selecting which class of shares to purchase.
Shares of beneficial interest of each Fund are offered continuously for
sale by the Distributor, an indirect subsidiary of Travelers, 65 East 55th
Street, New York, New York 10022. Shares of beneficial interest in each Fund are
available through PFS Investments, an affiliate of Travelers. Initial
investments in a Fund must be at least $250 and subsequent investments must be
at least $25. The Distributor may waive the minimum amount for initial
investment for shares involving periodic investments. Shares of each Fund may be
sold in foreign countries where permissible. Each Fund and
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<PAGE> 93
the Distributor reserve the right to refuse any order for the purchase of
shares. The Trust also reserves the right to suspend the sale of any Fund's
shares to the public in response to conditions in the securities markets or for
other reasons and to refuse any order for the purchase of shares.
Shares may be purchased on any business day by completing the application
included in this Prospectus and forwarding the application through PFS
Investments to PFS Shareholder Services (the "Transfer Agent"), 3100
Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0062. Checks drawn on
foreign banks must be payable in U.S. dollars and have the routing number of the
U.S. bank encoded on the check.
Additionally, investments of $25,000 or more may be made by having your
bank wire federal funds (funds of the Federal Reserve System) to the Transfer
Agent's bank. Wire transfers will only be accepted on days your bank, the
Transfer Agent, the Trust, and Bank South of Atlanta ("Bank South") are open for
business. Your wired funds must be received by 4:00 p.m. Eastern time by Bank
South to be credited to your account that day. Otherwise, your wire purchase
will be processed the next business day. The wire purchase will not be
considered made until the wired amount is received and the purchase is accepted
by the Trust. If the wire purchase does not contain the information stated
below, the Trust may reject it. Delays that may occur in wiring funds, including
delays in processing by the banks, are not the responsibility of the Trust or
Transfer Agent.
You must pay any charge assessed by your bank for the wire service. If a
wire transfer is rejected, all money received by the Trust, less any costs
incurred by the Trust or Transfer Agent in rejecting it, will be returned
promptly.
To insure the proper handling of your investment, the following procedures
should be observed:
New Account Procedures -- If the wire transfer is for a new account,
you and your PFS Investments representative should call the Transfer
Agent's Customer Service Department at (800) 544-5445 and ask for the Wire
Purchase Desk. They will assist you in establishing your account and
processing your wire purchase.
Existing Account Procedures -- If the wire transfer is for an existing
account, the wire must be sent to Bank South, Routing Number 061000078,
Atlanta, Georgia. It should state the following:
"Credit PFS Account #6380344
For Further Credit to CST Account # (your
account number)
For (your name)"
Upon executing your wire transfer, you or your PFS Investments
representative should contact the Transfer Agent's Wire Purchase Desk to notify
them of your name, your Trust account number and the name of the bank
transmitting the federal funds.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share of each Fund is determined once daily as of the close of
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
Eastern time) each day the Exchange is open. Net asset value per share of each
class of each Fund is determined by dividing the value of each Fund's portfolio
securities, cash, and other assets (including accrued interest) attributable to
each class less all liabilities (including accrued expenses) attributable to
each class by the total number of shares of the class outstanding.
Generally, the net asset values per share of the Class A and Class B shares
are expected to be substantially the same. Under certain circumstances, however,
the per share net asset values of the Class A and Class B shares may differ from
one another, reflecting the daily expense accruals of the distribution and
incremental transfer agency fees, if any, applicable with respect to the Class B
shares and the differential in the dividends paid on the classes of shares. The
price paid for shares purchased is based on the next calculation of net asset
value after an order in proper form is received by the Transfer Agent plus
applicable Class A sales charges.
Each class of shares of each Fund represents an interest in the same
portfolio of investments of such Fund, has the same rights and is identical in
all respects, except that (i) Class B shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and any
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B shares are
subject to a conversion feature. Each class has different exchange privileges
and certain different shareholder service options available. See "Distribution
Plans" and "Shareholder Services -- Exchange Privilege." The net income
attributable to Class B shares and the dividends payable on Class B shares will
be reduced by the amount of the distribution fee and incremental expenses, if
any, associated with such distribution fee. Sales personnel of PFS Investments
distributing each Fund's shares may receive differing compensation for selling
Class A or Class B shares.
CLASS A SHARES
The public offering price of Class A shares of each Fund is the next
determined net asset value plus a sales charge, as set forth herein.
22
<PAGE> 94
SALES CHARGE TABLES
EMERGING GROWTH II FUND, INTERNATIONAL EQUITY II FUND, GROWTH II FUND AND GROWTH
AND INCOME II FUND
<TABLE>
<CAPTION>
REALLOWED
TO PFS
AS % OF INVESTMENTS
NET AS % OF (AS A % OF
SIZE OF AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)*
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............................................................... 5.82% 5.50% 4.75%
$50,000 but less than $100,000.................................................. 4.99% 4.75% 4.00%
$100,000 but less than $250,000................................................. 3.90% 3.75% 3.25%
$250,000 but less than $500,000................................................. 3.09% 3.00% 2.50%
$500,000 but less than $1,000,000............................................... 2.04% 2.00% 1.75%
$1,000,000 or more.............................................................. (see herein) (see herein) (see herein)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GOVERNMENT II FUND
<TABLE>
<CAPTION>
REALLOWED
TO PFS
AS % OF INVESTMENTS
NET AS % OF (AS A % OF
SIZE OF AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)*
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.............................................................. 4.99% 4.75% 4.00%
$100,000 but less than $250,000................................................. 3.90% 3.75% 3.25%
$250,000 but less than $500,000................................................. 3.09% 3.00% 2.50%
$500,000 but less than $1,000,000............................................... 2.04% 2.00% 1.75%
$1,000,000 or more.............................................................. (see herein) (see herein) (see herein)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Additionally, the Distributor will pay to PFS Investments a promotional fee
calculated as a percentage of the sales charge reallowed to PFS Investments.
The percentage used in the calculation is 3%.
No sales charge is payable at the time of purchase on investments of $1
million or more. A commission will be paid by the Distributor to PFS Investments
for purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million. This commission will be reallowed to PFS Investments on
a quarterly basis prorated over the first 12 months as long as the assets remain
invested.
Class A shares of the Funds may be purchased at net asset value by the PFS
Primerica Corporation Savings and Retirement Plan (the "Plan") for its
participants, subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended. Class A shares so purchased are purchased for
investment purposes and may not be resold except by redemption or repurchase by
or on behalf of the Plan. Class A shares are also offered at net asset value to
accounts opened for shareholders by PFS Investments representatives where the
amounts invested represent the redemption proceeds from investment companies
distributed by an entity other than the Distributor, if such redemption has
occurred no more than 60 days prior to the purchase of shares of the Trust, and
the shareholder paid an initial sales charge and was not subject to a deferred
sales charge on the redeemed account. Class A shares are offered at net asset
value to such persons because of anticipated economies in sales efforts and
sales related expenses. Additionally, Class A shares of the Emerging Growth II
Fund and the International Equity II Fund are offered at net asset value to
accounts opened for shareholders by PFS Investments representatives where the
amounts represent the redemption proceeds from the Common Sense Growth Fund,
Common Sense Growth and Income Fund, Common Sense Government Fund, or Common
Sense Municipal Bond Fund if such redemption has occurred no more than 60 days
prior to the purchase of shares. The Trust may terminate, or amend the terms of,
offering shares of the Trust at net asset value to such persons at any time. The
Distributor may pay PFS Investments representatives through whom purchases are
made at net asset value an amount equal to 0.40% of the amount invested if the
purchase represents redemption proceeds from an investment company distributed
by an entity other than the Distributor. Contact the Transfer Agent at (800)
544-5445 for further information and appropriate forms.
PFS Investments may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, the Distributor or its affiliates may
also pay for certain non-cash sales incentives provided to PFS Investments
representatives. Such incentives do not have any effect on the net amount
invested. In addition to the reallowances from the applicable public offering
price described above, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation to PFS Investments representatives that sell shares of the Trust.
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described herein.
VOLUME DISCOUNTS. The size of the investment shown in the preceding tables
applies to the total amount being invested by any person in shares of the
indicated Fund alone, or in any combination of shares of the Fund and shares of
other Common Sense Funds (except Common Sense Money Market Fund). A person
eligible for a volume discount includes an individual; members of a family unit
comprising husband, wife and minor children; a trustee or other fiduciary
purchasing for a single fiduciary account including pension, profit-sharing and
other employee benefit trusts qualified under Section 401(a) of the Code, or
multiple custodial accounts where more than one beneficiary is involved if
purchases are made by salary reduction and/or payroll deduction for qualified
and nonqualified accounts and transmitted by a common employer entity. Employer
entity for payroll deduction accounts may include trade and craft associations
and any other similar organizations.
23
<PAGE> 95
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
tables may also be determined by combining the amount being invested in shares
of the indicated Fund plus the current offering price of all shares of other
Common Sense Funds (except Common Sense Money Market Fund) which have been
previously purchased and are still owned. Shares previously purchased are only
taken into account, however, if the Transfer Agent is notified by the
shareholder at the time an order is placed for a purchase which would qualify
for a reduced sales load on the basis of the current value of previous purchases
and if sufficient information is furnished to permit confirmation of such
purchases.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating all investments over a
13-month period to determine the sales load as outlined in the preceding tables.
Each investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal as if it were a single
investment. The size of investment shown in the preceding tables also includes
purchases of shares of any Fund and other Common Sense Funds (except Common
Sense Money Market Fund) over a 13-month period, based on the total amount of
intended purchases plus the value of all shares at the offering price of such
Funds previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charge applicable to the aggregate purchases made and the sales charge
previously paid. The initial purchase must be for an amount equal to at least
five percent of the minimum total purchase amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form included in this Prospectus.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following tables
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies
depending on the number of years from the time of payment for the purchase of
Class B shares until the time of redemption of such shares.
EMERGING GROWTH II FUND, INTERNATIONAL EQUITY II FUND, GROWTH II FUND AND GROWTH
AND INCOME II FUND
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
-------------------------------------------------------------------------------------------------
First............................................................................................ 5%
Second........................................................................................... 4%
Third............................................................................................ 3%
Fourth........................................................................................... 2.5%
Fifth............................................................................................ 1.5%
Sixth............................................................................................ None
-------------------------------------------------------------------------------------------------
</TABLE>
GOVERNMENT II FUND
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
-------------------------------------------------------------------------------------------------
First............................................................................................ 4%
Second........................................................................................... 4%
Third............................................................................................ 3%
Fourth........................................................................................... 2.5%
Fifth............................................................................................ 1.5%
Sixth............................................................................................ None
-------------------------------------------------------------------------------------------------
</TABLE>
In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares acquired pursuant to reinvestment of dividends or
distributions, second, of shares held for over five years and third, of shares
held for less than five years. The charge is not applied to dollar amounts
representing an increase in the net asset value since the time of purchase.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net
24
<PAGE> 96
asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds is
subject to a deferred sales charge at a rate of 4% (the applicable rate in the
second year after purchase).
A commission or transaction fee of 4% of the purchase amount will be paid
to PFS Investments at the time of purchase. Additionally, the Distributor may,
from time to time, pay additional promotional incentives in the form of cash or
other compensation, to PFS Investments representatives that sell Class B shares
of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B
shares (i) following the death or disability (as defined in the Code) of a
shareholder, (ii) in connection with certain distributions from an IRA or other
retirement plan, (iii) pursuant to the Trust's systematic withdrawal plan but
limited to 12% annually of the initial value of the account, and (iv) effected
pursuant to the right of the Trust to liquidate a shareholder's account as
described herein under "Redemption of Shares." See the Statement of Additional
Information for further discussion of waiver provisions.
--------------------------------------------------------------------------------
DISTRIBUTION PLANS
--------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment
company to directly or indirectly pay expenses associated with the distribution
of its shares ("distribution expenses") and servicing its shareholders in
accordance with a plan adopted by the investment company's board of directors
and approved by its shareholders. Pursuant to such Rule, the Trustees of the
Trust, and the shareholders of each class of each Fund have adopted two
Distribution Plans hereinafter referred to as the "Class A Plan" and the "Class
B Plan." Each Distribution Plan is in compliance with the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. ("NASD Rules")
applicable to mutual fund sales charges. The NASD Rules limit the annual
distribution costs and service fees that a mutual fund may impose on a class of
shares. The NASD Rules also limit the aggregate amount which the Fund may pay
for such distribution costs. Under the Class A Plan, a Fund pays 0.25% per annum
of its average daily net assets attributable to such class of shares to the
Distributor as a service fee. The service fee is intended to cover personal
services provided to Class A shareholders of a Fund by representatives of PFS
Investments and the maintenance of their accounts.
Under the Class B Plan, Class B shares are subject to a combined annual
distribution fee and service fee at the rate of 1% of a Fund's aggregate average
daily net assets attributable to such class of shares. Payments to the
Distributor under the Class B Plan applicable to Class B shares are used to make
service fee payments to PFS Investments of 0.25% per annum of average daily net
assets. In this regard, the Fund pays the Distributor 0.75% of the aggregate
average daily net assets of Class B shares, as compensation for providing sales
and promotional activities and services. Such activities and services relate to
the sale, promotion and marketing of the Class B shares. The expenditures of the
Distributor may consist of sales commissions to PFS Investments for selling
Class B shares, compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its sales and
promotional activities, including advertising expenditures related to the Class
B shares of a Fund and the costs of preparing and distributing promotional
materials with respect to such Class B shares.
The Distributor receives the proceeds of the initial sales charge paid upon
the purchase of Class A shares and the contingent deferred sales charge paid
upon certain redemptions of Class B shares, and may use these proceeds for any
of the distribution or service expenses described above.
During the period they are in effect, the Class A Plan and the Class B Plan
obligate each Fund to pay service fees and distribution fees to the Distributor
as compensation for its service and distribution activities, not as
reimbursement for specific expenses incurred. Thus, even if the Distributor's
expenses exceed its service or distribution fees for any Fund, the Fund will not
be obligated to pay more than those fees and, if the Distributor's expenses are
less than such fees, it will retain its full fees and realize a profit. Each
Fund will pay the service fees and distribution fees to the Distributor until
either the applicable Plan is terminated or not renewed. In that event, the
Distributor's expenses in excess of service fees and distribution fees received
or accrued through the termination date will be the Distributor's sole
responsibility and not obligations of a Fund. In their annual consideration of
the continuation of each Fund's Plans, the Trustees will review each Plan and
the Distributor's corresponding expenses for each class separately.
In adopting the Class A Plan and the Class B Plan, the Trustees of the
Trust determined that there was a reasonable likelihood that such Plans would
benefit each Fund and its shareholders. Information with respect to distribution
and service revenues and expenses is presented to the Trustees each year for
their consideration in connection with their deliberations as to the continuance
of the Distribution Plans. In their review of the Distribution Plans, the
Trustees are asked to take into consideration expenses incurred in connection
with the distribution and servicing of each class of shares separately. The
sales charge and distribution fee, if any, of a particular class will not be
used to subsidize the sale of shares of the other classes.
Actual distribution expenditures paid by the Distributor with respect to
Class B shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and payments received pursuant to contingent
deferred sales charges. Such excess will be carried forward without interest
charges, unless permitted under SEC regulations, and may be reimbursed by the
Fund or its shareholders from payments received through contingent deferred
sales charges in future years and from payments under the Class B Plan so long
as such Plan is in effect. For example, if in a fiscal year the Distributor
incurred distribution expenses under the Class B Plan of $1 million, of which
$500,000 was recovered in the form of contingent deferred sales charges paid by
investors and $400,000 was reimbursed in the form of payments made by the Fund
to the Distributor under the Class B Plan, the balance of $100,000, would be
subject to recovery in future fiscal years from such sources. For the period May
2, 1994 through October 31, 1994, the
25
<PAGE> 97
unreimbursed expenses incurred by the Distributor under the Class B Plan and
carried forward for the Growth II Fund, the Growth and Income II Fund and the
Government II Fund were approximately $280,000 or 4.8%, $183,000 or 5.0% and
$141,000 or 5.1%, respectively of the Class B shares' net assets.
If the Class B Plan was terminated or not continued, the Fund would not be
contractually obligated and has no liability to pay the Distributor for any
expenses not previously reimbursed by the Fund or recovered through contingent
deferred sales charges.
--------------------------------------------------------------------------------
SHAREHOLDER SERVICES
--------------------------------------------------------------------------------
The Trust offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. A CST Shareholder Service Form should be completed
to effect a change or cancel any Common Sense Trust account option. The CST
Shareholder Service Form is provided in the CST New Account Welcome Package.
Additional CST Shareholder Service Forms may be obtained from the Transfer
Agent. Customer Service representatives are available from 9:00 a.m. to 8:00
p.m. Monday through Friday (Eastern time) to assist you. If you prefer a
Spanish-speaking representative, please call (800) 544-7278 (Monday through
Friday). TDD service is available for the hearing impaired at (800) 824-1721.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder of record has an investment account
under which shares are held by the Transfer Agent. The Trust recommends that
shares be left on deposit with the Transfer Agent. If a share certificate is
desired, it is issued only for full shares (preferably 100 shares or more) and
must be requested in writing from the Transfer Agent for each transaction.
Except as described below, after each share transaction in an account, the
shareholder will receive a report showing the activity in the account. A
quarterly report will be sent to shareholders utilizing the pre-authorized check
plan. Additions to an investment account may be made at any time by mailing a
check directly to the Transfer Agent. There is no charge for establishing an
investment account in any Fund.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain distributions in shares of a
Fund. Such shares are acquired at net asset value (without a sales charge). This
reinvestment is automatic unless the shareholder instructs otherwise. The
investor may, on the CST Additional New Account Options Form found in the
Prospectus, instruct that dividends and/or capital gains distributions be paid
in cash or be credited to another account of the same class of any other Fund
described in this Prospectus and the Growth Opportunity Fund. If you are
changing this option after your account has been established, you should
complete a CST Shareholder Service Form and mail it to the Transfer Agent.
PRE-AUTHORIZED CHECK PLAN. A pre-authorized check plan is available under
which a shareholder can authorize the Transfer Agent to draw on a bank account
on a regular basis to invest pre-determined amounts in shares of a Fund. To
establish or change an existing pre-authorized check plan, a shareholder should
give the Transfer Agent ten days prior notice before drawing on such bank
account. You may choose to have your draft on any day of the month and the
Transfer Agent will submit the draft to your bank on that day. Additionally, the
Transfer Agent will purchase shares in your Common Sense Trust account on the
day indicated for the amount of the draft. If the draft is returned to the
Transfer Agent from the depository bank, it may attempt to redeposit the draft
in an effort to collect the proceeds before cancelling the shares bought with
the draft. A shareholder may designate in the application to increase the amount
of the pre-authorized check on an automatic basis. Additional information is
contained in the application included in this Prospectus. There is no charge for
establishing a pre-authorized check plan. Standard Pre-Authorized Check Plan
minimum draft amount is $25.
RETIREMENT PLAN. Eligible investors may establish individual retirement
accounts ("IRAs"). Van Kampen American Capital Trust Company, c/o Common
Sense(R) Custodial Services L.P., 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0062 serves as custodian under IRA, SEP and 403(b)(7) plans.
Common Sense(R) Custodial Services, L.P. is a limited partnership, which is an
indirect wholly owned subsidiary of Travelers. It is anticipated in the near
future that PFS Investments will commence serving as custodian for such plans.
There is an annual $20 maintenance fee. This fee is deducted from a
shareholder's account balance each December, unless prepaid. If a redemption is
requested during the year, the maintenance fee will be deducted from the
redemption proceeds. There will be no additional fees for the establishment of
new accounts. Details regarding fees, as well as information regarding plan
administration and other details regarding this Retirement Plan is available
from PFS Investments' registered representatives.
EXCHANGE PRIVILEGE. Shares of any Fund may be exchanged for shares of the
same class of any of the other Funds described in this Prospectus upon payment
of the excess, if any, of the sales charge applicable to the Fund being acquired
over the sales charge paid on the purchase.
Class B shareholders of a Fund have the ability to exchange their shares
("original shares") for the same class of shares of any other Fund described in
this Prospectus that offers such class of shares ("new shares") in an amount
equal to the aggregate net asset value of the original shares, without the
payment of any contingent deferred sales charge otherwise due upon redemption of
the original shares. For purposes of computing the contingent deferred sales
charge payable upon a redemption of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B
shareholders would remain subject to the contingent deferred sales charge
imposed by the original fund upon their redemption from the Common Sense family
of funds.
26
<PAGE> 98
Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by the Transfer Agent except as described below under "Systematic Exchange."
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes, although if the shares exchanged have been held for less
than 91 days, the sales charge paid on such shares is not included in the tax
basis of the exchanged shares, but is carried over and included in the tax basis
of the shares acquired. See the Statement of Additional Information. A Fund
reserves the right to reject any order to acquire its shares through exchange,
or otherwise modify, restrict or terminate the exchange privilege at any time on
60 days' notice to its shareholders of any termination or material amendment.
A shareholder wishing to make an exchange may do so by completing a CST
Exchange Form and sending it to the Transfer Agent. A signature guarantee and
other documentary evidence may be required for certain registrations other than
individual accounts, (e.g., corporation, trust, etc.). Exchanges are effected at
the net asset value next calculated after the request is received in good order.
See "Purchase of Shares" and "Redemption of Shares." If the exchanging
shareholder does not have an account in the Fund whose shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan or a pre-authorized bank draft for the new account, however, an
exchanging shareholder must file a specific written request.
A shareholder may utilize the Transfer Agent's Facsimile Transaction Line
("FAX") to effect an exchange as long as a signature guarantee or other
documentary evidence is not required. Exchange requests should be properly
signed by all owners of the account and faxed to the Transfer Agent at (800)
554-2374. Facsimile exchanges may not be available if the shareholder cannot
reach the Transfer Agent by FAX, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
regular exchange procedure described above. Facsimile exchanges received by the
Transfer Agent prior to 4:00 p.m. Eastern time on a regular business day will be
processed at the net asset value per share determined that day.
An investor considering an exchange should refer to the prospectus for
additional information regarding such fund prior to investing.
SYSTEMATIC EXCHANGES. A shareholder has the option to systematically
exchange a dollar or share amount on a monthly basis. You may automatically
exchange shares from one CST account for shares in another CST account on a
regular schedule (e.g., monthly or quarterly). The accounts must be of the same
class and have identical registrations and the originating account must have a
minimum balance of $5,000. The $5 transaction fee will be waived for all
systematic exchanges. The minimum exchange amount is $50. You may add this
service to your account by completing the CST Additional New Account Options
Form, found in the Prospectus, and submitting it with your initial application.
If you are selecting this option after your account has been established, you
should complete a CST Shareholder Service Form and mail it to the Transfer
Agent.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering price next computed after receipt of
instructions may establish a withdrawal plan. This plan provides for the orderly
use of the entire account, not only the income but also the capital, if
necessary. Each withdrawal constitutes a redemption of shares on which any
capital gain or loss will be recognized. The planholder may arrange for monthly,
quarterly, semiannual or annual checks in any amount not less than $50, in
multiples of $5, unless specifically authorized by the Distributor.
Class B shareholders who establish a withdrawal plan may redeem up to 12%
annually of the shareholder's Initial Account Balance without incurring a
contingent deferred sales charge. Initial Account Balance means the amount of
the shareholder's investment in a Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of a Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gain distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchase of additional shares ordinarily will
be disadvantageous to the shareholder because of the duplication of sales
charges. There is no charge for establishing a systematic withdrawal plan. You
may add this service to your account by completing the CST Additional New
Account Options Form, found in the Prospectus, and submitting it with your
initial application. If you are selecting this option after your account has
been established, you should complete a CST Shareholder Service Form and mail it
to the Transfer Agent.
DOLLAR COST AVERAGING. Special services are available that enable investors
to take advantage of dollar cost averaging through automatic monthly
investments. Dollar cost averaging involves the investment of a fixed dollar
amount in investment vehicles such as the Funds at pre-set intervals. This
practice will result in more shares being purchased when a Fund's net asset
value is relatively low, and fewer shares being purchased when a Fund's net
asset value is relatively high. Therefore, the investor's overall cost of shares
purchased is lower than it would be if the investor purchased a fixed number of
shares at pre-set intervals.
Investors may purchase shares of any of the Funds by using pre-authorized
checks drawn on the investor's bank account. See "Pre-Authorized Check Plan."
Further information on automatic investing and the advantages of dollar cost
averaging is set forth in the Statement of Additional Information.
27
<PAGE> 99
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the
Government II Fund for which certificates have not been issued may appoint the
Fund's Transfer Agent as agent and request, on the application form, special
forms of drafts payable through Fidelity National Bank ("Fidelity"). The
Transfer Agent issues these drafts on behalf of the Fund in books of ten drafts,
for which there is a charge by the Fund of $7.50 per book. These drafts may be
made payable by the shareholder to the order of any person in any amount of $250
or more. When a draft is presented to Fidelity for payment, full and fractional
shares required to cover the amount of the draft will be redeemed from the
shareholder's account by the Transfer Agent at the next determined net asset
value. Any gain or loss realized on the sale of shares is a taxable event. See
"Redemption of Shares." Drafts will not be honored for redemption of shares held
less than fifteen (15) days, or until the Transfer Agent is presented with
satisfactory evidence that the purchase check has cleared. Any shares for which
there are outstanding certificates may not be redeemed by draft. If the amount
of the draft is greater than the proceeds of all uncertificated shares held in
the shareholder's account, the draft will be returned and the shareholder may be
subject to additional charges imposed by banks. A shareholder may not liquidate
the entire account by means of a draft. The check writing privilege may be
terminated or suspended at any time by the Fund or Fidelity. Retirement plans
and accounts that are subject to backup withholding are not eligible for the
privilege. A "stop payment" system is not available on Government II Fund
checks. Fidelity will only honor those drafts authorized by the Trust.
--------------------------------------------------------------------------------
REDEMPTION OF SHARES
--------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares of any Fund at
any time by sending a written request in proper form directly to the Transfer
Agent at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0062. If you
should have any questions concerning how to redeem your account after reviewing
the information below, please contact the Transfer Agent at (800) 544-5445,
Spanish-speaking representatives (800) 544-7278 or TDD Line for the Hearing
Impaired (800) 824-1721.
As described herein under "Purchase of Shares," redemptions of Class B
shares are subject to a contingent deferred sales charge.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner(s) at the record address, if the
shareholder(s) has had an address change in the past 45 days, or if the
shareholder(s) is a corporation, sole proprietor, partnership, trust or
fiduciary, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly completed CST Redemption Form with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. For example, in the case of
shareholders holding certificates, the certificates for the shares being
redeemed must accompany the redemption request. Additional documentary evidence
of authority is also required by the Transfer Agent in the event redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator. Additionally, if a shareholder requests a redemption from a
Retirement Plan account (IRA, SEP or 403(b)(7)), such request must state whether
or not federal income tax is to be withheld from the proceeds of the redemption
check.
A shareholder may utilize the Transfer Agent's FAX to redeem their account
as long as a signature guarantee or other documentary evidence is not required.
Redemption requests should be properly signed by all owners of the account and
faxed to the Transfer Agent at (800) 554-2374. Facsimile redemptions may not be
available if the shareholder cannot reach the Transfer Agent by FAX, whether
because all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's regular redemption procedure described
above. Facsimile redemptions received by the Transfer Agent prior to 4:00 p.m.
Eastern time on a regular business day will be processed at the net asset value
per share determined that day.
In all cases, the redemption price is the net asset value per share of the
Fund next determined after the request for redemption is received in proper form
by the Transfer Agent. Payment for shares redeemed will be made by check mailed
within seven days after acceptance by the Transfer Agent of the request and any
other necessary documents in proper order. Such payment may be postponed or the
right of redemption suspended as provided by the rules of the SEC. If the shares
to be redeemed have been recently purchased by check or draft, the Transfer
Agent may hold the payment of the proceeds until the purchase check or draft has
cleared, usually a period of up to 15 days. Any taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
After following the above-stated redemption guidelines, a shareholder(s)
may elect to have the redemption proceeds wire-transferred directly to the
shareholder's bank account of record (defined as a currently established
pre-authorized draft on the shareholder's account with no changes within the
previous 45 days), as long as the bank account is registered in the same name(s)
as the account with the Fund. If the proceeds are not to be wired to the bank
account of record, or to the registered owner(s), a signature guarantee will be
required from all shareholder(s). A $25 service fee will be charged by the
Transfer Agent to help defray the administrative expense of executing a wire
redemption. Redemption proceeds will normally be wired to the designated bank
account on the next business day following the redemption, and should ordinarily
be credited to your bank account by your bank within 48 to 72 hours.
The Trust may redeem any shareholder account with a net asset value of less
than $200. Three months advance notice of any such involuntary redemption is
required and the shareholder may purchase prior to such redemption the required
value of additional shares in order to avoid such
28
<PAGE> 100
involuntary redemption. Any involuntary redemption may only occur if the
shareholder's account is less than the required minimum due to shareholder
redemptions or did not reach the required minimum because the shareholder failed
to meet the shareholder's obligations under a periodic investment arrangement.
Any taxable gain or loss will be recognized by the shareholder upon redemption
of shares. Any applicable contingent deferred sales charge will be deducted from
the proceeds of this redemption.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of a Fund may reinvest any portion or all of the proceeds of such
redemption in Class A shares of such Fund or any other Common Sense II Fund.
Such reinvestment is made at the net asset value (without sales charge) next
determined after the order is received, which must be within 60 days after the
date of the redemption. This privilege can be exercised only once.
--------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
Unless the shareholder instructs otherwise, all dividends and capital gains
distributions of each Fund are automatically reinvested in additional shares of
such Fund. See "Shareholder Services -- Reinvestment Plan." Dividends and
distributions paid by a Fund have the effect of reducing the net asset value per
share on the record date by the amount of the dividend or distribution.
Therefore, a dividend or distribution paid shortly after a purchase of shares by
an investor would represent, in substance, a return of capital to the
shareholder (to the extent it is paid on the shares so purchased), even though
it would be subject to income taxes, as discussed below.
The per share dividends on Class B shares will be lower than the per share
dividends on Class A shares as a result of the distribution fees and any
incremental transfer agency fees applicable to such class of shares.
DIVIDENDS AND DISTRIBUTIONS OF THE EMERGING GROWTH II FUND, THE
INTERNATIONAL EQUITY II FUND, THE GROWTH II FUND AND THE GROWTH AND INCOME II
FUND. Dividends from stocks and interest earned from other investments are the
main source of income for the Emerging Growth II Fund, the International Equity
II Fund, the Growth II Fund and the Growth and Income II Fund. When a Fund sells
portfolio securities, it may realize capital gains or losses, depending on
whether the prices of the securities sold are higher or lower than the prices
the Fund paid to purchase them. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including any losses carried forward from prior years.
The Emerging Growth II Fund, the International Equity II Fund and the
Growth II Fund distribute substantially all of their net investment income, less
expenses, and any net realized capital gains annually, normally in December. The
Growth and Income II Fund distributes substantially all of its net investment
income, less expenses quarterly, normally in March, June, September and
December, and it distributes any net realized capital gains annually, normally
in December. Net long-term gains realized from all four Funds' transactions in
options, futures and related options transactions may be paid out more
frequently (with short-term gains) as may be determined from time to time by the
Trustees, but only after appropriate regulatory approval is first obtained.
There is no assurance that such regulatory approval will be obtained.
DIVIDENDS AND DISTRIBUTIONS OF THE GOVERNMENT II FUND. Income dividends are
declared each business day, and paid monthly. Any taxable net realized
short-term capital gains may be distributed quarterly and any net realized
long-term gains are distributed to shareholders annually, normally in December.
Net long-term gains realized from the Fund's transactions in options, futures
and related options transactions may be paid out more frequently (with
short-term gains) as may be determined from time to time by the Trustees, but
only after appropriate regulatory approval is first obtained. There is no
assurance that such regulatory approval will be obtained.
In computing interest income, the Fund does not amortize debt discount or
premiums resulting from the purchase of debt securities. Thus in the case of
U.S. Government securities purchased at a premium, interest income is greater
than it would be if the premium was amortized.
TAXES. Each Fund intends to qualify as a regulated investment company under
the Code. By so qualifying and by distributing all of its net investment income
and net realized capital gains within the time periods specified in the Code,
each Fund would not be required to pay any federal income tax. Dividends from
net investment income and distributions from any net realized short-term capital
gains are taxable to shareholders as ordinary income. All such dividends are
taxable to the shareholder whether or not reinvested in shares. However,
shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them.
Dividends and interest received by the Emerging Growth II Fund, the
International Equity II Fund, the Growth II Fund and the Growth and Income II
Fund may give rise to withholding and other taxes imposed by foreign countries.
Tax conventions between certain countries and the United States may reduce or
eliminate such taxes. Investors may be entitled to claim United States foreign
tax credits with respect to such taxes, subject to certain provisions and
limitations contained in the Code.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the rate of foreign tax in
advance since the amount of a Fund's assets to be invested in various countries
is not known. Such foreign taxes would reduce the income of the Fund distributed
to shareholders.
If, at the end of the International Equity II Fund's taxable year, more
than 50% of the value of its total assets consists of stock or securities of
foreign corporations, the International Equity II Fund may make an election
pursuant to which foreign income taxes paid by it will be treated as paid
29
<PAGE> 101
directly by its shareholders. The International Equity II Fund will make this
election only if it deems the election to be in the best interests of its
shareholders, and will notify shareholders in writing each year if it makes the
election and the amount of foreign taxes to be treated as paid by the
shareholders. If the International Equity II Fund makes such an election, the
amount of such foreign taxes would be included in the income of shareholders,
and a shareholder other than a foreign corporation or non-resident alien
individual could claim either a credit or, provided the shareholder itemizes
deductions, a deduction for U.S. federal income tax purposes for such foreign
taxes. Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to the limitation that the credit may not exceed
the shareholders' U.S. tax (determined without regard to the availability of the
credit) attributed to their total foreign source taxable income. For this
purpose, the portion of dividends and distributions paid by the International
Equity II Fund from its foreign source income will be treated as foreign source
income. The International Equity II Fund's gains and losses from the sale of
securities and from certain foreign currency gains and losses will generally be
treated as derived from U.S. sources. The limitation on the foreign tax credit
is applied separately to foreign source "passive income," such as the portion of
dividends received from the International Equity II Fund that qualifies as
foreign source income. In addition, the foreign tax credit is allowed to offset
only 90% of the alternative minimum tax imposed on corporations and individuals.
Because of these limitations, shareholders may be unable to claim a credit for
the full amount of their proportionate share of the foreign income taxes paid by
the International Equity II Fund.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Trust and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisors for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or citizenship tax consequences of receipt of
dividends and distributions from the Trust.
Shareholders are notified annually of the federal tax status of dividends
and capital gains distributions, including information as to the portion
(including short-term capital gains) taxable as ordinary income, and the portion
taxable as long-term capital gains. TO AVOID BEING SUBJECT TO A 31% FEDERAL
BACKUP WITHHOLDING ON DIVIDENDS, DISTRIBUTIONS AND REDEMPTION PAYMENTS,
SHAREHOLDERS MUST FURNISH THE FUND WITH THEIR CORRECT TAXPAYER IDENTIFICATION
NUMBER. Shareholders are urged to consult their tax advisers with specific
reference to their own tax situation.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS. Gains or losses on each
Fund's transactions in certain listed options (except certain equity options) on
securities or indices, futures or options on futures generally are treated as
60% long-term and 40% short-term, and positions held by a Fund at the end of its
fiscal year generally are required to be marked to market, with the result that
unrealized gains and losses are treated as though they were realized. Gains and
losses realized by a Fund on transactions in over-the-counter options generally
are short-term capital gains or losses unless the option is exercised in which
case the character of the gain or loss is determined by the holding period of
the underlying security. The Code contains certain "straddle" rules which
require deferral of losses incurred in certain transactions involving hedged
positions to the extent a Fund has unrealized gains in offsetting positions and
generally terminates the holding period of the subject position. Additional
information is set forth in the Statement of Additional Information.
--------------------------------------------------------------------------------
PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
From time to time, each of the Funds may advertise its total return for
prior periods. Any such advertisement would include at least average annual
total return quotations for one year, five years and for the life of each Fund.
Other total return quotations, aggregate or average, over other time periods may
also be included.
The total return of a Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 5.50% for Class A shares of the
Emerging Growth II Fund, the International Equity II Fund, the Growth II Fund
and the Growth and Income II Fund and 4.75% for Class A shares of the Government
II Fund); that all income dividends or capital gains distributions during the
period are reinvested in Fund shares at net asset value; and that any applicable
contingent deferred sales charge has been paid. Total return will vary depending
on market conditions, the securities comprising a Fund's portfolio, a Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, the Government II Fund may also
advertise its current "yield." Yield figures are based on historical earnings
and are not intended to indicate future performance. Yield is determined by
analyzing the Fund's net income per share for a 30-day (or one-month) period
(which period will be stated in the advertisement), and dividing by the current
maximum offering price per share on the last day of the period. A "bond
equivalent" annualization method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Fund in accordance with generally accepted
accounting principles and from net income computed for federal income tax
reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Fund's then current dividend rate.
30
<PAGE> 102
A Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by a Fund, portfolio maturity and a Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Fund's shares, a Fund's investment policies, and the risks of
investing in shares of a Fund. The investment return and principal value of an
investment in a Fund will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
Yield and total return are calculated separately for each Fund's Class A
and Class B shares. Class A total return figures include the maximum sales
charge applicable; Class B total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total return for each of the classes will differ
although the yield and total return of Class A shares are expected to exceed
that of Class B shares.
In reports or other communications to shareholders or in advertising
material, a Fund may compare its performance with that of other mutual funds as
listed in the ratings or rankings prepared by Lipper Analytical Services, Inc.,
CDA, Ibbotson Associates, Morningstar Mutual Funds or similar independent
services which monitor the performance of mutual funds or with the Consumer
Price Index, Dow Jones Industrial Average, Salomon Brothers' various indices,
Standard & Poor's or NASDAQ, or with other international indices, or other
appropriate indices of investment securities or with investment or savings
vehicles. The performance information may also include evaluations of a Fund
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Business Week, Forbes,
Fortune, Financial World, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance Magazine, Money, Mutual Fund Forecaster, New York
Times, Pension World, Stanger's Investment Advisor, U.S. News & World Report,
USA Today and The Wall Street Journal. Such comparative performance information
will be stated in the same terms in which the comparative data or indices are
stated. Any such advertisement would also include the standard performance
information required by the SEC as described above. For these purposes, the
performance of a Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance.
The Funds may, from time to time, illustrate the benefits of tax-deferral
by comparing taxable investments to investments made through tax-deferred
retirement plans and the Funds may illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market.
The Funds may, from time to time, in reports or other communications to
shareholders or in advertising material, illustrate the benefits of compounding
at various assumed rates of return. Such illustrations may be in the form of
charts or graphs and will not be based on historical returns experienced by the
Funds. The Funds may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Funds may, from time to time, in communications to shareholders or in
advertising material illustrate in graph, chart or narrative form: a) the
importance of investment goals such as owning a home, funding a college
education, or saving money for retirement. These illustrations may depict the
rising costs of college and mortgage payments and the declining number of
workers supporting the Social Security system. Fund communications and
advertisements may also encourage investments in the Funds for purposes of
helping families to achieve their investment goals; b) the benefits and
popularity of purchasing term insurance as opposed to other, more expensive
types of insurance in addition to the possible benefits of investing the savings
in mutual funds; c) the growth of mutual fund assets as reported by industry
publications; and d) the theory of decreasing responsibility, i.e. as
individuals grow older and their assets increase, the need for life insurance
generally decreases.
The Trust expects to include additional performance information regarding
each Fund in its Annual Report.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
ORGANIZATION OF THE TRUST. The Trust was organized under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." It is a diversified, open-end management
investment company. The Trust is authorized to issue an unlimited number of
Class A and Class B shares of beneficial interest of $.01 par value, in the
Funds. Other classes of shares may be established from time to time in
accordance with the Trust's Declaration of Trust. Shares issued are fully paid,
non-assessable and have no preemptive or conversion rights. In the event of
liquidation of any Fund, shareholders of such Fund are entitled to share pro
rata in the net assets of the Fund available for distribution to shareholders.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. Each class of shares represents interests in the assets of each
Fund and has identical voting, dividend, liquidation and other rights on the
same terms and conditions, except that the distribution fees and/or service fees
and any incremental transfer agency fees related to each class of shares of each
Fund are borne solely by that class, and each class of shares of each Fund has
exclusive voting rights with respect to provisions of the Trust's Class A Plan
and Class B Plan which pertain to that class of each Fund. An order has been
received from the SEC permitting the issuance and sale of multiple classes of
shares representing interests in each Fund's existing portfolio. All shares have
equal voting rights, except that only shares of the respective Fund are entitled
to vote on matters concerning only that Fund. There will normally be no meetings
of shareholders for the purpose of electing Trustees unless and until such time
as less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of
31
<PAGE> 103
Trustees. Shareholders may, in accordance with the Declaration of Trust, cause a
meeting of shareholders to be held for the purpose of voting on the removal of
Trustees. Except as set forth above, the Trustees shall continue to hold office
and appoint successor Trustees.
The Declaration of Trust establishing the Trust, dated January 29, 1987, a
copy of which together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Common Sense Trust" refers to the Trustees under the
Declaration collectively as Trustees, not as individuals or personally; and no
Trustee, officer or shareholder of the Trust shall be held to any personal
liability, nor shall resort be had to their private property for the
satisfaction of any obligation or liability of any Fund but the assets of the
applicable Fund only shall be liable.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed by writing
the Transfer Agent at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia
30199-0062 or calling (800) 544-5445.
TRANSFER AGENT. PFS Shareholder Services, an indirect subsidiary of
Travelers, serves as Transfer Agent for the Fund. See "The Trust and Its
Management."
LEGAL COUNSEL. Sullivan & Worcester, 1025 Connecticut Avenue N.W.,
Washington, D.C. 20036, is legal counsel to the Trust.
INDEPENDENT AUDITORS. Ernst & Young LLP, 1221 McKinney, Suite 2400,
Houston, Texas 77010, are the independent auditors for the Trust.
32
<PAGE> 104
STATEMENT OF ADDITIONAL INFORMATION
COMMON SENSE TRUST
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
AUGUST 18, 1995
Common Sense Trust (the "Trust") is a diversified, open-end management
investment company with ten separate Portfolios, five of which are discussed
herein: the Common Sense II Emerging Growth Fund (the "Emerging Growth II
Fund"), the Common Sense II International Equity Fund (the "International Equity
II Fund"), the Common Sense II Growth Fund (the "Growth II Fund"), the Common
Sense Growth and Income II Fund (the "Growth and Income II Fund") and the Common
Sense II Government Fund (the "Government II Fund"). Each Fund is in effect a
separate fund issuing its own shares.
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus bearing the same date and should be read in conjunction with the
Prospectus. A Prospectus may be obtained without charge by writing Common Sense
Distributors at 3100 Breckinridge Boulevard, Bldg. 200, Duluth, Georgia
30199-0001.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
GOALS AND INVESTMENT POLICIES......................................................... 3
Emerging Growth II Fund............................................................. 3
International Equity II Fund........................................................ 3
Growth II Fund...................................................................... 3
Growth and Income II Fund........................................................... 3
Government II Fund.................................................................. 3
REPURCHASE AGREEMENTS................................................................. 5
REVERSE REPURCHASE AGREEMENTS......................................................... 6
COMMERCIAL BANK OBLIGATIONS........................................................... 6
COMMERCIAL PAPER...................................................................... 6
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS........................................ 7
FORWARD COMMITMENTS................................................................... 13
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY.................................... 13
INTEREST RATE TRANSACTIONS............................................................ 14
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS.......................................... 15
LOANS OF PORTFOLIO SECURITIES......................................................... 16
INVESTMENT RESTRICTIONS............................................................... 16
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 20
INVESTMENT ADVISORY AGREEMENT......................................................... 24
DISTRIBUTOR........................................................................... 26
DISTRIBUTION PLANS.................................................................... 26
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 28
DETERMINATION OF NET ASSET VALUE...................................................... 30
PURCHASE AND REDEMPTION OF SHARES..................................................... 31
EXCHANGE PRIVILEGE.................................................................... 34
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 34
OTHER INFORMATION..................................................................... 36
FINANCIAL STATEMENTS.................................................................. 39
APPENDIX.............................................................................. 40
</TABLE>
<PAGE> 105
GENERAL INFORMATION
Van Kampen American Capital Asset Management, Inc. (the "Adviser") is a
subsidiary of Van Kampen American Capital, Inc. ("VKAC") which is a wholly-owned
subsidiary of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is controlled
by the Clayton & Dubilier Private Equity Fund IV Limited Partnership (the "C&D
L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York private investment firm. The general partner
of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel,
Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than seven
percent of the common stock of VK/AC Holding and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding. The Adviser together with its predecessors has been in the
investment advisory business since 1926.
Smith Barney Mutual Funds Management Inc. (the "Subadviser) provides
investment advisory services to the Adviser in connection with the International
Equity II Fund. The Subadviser is a part of Smith Barney Capital Management,
which has been in the investment advisory business for 48 years. The Subadviser
was incorporated on March 12, 1968. The Subadviser renders investment management
advice to investment companies and institutional clients with aggregate assets
under management of $55 billion as of January 31, 1995. The Subadviser is a
wholly-owned subsidiary of Smith Barney Harris Upham & Co. which in turn is a
wholly-owned subsidiary of Smith Barney Inc. Smith Barney Inc. is a subsidiary
of The Travelers Inc. ("Travelers"). Travelers is engaged primarily in
investment services, consumer finance services and insurance services.
PFS Distributors (the "Distributor") is a subsidiary of PFS Distributors,
Inc., an affiliate of Primerica Financial Services, Inc. ("Primerica
Financial"). Common Sense Shareholder Services (the "Transfer Agent"), is a
subsidiary of PFS Services, Inc., an affiliate of Primerica Financial. Common
Sense Custodial Services, L.P. ("CSCS") is also an affiliate of Primerica
Financial. Primerica Financial is an indirect wholly-owned subsidiary of
Travelers.
As of July 31, 1995, no person was known to own beneficially or of record
as much as five percent of the outstanding shares of any Fund of the Trust
except as follows:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OWNERSHIP AT CLASS OF PERCENTAGE
OF HOLDER FUND JULY 31, 1995 SHARES OWNERSHIP
------------------------------------ --------------------- ---------------- -------- ----------
<S> <C> <C> <C> <C>
Van Kampen American Capital Govt. 243,768 shares Class A 40.1%
Asset Management, Inc. Growth & Income 85,910 shares Class A 11.6%
2800 Post Oak Blvd. International Equity 84,682 shares Class A 25.0%
Houston, Texas 77056
Van Kampen American Capital II Govt. 152,668 shares Class A 25.1%
Trust Co. II Govt. 219,743 shares Class B 37.5%
2800 Post Oak Blvd. Growth 556,563 shares Class A 52.3%
Houston, Texas 77056 Growth 1,013,158 shares Class B 58.9%
Growth & Income 349,900 shares Class A 47.5%
Growth & Income 540,356 shares Class B 51.9%
Emerging Growth 364,512 Class A 59.2%
Emerging Growth 211,966 Class B 64.8%
International Equity 101,066 Class A 29.8%
International Equity 62,883 Class B 63.5%
PFS Distributors Emerging Growth 84,674 Class B 25.9%
3100 Breckinridge Blvd., Bldg. 200
Duluth, Georgia 30199-0062
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and individual retirement accounts.
2
<PAGE> 106
GOALS AND INVESTMENT POLICIES
The following disclosures supplement disclosures set forth under an
identical caption in the Prospectus and do not, standing alone, present a
complete and accurate explanation of the matters disclosed. Readers must refer
also to this caption in the Prospectus for a complete presentation of the
matters disclosed below.
EMERGING GROWTH II FUND
The Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks of small and medium sized
companies considered by the Adviser to be emerging growth companies.
INTERNATIONAL EQUITY II FUND
The Fund seeks total return on its assets from growth of capital and income
by investing at least 65% of its assets in a diversified portfolio of equity
securities of established non-United States issuers.
GROWTH II FUND
The Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks and options on common stocks.
The Fund may also engage in transactions involving stock index futures contracts
and options on such contracts. Any income received on such securities is
incidental to the goal of capital appreciation.
GROWTH AND INCOME II FUND
The Fund seeks reasonable growth and income through investments in equity
securities including common and preferred stocks and securities convertible into
common and preferred stocks.
In general, the Fund intends to invest in securities that have yielded a
dividend or interest return to security holders within the past twelve months;
however, it may invest in non-income producing investments held for anticipated
increase in value. The Fund may also engage in transactions in options, futures
contracts, and options on futures.
GOVERNMENT II FUND
The Fund seeks to provide investors with a high current return consistent
with preservation of capital by investing in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The Fund
may also purchase and sell options and engage in transactions in interest rate
futures contracts and options on such contracts in order to hedge against
changes in interest rates.
The Fund seeks high current return consistent with preservation of capital.
The Fund intends to invest at least 80% of its assets in debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
Repurchase agreements may be entered into with domestic banks or broker-dealers
deemed creditworthy by the Advisers solely for purposes of investing the Fund's
cash reserves or when the Fund is in a temporary defensive posture. The Fund may
write covered or fully collateralized call options on U.S. Government securities
and enter into closing or offsetting purchase transactions with respect to
certain of such options. The Fund may also write secured put options and enter
into closing or offsetting purchase transactions with respect to such options.
The Fund may write both listed and over-the-counter options as described in the
Prospectus.
The Fund seeks to obtain a high current return from the following sources:
- interest paid on the Fund's portfolio securities;
- premiums earned upon the expiration of options written;
- net profits from closing transactions; and
- net gains from the sale of portfolio securities on the exercise of
options or otherwise.
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The Fund is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect the
value of and yields on U.S. Government securities. Accordingly, there is no
assurance that the Fund's investment objective will be achieved.
MORTGAGE RELATED SECURITIES. The Government II Fund may invest in
mortgage-related securities, including those representing an undivided ownership
interest in a pool of mortgage loans, e.g., GNMA, FNMA, FHLMC Certificates.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National Mortgage
Association ("GNMA") is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities backed
by pools of mortgages.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid and owned on the mortgage pool net of fees paid to the
"issuer" and GNMA, regardless of whether or not the mortgagor actually makes the
payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FMHA"), or guaranteed by the Veterans Administration
("VA"). Once a pool of such mortgages is assembled and approved by GNMA, the
GNMA guarantee is backed by the full faith and credit of the U.S. Government.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before maturity of the mortgages in the pool. The Fund normally
will not distribute principal payments (whether regular or prepaid) to its
shareholders. Rather, it will invest such payments in additional mortgage-
related securities of the types described above or other U.S. Government
securities. Interest received by the Fund will, however, be distributed to
shareholders. Foreclosures impose no risk to principal investment because of the
GNMA guarantee.
As prepayment rates of the individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the 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.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than
at par.
2. After issuance, Certificates usually trade in the secondary market at
a premium or discount.
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3. Interest is paid monthly rather than semi-annually as is the case
for traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC") was
created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. FHLMC issues two types of mortgage
pass-through securities, mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. Like GNMA Certificates, PCs are assumed to
be prepaid fully in their twelfth year. FHLMC guarantees timely monthly payment
of interest of PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately 10 years.
FNMA SECURITIES. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages insured by the
FHA. FNMA issues guarantee mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and the full return of principal. Like GNMA Certificates,
FNMA Certificates are assumed to be prepaid fully in their twelfth year.
Risk of foreclosure of the underlying mortgages is greater with FHLMC and
FNMA securities because, unlike GNMA securities, FHLMC and FNMA securities are
not guaranteed by the full faith and credit of the U.S. Government.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with broker-dealers or
domestic banks. The Trustees will review on a continuing basis those
institutions which enter into a repurchase agreement with the Fund. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, usually not more than seven days from
the date of purchase, thereby determining the yield during the purchaser's
holding period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered to be loans under the Investment Company Act of
1940, as amended ("1940 Act") or evidence of book entry transfer to the account
of a custodian or bank acting as agent. The seller under a repurchase agreement
is required to maintain the value of the underlying securities marked to market
daily at not less than the repurchase price. The underlying securities (normally
securities of the U.S. Government, or its agencies and instrumentalities) may
have maturity dates exceeding one year. The Fund does not bear the risk of a
decline in
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value of the underlying security unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and loss including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto, (b) possible lack of access to income on the underlying security
during this period, and (c) expenses of enforcing its rights.
REVERSE REPURCHASE AGREEMENTS
The International Equity II Fund may invest in reverse repurchase
agreements. The International Equity II Fund does not currently intend to commit
more than 5% of its net assets to reverse repurchase agreements. The Fund may
enter into reverse repurchase agreements with broker/dealers and other financial
institutions. Such agreements involve the sale of portfolio securities with an
agreement to repurchase the securities at an agreed-upon price, date and
interest payment and are considered to be borrowings by the International Equity
II Fund and are subject to the borrowing limitations set forth under "Investment
Restrictions." Since the proceeds of reverse repurchase agreements are invested,
this would introduce the speculative factor known as "leverage." The securities
purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally, the effect of such a transaction is that the
International Equity II Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only advantageous
if the Fund has an opportunity to earn a greater rate of interest on the cash
derived from the transaction than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available, and
the Fund intends to use the reverse repurchase technique only when the
Subadviser believes it will be advantageous to the International Equity II Fund.
The use of reverse repurchase agreements may exaggerate any interim increase or
decrease in the value of the Fund's assets. The Fund's custodian bank will
maintain a separate account for the Fund with securities having a value equal to
or greater than such commitments.
COMMERCIAL BANK OBLIGATIONS
For the purposes of the International Equity II Fund's investment policies
with respect to bank obligations, obligations of foreign branches of U.S. banks
and of foreign banks may be general obligations of the parent bank in addition
to the issuing bank, or may be limited by the terms of a specific obligation and
by government regulation. As with investment in foreign securities in general,
investments in the obligations of foreign branches of U.S. banks and of foreign
banks may subject the International Equity II Fund to investment risks that are
different in some respects from those of investments in obligations of domestic
issuers. Although the Fund will typically acquire obligations issued and
supported by the credit of U.S. or foreign banks having total assets at the time
of purchase in excess of U.S. $1 billion (or the equivalent thereof), this U.S.
$1 billion figure is not a fundamental investment policy or restriction of the
International Equity II Fund. For calculation purposes with respect to the U.S.
$1 billion figure, the assets of a bank will be deemed to include the assets of
its U.S. and non-U.S. branches.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. A variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving periodically
fluctuating rates of interest under a letter agreement between a commercial
paper issuer and an institutional lender, such as one of the Funds pursuant to
which the lender may determine to invest varying amounts. Transfer of such notes
is usually restricted by the issuer, and there is no secondary trading market
for such notes. Each Fund therefore, may not invest in a master demand note, if
as a result more than 10% (15% in the case of the Emerging Growth II Fund and
the International Equity II Fund) of the value of the Fund's total assets would
be invested in such notes and other illiquid securities.
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OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
SELLING CALL AND PUT OPTIONS
(ALL FUNDS)
PURPOSE. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund's current return can be expected to
fluctuate because premiums earned from writing options and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities also results in a higher
portfolio turnover.
SELLING OPTIONS. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Emerging Growth II
Fund, the International Equity II Fund, the Growth and Income II Fund and the
Growth II Fund sell call options only on a covered basis. The Government II Fund
sells call options either on a covered basis, or for cross-hedging purposes. A
call option is covered if the Fund owns or has the right to acquire the
underlying securities subject to the call option at all times during the option
period. Thus, the Government II Fund may sell options on U.S. Government
securities or forward commitments of such securities. An option is for
cross-hedging purposes (relative to Government II Fund only) to hedge against a
security which the Fund owns or has the right to acquire. In such circumstances,
the Government II Fund maintains in a segregated account with the Fund's
Custodian, cash or U.S. Government securities in an amount not less than the
market value of the underlying security, marked to market daily, while the
option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. A Fund sells put options only on a
secured basis, which means that, at all times during the option period, the Fund
would maintain in a segregated account with its Custodian cash, cash equivalents
or U.S. Government securities in an amount of not less than the exercise price
of the option, or will hold a put on the same underlying security at an equal or
greater exercise price. A Fund generally sells put options when the Adviser
wishes to purchase the underlying security for the Fund's portfolio at a price
lower than the current market price of the security.
CLOSING PURCHASE TRANSACTIONS AND OFFSETTING TRANSACTIONS. In order to
terminate its position as writer of a call or put option, a Fund may enter into
a "closing purchase transaction," which is the purchase of a call (put) on the
same underlying security and having the same exercise price and expiration date
as the call (put) previously sold by the Fund. The Fund will realize a gain
(loss) if the premium plus commission paid in the closing purchase transaction
is less (greater) than the premium it received on the sale of the option. A Fund
would also realize a gain if an option it has sold lapses unexercised.
A Fund may sell options that are listed on an exchange as well as options
that are traded over-the-counter. A Fund may close out its position as writer of
an option only if a liquid secondary market exists for options of that series,
but there is no assurance that such a market will exist, particularly in the
case of over-the-counter options, since they can be closed out only with the
other party to the transaction. Alternatively, a Fund may purchase an offsetting
option, which does not close out its position as a writer, but provides an asset
of equal value to its obligation under the option sold. If a Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
RISKS OF SELLING OPTIONS. By selling a call option, a Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the United States exchanges has established limitations governing
the maximum number of call or put options on the same underlying security
(whether or not covered) that may be written by a single investor, whether
acting alone or in concert with others, regardless of whether such options are
written on one or more accounts or through one or more brokers. An exchange may
order the liquidation of positions found to
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be in violation of those limits, and it may impose other sanctions or
restrictions. These position limits may restrict the number of options the Fund
may be able to write.
PURCHASING CALL AND PUT OPTIONS
(ALL FUNDS)
A Fund may purchase call options to protect (e.g., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options may be purchased for their leverage potential. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, a Fund can benefit from any significant
increase in the price of the underlying security to a greater extent than had it
invested the same amount in the security directly. However, because of the very
high volatility of option premiums, a Fund could bear a significant risk of
losing the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Conversely, put options may be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of a Fund's assets generally. Alternatively, put options may be purchased for
capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options. In any case, the purchase of
options for capital appreciation would increase a Fund's volatility by
increasing the impact of changes in the market price of the underlying
securities on a Fund's net asset value.
The Funds may purchase either listed or over-the-counter options.
OPTIONS ON STOCK INDEXES
(EMERGING GROWTH II FUND, INTERNATIONAL EQUITY II FUND, GROWTH AND INCOME II
FUND AND GROWTH II FUND)
Options on stock indices are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. Options are currently traded on The Chicago Board
Options Exchange, the New York Stock Exchange, the American Stock Exchange and
other exchanges.
Gain or loss to a Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an Exchange, or it
may let the option expire unexercised.
FOREIGN CURRENCY OPTIONS (INTERNATIONAL EQUITY II FUND)
The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than five percent of the Fund's net assets at
any given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the
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Fund from time to time and over-the-counter options may also be purchased, but
only when the Adviser believes that a liquid secondary market exists for such
options, although there can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investment generally. See "Investment Practices and Risks -- Options,
Futures Contracts and Related Options" in the Prospectus.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
FUTURES CONTRACTS
(ALL FUNDS)
The Trust may engage in transactions involving futures contracts and
related options in accordance with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Trust and its Funds is
exempt from registration as a "commodity pool."
TYPES OF CONTRACTS. An interest rate futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of a
specific type of debt security at a specified future time and at a specified
price. A currency futures contract is similar except that the subject of the
contract is a specific currency. Although futures contracts call for delivery of
specified securities (or, in the case of currency futures contracts,
currencies), in most cases the contracts are closed out (by an offsetting
purchase or sale) prior to actual delivery, with the difference between the
contract price and the offsetting price paid in cash.
A stock index futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of cash equal to a specified dollar
amount times the difference between the stock index value at a specified time
and the price at which the futures contract is originally struck. A stock index
fluctuates with changes in the market values of the stocks included. No physical
delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in differences in
correlation of the futures contracts with movements in the value of the
securities being hedged.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto
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Stock Exchange. Futures and futures options on the Nikkei Index are traded on
the CME and United States commodity exchanges may develop futures and futures
options on other indices of foreign securities. Futures and options on United
States devised index of foreign stocks are also being developed.
The International Equity II Fund may enter into futures contracts for
non-hedging purposes, subject to applicable law.
INITIAL AND VARIATION MARGIN. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, a Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when a Fund purchases a futures contract and the price of the
underlying security or index rises, that position increases in value, and the
Fund receives from the broker a variation margin payment equal to that increase
in value. Conversely, where the Fund purchases a futures contract and the value
of the underlying security or index declines, the position is less valuable, and
the Fund is required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
FUTURES STRATEGIES. When a Fund anticipates a significant market or market
sector advance, the purchase of a futures contract affords a hedge against not
participating in the advance at a time when the Fund is not fully invested
("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. A Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
For example, if the Government II Fund holds long-term U.S. Government
securities, and a rise in long-term interest rates is anticipated, it could, in
lieu of selling its portfolio securities, sell futures contracts for similar
long-term securities. If interest rates increased and the value of the Fund's
securities declined during the period the contracts were outstanding, the value
of the Fund's futures contracts should increase, thereby protecting the Fund by
preventing net asset value from declining as much as it otherwise would have.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
over-the-counter option purchased by the Government II Fund, the Fund could
experience a loss of all or part of the value of the option. Transactions are
entered into by a Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Persons who trade in futures contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, whose business activity involves
investment or other commitment in securities or other obligations, use the
futures market to offset unfavorable changes in value that may occur because of
fluctuations in the
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value of the securities and obligations held or committed to be acquired by them
or fluctuations in the value of the currency in which the securities or
obligations are denominated. Debtors and other obligors may also hedge the
interest cost of their obligations. The speculator, like the hedger, generally
expects neither to deliver nor to receive the financial instrument underlying
the futures contract, but, unlike the hedger, hopes to profit from fluctuations
in prevailing interest rates or currency exchange rates.
Each Fund's futures transactions will be entered into for traditional
hedging purposes; that is, futures contracts will be sold to protect against a
decline in the price of securities or currencies that the Fund owns, or futures
contracts will be purchased to protect a Fund against an increase in the price
of securities of currencies it has committed to purchase or expects to purchase.
The International Equity II Fund may also enter into futures transactions for
non-hedging purposes, subject to applicable law.
SPECIAL RISKS ASSOCIATED WITH FUTURES TRANSACTIONS. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the portfolio of
securities being hedged diverges from the securities upon which the futures
contract is based. If the price of the futures contract moves less than the
price of the securities being hedged, the hedge will not be fully effective, but
if the price of the securities being hedged moves in an unfavorable direction,
the Fund would be in a better position than if it had not tried to hedge.
However, if the price of the security being hedged moves in a favorable
direction, the hedge will partially offset this advantage. To compensate for the
imperfect correlation of movements of prices of a futures contract and the
securities being hedged, a Fund may buy or sell futures contracts in a greater
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the securities being hedged has been greater than the
historical volatility of the securities underlying the futures contract, or may
buy or sell fewer futures contracts if the historical volatility of the
securities being hedged is less than the historical volatility of the securities
underlying the futures contract. Nevertheless, the price of the futures contract
may move less than the price of the securities which are the subject of the
hedge (or the value of futures contracts and securities held by a Fund may
decline simultaneously), resulting in the hedge not being fully effective.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to initial margin depository and maintenance
requirements. Rather than meet additional margin deposit requirements, investors
may close futures contracts through offsetting transactions, which could distort
the normal relationship between the futures market and the securities underlying
the futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although a Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, a Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged will not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
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Successful use of futures is also subject to the Advisers' ability
correctly to predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in futures
contracts. In such cases, if the Fund has insufficient cash, it may have to sell
portfolio securities at a time when it is disadvantageous to do so in order to
meet the daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that a Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed 5% of the fair market value of a Fund's assets. The International Equity
II Fund may enter into transactions in futures contracts and options on futures
contract only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes provided the aggregate initial
margin and premiums on such non-hedging positions does not exceed 5% of the
liquidation value of the Fund's assets. Relative to the purchase or sale of
futures contracts by a Fund, an amount of cash, cash equivalents or U.S.
Government securities equal to the market value of the obligation under the
futures contracts (less any related margin deposits) will be maintained in a
segregated account with the Custodian.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS. Each of the Exchanges
has established limitations governing the maximum number of call or put options
on the same underlying security or futures contract (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more accounts or through
one or more brokers). Option positions of all investment companies advised by
the Adviser are combined for purposes of these limits. An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Fund may sell.
Although a Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, there is no guarantee that the price of the
securities being hedged will, in fact, correlate with the price movements in a
futures contract and thus provide an offset to losses on the futures contract.
A Fund pays commissions on futures contracts and options transactions.
OPTIONS ON FUTURES CONTRACTS (ALL FUNDS)
A Fund may also purchase and sell options on futures contracts which are
traded on an Exchange. 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. As a seller of an option on a futures contract, a Fund is subject to
initial margin and maintenance requirements similar to those applicable to
futures contracts. In addition, net option premiums received by a Fund are
required to be included as initial margin deposits. When an option on a futures
contract is exercised, delivery of the futures position is accompanied by cash
representing the difference between the current market price of the futures
contract and the exercise price of the option. A Fund may purchase put options
on futures contracts in lieu of, and for the same purposes as, the sale of a
futures contract. The purchase of call options on futures contracts is intended
to serve the same purpose as the actual purchase of the futures contract.
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RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on stock index futures. The Adviser will not
purchase options on stock index futures on any Exchange unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risks in connection with options on futures transactions are no greater than
the risks in connection with stock index futures transactions. Compared to the
use of stock index futures, the purchase of options on stock index futures
involves less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However there may be
circumstances, such as when there is no movement in the level of the index, when
the use of an option on a stock index future would result in a loss to the Fund
when the use of a stock index future would not.
FORWARD COMMITMENTS (GOVERNMENT II FUND ONLY)
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase continues. Since the
market value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of the Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to sell continues. By entering into
a Forward Commitment sale transaction, the Fund forgoes or reduces the potential
for both gain and loss in the security which is being hedged by the Forward
Commitment sale.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY
(INTERNATIONAL EQUITY II FUND)
A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. The Fund may either accept or make delivery of the currency at the
maturity of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. The Fund
engages in forward currency transactions in anticipation of, or to protect
itself against fluctuations in exchange rates. The Fund might sell a particular
foreign currency forward, for example, when it holds bonds denominated in that
currency but anticipates, and seeks to be protected against, decline in the
currency against the U.S. dollar. Similarly, the Fund might sell the U.S. dollar
forward when it holds bonds denominated in U.S. dollars but anticipates, and
seeks to be protected against, a decline in the U.S. dollar relative to other
currencies. Further, the Fund might purchase a currency forward to "lock in" the
price of securities denominated in that currency which it anticipates
purchasing.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset,
that is the subject of the hedge, generally will not be precise. In addition,
the Fund may not always be able to enter into foreign currency forward contracts
at attractive prices and this will limit the Fund's ability to use such contract
to hedge or cross-hedge its assets. Also, with regard to the Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Fund's cross-hedges and
the movements in the exchange rates of foreign currencies in which the Fund's
assets that are the subject of such cross-hedges are denominated.
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Forward contracts are traded in an interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement and is consummated without
payment of any commission. The Fund, however, may enter into forward contracts
with deposit requirements or commissions.
A put option on currency gives the Fund, as purchaser, the right (but not
the obligation) to sell a specified amount of currency at the exercise price
until the expiration of the option. A call option gives the Fund, as purchaser,
the right (but not the obligation) to purchase a specified amount of currency at
the exercise price until its expiration. The Fund might purchase a currency put
option, for example, to protect itself during the contract period against a
decline in the value of a currency in which it holds or anticipates holding
securities. If the currency's value should decline, the loss in currency value
should be offset, in whole or in part, by an increase in the value of the put.
If the value of the currency instead should rise, any gain to the Fund would be
reduced by the premium it had paid for the put option. A currency call option
might be purchased, for example, in anticipation of, or to protect against, a
rise in the value of a currency in which the Fund anticipates purchasing
securities.
The Fund's ability to establish and close out positions in foreign currency
options is subject to the existence of a liquid market. There can be no
assurance that a liquid market will exist for a particular option at any
specific time. In addition, options on foreign currencies are affected by all of
those factors that influence foreign exchange rates and investment generally.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Exchange
markets for options on foreign currencies exist but are relatively new, and the
ability to establish and close out positions on the exchanges is subject to
maintenance of a liquid secondary market. Closing transactions may be effected
with respect to options traded in the over-the-counter ("OTC") markets
(currently the primary markets for options on foreign currencies) only by
negotiating directly with the other party to the option contract or in a
secondary market for the option if such market exists. Although the Fund intends
to purchase only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. In such event, it may not be possible to
effect closing transactions with respect to certain options, with the result
that the Fund would have to exercise those options which it has purchased in
order to realize any profit. The staff of the Securities and Exchange Commission
has taken the position that, in general, purchased OTC options and the
underlying securities used to cover written OTC options are illiquid securities.
However, the Fund may treat as liquid the underlying securities used to cover
written OTC options, provided it has arrangements with certain qualified dealers
who agree that the Portfolio may repurchase any option it writes for a maximum
price to be calculated by a predetermined formula. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
INTEREST RATE TRANSACTIONS (INTERNATIONAL EQUITY II FUND)
Among the hedging transactions into which the Fund may enter are interest
rate swaps and the purchase or sale of interest rate caps and floors. The Fund
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as a hedge and not
as a speculative investment. The Fund will not sell interest rate caps or floors
that it does not own. Interest rate swaps involve the exchange by the 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 notional 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 notional principal amount from the party selling such interest
rate floor.
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The Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted but, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as these hedging transactions are entered into for good faith hedging purposes,
the investment adviser and the Fund believe such obligations do not constitute
senior securities and, accordingly will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by a custodian that satisfies the
requirements of the 1940 Act. The Fund will not enter into any interest rate
swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the highest rating
category of at least one nationally recognized rating organization at the time
of entering into such transaction. If there is a default by the other party to
such a transaction, the 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 swap documentation. As a result, the
swap market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
New options and futures contracts and various combinations thereof continue
to be developed and the Fund may invest in any such options and contracts as may
be developed to the extent consistent with its investment objective and
regulatory requirements applicable to investment companies.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS (INTERNATIONAL EQUITY II FUND)
Use of many hedging and other strategic transactions including currency and
market index transactions by the Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with its
custodian, or a designated sub-custodian, to the extent the Fund's obligations
are not otherwise "covered" through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by the Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade debt obligations at least equal to the current amount of the obligation
must be segregated with the custodian or sub-custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. A call option on
securities written by the Fund, for example, will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by the
Fund will require the Fund to segregate liquid high grade debt obligations equal
to the exercise price. Except when the Fund enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the Fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency, liquid securities
denominated in that currency equal to the Fund's obligations or to segregate
liquid high grade debt obligations equal to the amount of the Fund's
obligations.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Fund will
not be required to do so. As a result, when the Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical
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delivery or with an election of either physical delivery or cash settlement will
be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt or equity securities or other acceptable
assets. The Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap on
a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Hedging and other strategic transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. The
Fund may also enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding obligation in
related options and hedging and other strategic transactions. The Fund could
purchase a put option, for example, if the strike price of that option is the
same or higher than the strike price of a put option sold by the Fund. Moreover,
instead of segregating assets if it holds a futures contract or forward
contract, the Fund could purchase a put option on the same futures contract or
forward contract with a strike price as high or higher than the price of the
contract held. Other hedging and other strategic transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it terminates
prior to that time, assets equal to any remaining obligation would need to be
segregated.
LOANS OF PORTFOLIO SECURITIES
Each of the Funds may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that cash equal to 100% of the
market value of the securities loaned is deposited by the borrower with the
particular Fund and is marked to market daily. While such securities are on
loan, the borrower is required to pay the Fund any income accruing thereon.
Furthermore, the Fund may invest the cash collateral in portfolio securities
thereby increasing the return to the Fund as well as increasing the market risk
to the Fund. A Fund will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its shares are
qualified for sale. However, should the Fund believe that lending securities is
in the best interests of the Fund's shareholders, it would consider withdrawing
its shares from sale in any such state.
Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. Each Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions which may not be changed
with respect to any Fund without the approval of the holders of a majority of
the outstanding shares of such Fund. Such majority (as defined by the 1940 Act)
is the lesser of (i) 67% or more of the voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding voting securities. The percentage limitations need only be met at
the time the investment is made or after relevant action is taken. These
restrictions provide that a Fund shall not:
1. Make any investment in real estate, commodities or commodities
contracts, except that each Fund may engage in transactions in forward
commitments, futures contracts, foreign currency futures and
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related options and may purchase or sell securities which are secured by
real estate or interests therein; or issued by companies; including real
estate investment trusts, which invest in real estate or interests therein;
and the International Equity II Fund may engage in currency transactions;
2. Lend money except by the purchase of bonds or other debt
obligations of types commonly offered publicly or privately and purchased
by financial institutions, including investments in repurchase agreements.
A Fund will not invest in repurchase agreements maturing in more than seven
days (unless subject to a demand feature) if any such investment, together
with any illiquid securities (including securities which are subject to
legal or contractual restrictions on resale) held by the Fund, exceeds 10%
of the market or other fair value of its total net assets (15% in the case
of the Emerging Growth II Fund and the International Equity II Fund);
provided, however, that with respect to the Emerging Growth II Fund, the
International Equity II Fund, the Growth II Fund and the Growth and Income
II Fund, illiquid securities shall exclude shares of other open-end
investment companies owned by the Fund but include the Fund's pro rata
portion of the securities and other assets owned by any such company. See
"Repurchase Agreements";
3. Underwrite securities of other companies, except insofar as a Fund
might be deemed to be an underwriter for purposes of the Securities Act of
1933 in the resale of any securities owned by the Fund;
4. Lend its portfolio securities in excess of 10% (15% in the case of
the Emerging Growth II Fund and the International Equity II Fund) of its
total assets, both taken at market value, provided that any loans shall be
in accordance with the guidelines established for such loans by the
Trustees as described under "Loans of Portfolio Securities", including the
maintenance of collateral from the borrower equal at all times to the
current market value of the securities loaned;
5. With respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer (except obligations of the U.S.
Government, its agencies or instrumentalities and repurchase agreements
secured thereby) or purchase more than 10% of the outstanding voting
securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies by the
Emerging Growth II Fund, the International Equity II Fund, the Growth II
Fund and the Growth and Income II Fund, to the extent permitted by rule or
order of the Securities and Exchange Commission ("SEC") exempting them from
the limitations imposed by Section 12(d)(1) of the 1940 Act;
6. Invest more than 25% of the value of its total assets in securities
of issuers in any particular industry; provided, however, that with respect
to the Emerging Growth II Fund, the International Equity II Fund, the
Growth II Fund and the Growth and Income II Fund, this limitation shall
exclude shares of other open-end investment companies owned by the Fund but
include the Fund's pro rata portion of the securities and other assets
owned by any such company. (This does not restrict any of the Funds from
investing in obligations of the U.S. Government and repurchase agreements
secured thereby);
7. With respect to all Funds other than the Emerging Growth II Fund
and the International Equity II Fund, borrow in excess of 10% of the market
or other fair value of its total assets, or pledge its assets to an extent
greater than 5% of the market or other fair value of its total assets,
provided that so long as any borrowing exceeds 5% of the value of the
Fund's total assets, the Fund shall not purchase portfolio securities. Any
such borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. With respect to
the Emerging Growth II Fund, borrow money except temporarily from banks to
facilitate payment of redemption requests and then only in amounts not
exceeding 33 1/3% of its net assets, or pledge more than 10% of its net
assets in connection with permissible borrowings or purchase additional
securities when money borrowed exceeds 5% of its net assets. With respects
to the International Equity II Fund, borrow money from banks on a secured
or unsecured basis, in excess of 25% of the value of its total assets.
Deposits in escrow in connection with the writing of covered call or
secured put options, or in connection with the purchase or sale of forward
contracts, futures contracts, foreign currency futures and related options,
are not deemed to be a pledge or other encumbrance. This restriction shall
not prevent the International Equity II Fund from entering into reverse
repurchase agreements, provided that reverse repurchase agreements and any
transactions
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constituting borrowing by the Fund may not exceed 33 1/3% of the Fund's net
assets. The International Equity II Fund may not mortgage or pledge its
assets except to secure borrowings permitted under this restriction; and
8. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit a Fund from (i) making and
collateralizing any permitted borrowings, (ii) making any permitted loans
of its portfolio securities, or (iii) entering into repurchase agreements,
utilizing options, futures contracts and foreign currency futures and
options thereon, forward contracts, forward commitments and other
investment strategies and instruments that would be considered "senior
securities" but for the maintenance by the Fund of a segregated account
with its custodian or some other form of "cover."
The Trust has adopted additional investment restrictions with respect to
the Funds, which may be changed by the Trustees without a vote of shareholders.
These restrictions provide that a Fund shall not:
1. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by a Fund of an initial or
variation margin in connection with forward contracts, futures contracts,
foreign currency futures or related option transactions is not considered
the purchase of a security on margin;
2. Invest in securities of any company if any officer or trustee of
the Trust or of the Adviser owns more than 1/2 of 1% of the outstanding
securities of such company, and such officers and trustees own more than 5%
of the outstanding securities of such issuer;
3. Invest in oil or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Growth II Fund, the
Growth and Income II Fund, the International Equity II Fund and the
Emerging Growth II Fund may invest in the securities of companies which
invest in or sponsor such programs;
4. Invest in companies for the purpose of acquiring control or
management thereof;
5. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except through
purchase in the open market in a transaction involving no commission or
profit to a sponsor or dealer (other than the customary brokers commission)
or as part of a merger, consolidation or other acquisition, except that the
International Equity II Fund, the Emerging Growth II Fund, the Growth II
Fund and the Growth and Income II Fund, may acquire shares of other
open-end investment companies to the extent permitted by rule or order of
the SEC exempting them from the limitations imposed by Section 12(d)(1) of
the 1940 Act;
6. Purchase an illiquid security if, as a result of such purchase,
more than 10% of the Fund's net assets (15% in the case of the Emerging
Growth II Fund and the International Equity II Fund) would be invested in
such securities; provided, however, that with respect to the International
Equity II Fund and the Emerging Growth II Fund, the Growth II Fund and the
Growth and Income II Fund, this limitation shall exclude shares of other
open-end investment companies owned by the Fund but include the Fund's pro
rata portion of the securities and other assets owned by any such company.
Illiquid securities include securities subject to legal or contractual
restrictions on resale, which include repurchase agreements which have a
maturity of longer than seven days. This policy does not apply to
restricted securities eligible for resale pursuant to Rule 144A under the
1933 Act which the Trustees or the Adviser under Board-approved guidelines,
may determine are liquid nor does it apply to other securities for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists;
7. Invest more than 5% of its assets in companies having a record
together with predecessors, of less than three years' continuous operation,
except that the International Equity II Fund, the Emerging Growth II Fund,
the Growth II Fund and the Growth and Income II Fund, may acquire shares of
other open-end investment companies to the extent permitted by rule or
order of the SEC exempting them from the limitations imposed by Section
12(d)(1) of the 1940 Act;
18
<PAGE> 122
8. Except for the International Equity II Fund, purchase any security
issued by any company deriving more than 25% of its gross revenues from the
manufacture of alcohol or tobacco;
9. Make short sales of securities, unless at the time of sale a Fund
owns or has the right to acquire at no additional cost securities identical
to those sold short; provided that this prohibition does not apply to the
writing of options or the sale of forward contracts, futures, foreign
currency futures or related options; and
10. Invest more than 5% of its net assets in warrants or rights valued
at the lower of cost or market, nor more than 2% of its net assets in
warrants or rights (valued on such basis) which are not listed on the New
York or American Stock Exchanges. Warrants or rights acquired in units or
attached to other securities are not subject to the foregoing limitations.
FOREIGN INVESTMENTS FOR FUNDS OTHER THAN THE INTERNATIONAL EQUITY II FUND.
The Growth II Fund, the Growth and Income II Fund and the Emerging Growth II
Fund may not invest in the securities of a foreign issuer if, at the time of
acquisition, more than 20% of the value of the Fund's total assets would be
invested in such securities.
FUTURES CONTRACTS AND OPTIONS. In addition, the Growth and Income II Fund
and the Growth II Fund may not write, purchase or sell puts, calls or
combinations thereof, except that each Fund may (a) write covered call options
with respect to any part or all of its portfolio securities, write secured put
options, or enter into closing purchase transactions with respect to such
options, (b) purchase and sell put options to the extent that the premiums paid
for all such options do not exceed 10% of its total assets and only if the Fund
owns the securities covered by the put option at the time of purchase, and (c)
engage in futures contracts and related options transactions as described
herein. The Emerging Growth II Funds, the International Equity II Fund, the
Growth II Fund and the Growth and Income II Fund may purchase put and call
options which are purchased on an exchange in other markets, or currencies and,
as developed from time to time, various futures contracts on market indices and
other instruments. Purchasing options may increase investment flexibility and
improve total return, but also risks loss of the option premium if an asset the
Fund has the option to buy declines in value.
The Government II Fund may not write, purchase or sell puts, calls or
combinations thereof, except that the Fund may (a) write covered or fully
collateralized call options, write secured put options, and enter into closing
or offsetting purchase transactions with respect to such options, (b) purchase
and sell options to the extent that the premiums paid for all such options owned
at any time do not exceed 10% of its total assets, and (c) engage in futures
contracts and related options transactions as described herein.
The Trust has made an undertaking with certain states that at least 30 days
prior to any change by a Fund in its goal, the Fund will provide written notice
to shareholders of such change and will waive any fee if the shareholder redeems
or exchanges the account. The Trust has made an undertaking with a certain state
that with respect to each Fund, Rule 144A securities will be included as an
illiquid security to meet the 10% limitation on investing in illiquid
securities. The Trust has undertaken with a certain state that each Fund (except
the Government II Fund) limit its investments in restricted securities,
unseasoned issuers and not readily marketable securities to 15% of its total
assets; provided, however that its investments in restricted securities will be
limited to a maximum of 10% of total assets. Each Fund (except the Government II
Fund) has undertaken with a certain state to limit its investments in the
securities of one or more real estate investment trusts to 10% of its total
assets. The Growth II Fund and the Growth and Income II Fund have undertaken not
to invest in the securities of one or more investment companies if by reason
thereof the value of its aggregate investment in such securities would exceed
15% of its total assets.
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<PAGE> 123
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees and executive officers and their principal occupations for the
past 5 years are listed below.
DONALD M. CARLTON, Trustee. Radian Corporation, 8501 N. Mopac Blvd.,
Building No. 6, Austin, Texas 78759. President and Chief Executive Officer of
Radian Corporation (technology/services); Director of The Hartford Steam Boiler
Inspection & Insurance Company (insurance/engineering services), Joy
Technologies, Inc. (manufacturer/servicer of coal mining equipment), and Medical
Polymers Technologies, Inc.(1)
Age: 58
A. BENTON COCANOUGHER, Trustee. Texas A & M University, 601 Blocker Bldg.,
College Station, Texas 77843-4113. Dean of College of Business Administration
and Graduate School of Business of Texas A & M University; Director of Randall's
Food Markets, Inc.; Director of First American Bank; Director of First American
Savings Bank; formerly Senior Vice President and Dean of the University of
Houston.(1)
Age: 57
STEPHEN RANDOLPH GROSS, Trustee. 2625 Cumberland Parkway, Suite 400,
Atlanta, Georgia 30339. Managing Partner and Vice President of Gross, Collins &
Cress, P.C. (accounting firm); Director of Charter Bank & Trust.(1)
Age: 47
NORMAN HACKERMAN, Trustee. The Robert A. Welch Foundation, 4605 Post Oak
Place, Suite 200, Houston, Texas 77027. Chairman of the Scientific Advisory
Board of The Robert A. Welch Foundation (research); Director of Scientific
Measurement Systems, Inc. (industrial tomography), Radian Corporation (research
and development), Electrosource, Inc. (lead storage battery manufacturer),
Carbon Fuels Corp. (coal refinery), and American General Series Portfolio Co.
(mutual fund); President Emeritus of Rice University, Houston, Texas; formerly
Director of Columbia Scientific Instruments, Inc. (design and manufacture of
instrument), Fueltech, Inc. (combustion); and Vista Chemical Co.(1)(2)
Age: 83
ROBERT D.H. HARVEY, Trustee. Nations Bank, 10 Light Street, P.O. Box 987,
Baltimore, Maryland 21203. Chairman of Maryland Science Center; formerly
Chairman of the Board, Chief Executive Officer, Member of the Advisory Board and
Vice Chairman of the Board of Maryland National Bank, Baltimore, Maryland (bank
holding company).(1)
Age: 75
JEFFREY B. LANE,* Trustee. 1345 Avenue of the Americas, New York, New York
10105. President, Director and Member of the Executive Committee of Smith Barney
International Inc.; Vice Chairman and Director of Smith Barney Inc.; Director of
the Long Island Jewish Medical Center, and Woodmere Academy; formerly President
of Shearson Lehman Brothers, Inc.; formerly President and Director of Primerica
Holdings, Inc.
Age: 53
ALAN G. MERTEN, Trustee. Johnson Graduate School of Management, 303 Malott
Hall, Cornell University, Ithaca, New York 14853. The Anne and Elmer Lindseth
Dean of Johnson Graduate School of Management of Cornell University; Director of
Comshare, Inc. (information technology), and Tompkins County Trust Company,
Ithaca, New York.(1)
Age: 53
STEVEN MULLER, Trustee. 1619 Massachusetts Avenue, N.W., Suite 711,
Washington, DC 20036. Chairman of The 21st Century Foundation (public affairs);
President Emeritus of The Johns Hopkins University; Director of Alex. Brown &
Sons, Inc., Beneficial Corporation (bank holding company), and Millipore
Corporation (bio-technology).(1)
Age: 67
20
<PAGE> 124
F. ROBERT PAULSEN, Trustee. 2801 N. Indian Ruins, Tucson, Arizona 85715.
Dean Emeritus and Professor Emeritus of Higher Education of The University of
Arizona; Director of American General Series Portfolio Co. (mutual fund).(1)(2)
Age: 73
R. RICHARDSON PETTIT, Trustee. Department of Finance, College of Business,
University of Houston, 4800 Calhoun, Houston, Texas 77204-6283. Duncan Professor
of Finance of the University of Houston; formerly Hanson Distinguished Professor
of Business of the University of Washington.(1)
Age: 53
DON G. POWELL,* Chairman of the Board, Trustee and President. 2800 Post Oak
Blvd., Houston, Texas 77056. Chairman, Chief Executive Officer and Director of
the Adviser; President, Chief Executive Officer and Director of VKAC and VK/AC
Holding. Director, Trustee or Managing General Partner of each of the Van Kampen
American Capital Funds and other open-end investment companies and closed-end
investment companies advised by the Adviser and its affiliates.(1)(2)(3)
Age: 55
ALAN B. SHEPARD, JR., Trustee. 1512 Bonifacio Road, P.O. Box 63, Pebble
Beach, CA 93953. President of Seven Fourteen Enterprises, Inc. (investments);
Partner of Houston Partners (venture capital); Director and Vice Chairman of
Kwik-Kopy Corporation (printing); formerly Director of Shaklee Corporation
(direct sales).(1)(2)
Age: 71
MILLER UPTON, Trustee. 914 Tarrant Drive, Route 3, Box 85-A, Fontana,
Wisconsin 53125. Economist; Consultant; Director of American General Series
Portfolio Co. (mutual fund); formerly Director of Home Life Insurance Company of
New York, and Household International, Inc. (financial services).(1)(2)
Age: 78
BENJAMIN N. WOODSON, Trustee. 2727 Allen Parkway, Suite 460, Houston, Texas
77019-2115. Consultant; Director, Financial Securities Advisors, Inc.; Advisory
Director, Texas Commerce Bank; formerly Director of Mitchell Energy and
Development Corp.; formerly Chairman of the Board and Chief Executive Officer of
American General Corporation.(1)
Age: 87
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Trust by reason of his position with the Adviser. Mr. Lane
is an interested person of the Distributor, the investment subadviser to one
of the Common Sense II Funds, and the Trust by reason of his position with an
affiliate of The Travelers Inc.
OFFICERS
GERALD BAXTER, President. 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0062. Vice President, Associate General Counsel and Secretary of
Primerica Financial Services. Formerly, partner with Trotter, Smith & Jacobs.
Age: 43
STEPHEN L. BOYD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President -- Portfolio Manager of the Adviser.(3)
Age: 54
JAMES CONHEADY, Vice President. 388 Greenwich Street, New York, New York
10013. Managing Director of Smith Barney. Formerly, First Vice President of
Drexel Burnham.
Age: 59
21
<PAGE> 125
KENNETH S. DURHAM, Vice President. 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30199-0001. President of the Distributor; President and Director
of PFS Distributors, Inc.; President of PFS Investments Inc., ("PFS
Investments"); Vice President of the Transfer Agent; Vice President of PFS
Services, Inc.; Director of PFS Asset Management, Inc.; formerly Marketing
Manager of PFS Distributors, Inc.
Age: 52
HUEY P. FALGOUT, JR. Assistant Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Assistant Secretary of the Adviser. Formerly
associate with Johnson and Gibbs.(3)
Age: 31
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Assistant General Counsel and Secretary of the
Adviser.(3)
Age: 41
JAMES A. GILLIGAN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President -- Portfolio Manager of the Adviser. Formerly Security
Analyst of the Adviser.(3)
Age: 37
DAVID C. JOHNSON, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Vice President of the Adviser and an agent of Van Kampen
American Capital Investment Advisory Corp., an affiliate of the Adviser.
Age: 42
GARY M. LEWIS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President -- Portfolio Manager of the Adviser.(3)
Age: 41
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant Controller.(3)
Age: 35
DENNIS J. MCDONNELL, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. President, Chief Operating Officer and a Director of the
Adviser. Director of VK/AC Holding and VKAC.(3)
Age: 53
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(3)
Age: 49
RONALD A. NYBERG, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Executive Vice President, General Counsel and Secretary of VKAC.
Executive Vice President and a Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.(3)
Age: 42
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income and
Director of the Adviser.(3)
Age: 48
GREGORY PITTS, Vice President. 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0062. Senior Vice President of PFS Shareholder Services.
Age: 32
JOHN R. REYNOLDSON, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Investment Vice President of the Adviser.(3)
Age: 42
22
<PAGE> 126
JEFFREY RUSSELL, Vice President. 388 Greenwich Street, New York, New York
10013. Managing Director of Smith Barney. Formerly, Vice President of Drexel
Burnham.
Age: 37
ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
the Adviser; Executive Vice President of VKAC.(3)
Age: 53
DAVID R. TROTH, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of the Adviser.(3)
Age: 61
D. RICHARD WILLIAMS, Vice President. 3120 Breckinridge Blvd., Duluth,
Georgia 30199-0001. Chief Executive Officer and General Manager and Executive
Committee Member of the Distributor; President, General Manager, Executive
Committee Member and Chief Executive Officer of the Transfer Agent; President of
CSCS; Chief Financial Officer and Treasurer of Primerica Financial; Director,
Chief Executive Officer and Executive Committee Member of PFS Investments Inc.;
Director and Chief Executive Officer of PFS Distributors, Inc.; President Chief
Executive Officer and Director of PFS Asset Management, Inc. and PFS Services,
Inc.; President and Director of PFS Custodial Services, Inc.; Vice Chairman,
Executive Committee Member, Investment Committee Member, Co-Chief Executive
Officer, Chief Financial Officer and Director of Primerica Life Insurance
Company.
Age: 38
J. DAVID WISE, Assistant Secretary. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President, Associate General Counsel, Compliance Review Officer and
Assistant Secretary of the Adviser.(4)
Age: 51
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; President and Chief Operating
Officer of Van Kampen American Capital Services, Inc.; Executive Vice President
and Chief Operating Officer of Van Kampen American Capital Trust Company;
Executive Vice President of Van Kampen American Capital Shareholder Services,
Inc.(3)
Age: 50
---------------
(1) A director of American Capital Bond Fund, Inc., American Capital Convertible
Securities, Inc. and American Capital Income Trust, closed-end investment
companies advised by the Adviser.
(2) Managing General Partner of American Capital Exchange Fund, an open-end
investment company advised by the Adviser.
(3) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.
No compensation was paid by these Funds to the Trustees for the fiscal year
ended October 31, 1994. Additional information regarding compensation paid by
the related mutual funds for which the Trustees serve as directors or trustees
noted above for the calendar year ended December 31, 1994, is set forth below.
Messrs. Lane and Powell are not compensated for their service as Trustees,
because of their affiliation with the Distributor and the Adviser, respectively.
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<PAGE> 127
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL(1)
COMPENSATION
PENSION OR FROM
AGGREGATE RETIREMENT REGISTRANT
COMPENSATION BENEFITS AND
FROM REGISTRANT ACCRUED AS FUND COMPLEX
----------------- PART OF FUND PAID TO
NAME OF PERSON EM G G/I GVT INT EXPENSES DIRECTORS
----------------------------------------- --- --- --- --- --- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Donald M. Carlton.................... 0 0 0 0 0 N/A $ 38,000
Dr. A. Benton Cocanougher................ 0 0 0 0 0 N/A 38,000
Stephen Randolph Gross................... 0 0 0 0 0 N/A 42,000
Dr. Norman Hackerman..................... 0 0 0 0 0 N/A 47,000
Robert D. H. Harvey...................... 0 0 0 0 0 N/A 42,000
Dr. Alan G. Merten....................... 0 0 0 0 0 N/A 36,000
Dr. Steven Muller........................ 0 0 0 0 0 N/A 38,000
Dr. F. Robert Paulsen.................... 0 0 0 0 0 N/A 52,000
Dr. R. Richardson Pettit................. 0 0 0 0 0 N/A 38,000
Alan B. Shepard, Jr...................... 0 0 0 0 0 N/A 48,250
Miller Upton............................. 0 0 0 0 0 N/A 47,000
Benjamin N. Woodson...................... 0 0 0 0 0 N/A 38,000
</TABLE>
---------------
(1) Reflects thirteen investment companies in the fund complex. Amounts
reflected are for the calendar year ended December 31, 1994.
Legend:
<TABLE>
<S> <C>
Em = Emerging Growth II Fund
G = Growth II Fund
G/I = Growth and Income II Fund
GVT = Government II Fund
Int = International Equity II Fund
</TABLE>
INVESTMENT ADVISORY AGREEMENT
The Trust and the Adviser are parties to a separate Investment Advisory
Agreement for each Fund (other than the Emerging Growth II Fund and the
International Equity II Fund), dated December 20, 1994 and for the Emerging
Growth II Fund and the International Equity II Fund, dated February 21, 1995
(each an "Advisory Agreement" and together, the "Advisory Agreements"). Under
each Fund's Advisory Agreement, the Trust retains the Adviser to manage the
investment of the Fund's assets and to place orders for the purchase and sale of
its portfolio securities. The Adviser is responsible for obtaining and
evaluating economic, statistical, and financial data and for formulating and
implementing investment programs in furtherance of each Fund's investment
objectives. The Adviser also furnishes at no cost to the Trust (except as noted
herein) the services of sufficient executive and clerical personnel for the
Trust as are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation materials. In addition,
the Adviser furnishes at no cost to the Trust the services of a President of the
Trust, one or more Vice Presidents as needed, and a Secretary.
Under each Fund's Advisory Agreement, the Trust bears the cost of its
accounting services, which includes maintaining its financial books and records
and calculating the daily net asset value of each Fund. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among all
investment companies advised or subadvised by the Adviser. The Trust also pays
transfer agency fees, distribution fees, service fees, custodian fees, legal
fees, the costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser.
The Trust retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under the
relevant Advisory Agreement, the Trust pays the Adviser an
24
<PAGE> 128
annual fee for the Emerging Growth II Fund, the Growth and Income II Fund and
the Growth II Fund, calculated separately for each Fund, at the rate of 0.65% of
the first $1 billion of the Fund's average daily net assets; 0.60% of the next
$1 billion of the Fund's average daily net assets; 0.55% of the next $1 billion
of the Fund's average daily net assets; 0.50% of the next $1 billion of the
Fund's average daily net assets; and 0.45% of the Fund's average daily net
assets in excess of $4 billion. The Trust pays the Adviser an annual fee for the
International Equity II Fund at the rate of 1.00% of the Fund's average daily
net assets. This fee is higher than that charged by most other mutual funds but
the Trust believes it is justified by the special international nature of the
Fund and is not necessarily higher than the fees charged by certain mutual funds
with investment objectives and policies similar to those of the Fund. The
Adviser has entered into a subadvisory agreement dated February 21, 1995 (the
"Subadvisory Agreement") with the Subadviser to assist it in performing its
investment advisory functions. Pursuant to the Subadvisory Agreement, the
Subadviser receives on an annual basis 50% of the compensation received by the
Adviser from the International Equity II Fund. The Trust pays the Adviser an
annual fee for the Government II Fund at the rate of 0.60% of the first $1
billion of the Fund's average daily net assets; 0.55% of the next $1 billion of
the Fund's average daily net assets; 0.50% of the next $1 billion of the Fund's
average daily net assets; 0.45% of the next $1 billion of the Fund's average
daily net assets; 0.40% of the next $1 billion of the Fund's average daily net
assets; and 0.35% of the Fund's average daily net assets in excess of $5
billion.
The average daily net assets of each Fund are determined by taking the
average of all of the determinations of net asset value of such Fund for each
business day during a given calendar month. Such fee is payable for each
calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any direct
or indirect majority-owned subsidiary of VKAC in connection with the purchase
and sale of portfolio investments of the Trust, less any direct expenses
incurred by such person in connection with the purchase and sale of portfolio
investments of the Trust, less any direct expense incurred by the Adviser or
such person under common control with the Adviser in connection with obtaining
such payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Trust's benefit, and to advise
the Trustees of any other commissions, fees, brokerage or similar payments which
may be possible under applicable laws for the Adviser or any direct or indirect
majority-owned subsidiary of VKAC to receive in connection with the Trust's
portfolio transactions or other arrangements which may benefit the Trust.
Each Fund's Advisory Agreement also provides that, in the event the
ordinary business expenses of the Fund, for any fiscal year should exceed the
most restrictive expense limitation applicable in the states where the Trust's
shares are qualified for sale, unless waived, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year. Ordinary business expenses do not include (1) interest and
taxes, (2) brokerage commissions, (3) certain litigation and indemnification
expenses as described in each Advisory Agreement and (4) payments made by a Fund
pursuant to the Distribution Plans. Each Fund's Advisory Agreement also provides
that the Adviser shall not be liable to the Trust for any actions or omissions
if it acted in good faith without negligence or misconduct.
Each Advisory Agreement has an initial term of two years and thereafter may
be continued from year to year if specifically approved at least annually (a)(i)
by the Trustees or (ii) by vote of a majority of the Fund's outstanding voting
securities, and (b) by the affirmative vote of a majority of the Trustees who
are not parties to the agreement or interested persons of any such party by
votes cast in person at a meeting called for such purpose. Each Fund's Advisory
Agreement provides that it shall terminate automatically if assigned and that it
may be terminated without penalty by either party on 60 days' written notice.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets. The Trust has received from California (the state with the
most restrictive expense limitation) a waiver, which allows each Fund to exclude
shareholder service costs from the calculation of the expense limitation.
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<PAGE> 129
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of each
Fund of the Trust pursuant to a written agreement, dated May 2, 1994 for the
Growth II Fund, the Growth and Income II Fund and the Government II Fund and
agreements dated February 21, 1995 for the Emerging Growth II Fund and the
International Equity II Fund (each, an "Underwriting Agreement" and together,
the "Underwriting Agreements"). The Distributor has entered into a selling
agreement with PFS Investments giving PFS Investments the exclusive right to
sell shares of each Fund of the Trust on behalf of the Distributor. The
Distributor's obligation is an agency or "best efforts" arrangement under which
the Distributor is required to take and pay only for such shares of each Fund as
may be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Underwriting Agreements are renewable from year to year if
approved (a) by the Trustees or by a vote of a majority of the Trust's
outstanding voting securities, and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Agreement or interested persons of any party
by votes cast in person at a meeting called for such purpose. The Underwriting
Agreements provide that they will terminate if assigned, and that they may be
terminated without penalty by either party on 60 days' written notice.
The following table shows commissions paid, amounts retained by the
Distributor and amounts received by PFS Investments under the relevant
Underwriting Agreement during the period from inception of the Growth II Fund,
the Growth and Income II Fund and the Government II Fund (May 3, 1994) through
the end of the Trust's fiscal year end (October 31, 1994). Since the
International Equity II Fund and the Emerging Growth II Fund commenced
operations on February 21, 1995, the following information is not yet available
with respect to those Funds.
<TABLE>
<CAPTION>
GROWTH AND
GROWTH II INCOME II GOVERNMENT II
--------- ---------- -------------
<S> <C> <C> <C>
Total Underwriting Commissions.................. $ 181,511 $117,194 $61,158
Amount Retained by Distributor.................. $ 25,028 $ 16,465 $ 8,845
Amount Received by PFS Investments.............. $ 156,483 $100,729 $52,313
</TABLE>
The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising. The Trust pays all
expenses attributable to the registrations of its shares under federal and state
blue sky laws, including registration and filing fees, the cost of preparation
of the prospectuses, related legal and auditing expenses, and the cost of
printing prospectuses for current shareholders.
DISTRIBUTION PLANS
The Trust has adopted a Class A distribution plan and a Class B
distribution plan (the "Class A Plan" and "Class B Plan," respectively) to
permit each Fund directly or indirectly to pay expenses associated with
servicing shareholders and in the case of the Class B Plan the distribution of
its shares (the Class A Plan and the Class B Plan are sometimes referred to
herein collectively as "Plans" and individually as a "Plan").
With respect to the Class A Plan, each Fund is authorized to pay the
Distributor, as compensation for the Distributor's services, a service fee at an
annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares. Such fee shall be calculated and accrued daily and paid monthly. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate PFS Investment for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund include payments at an annual rate of 0.25% of the average daily net
assets of the Class B shares to the Distributor for payments for personal
service and/or the maintenance of shareholder accounts. With respect to the
Class B Plan, authorized payments by the Fund also include payments at an annual
rate of 0.75% of the average daily net assets of the Class B shares to the
Distributor as compensation for providing sales and promotional activities and
services.
In reporting amounts expended under the Plans to the Trustees, the
Distributor will allocate expenses attributable to the sale of both Class A and
Class B shares to each class based on the ratio of sales of Class A
26
<PAGE> 130
and Class B shares to the sales of both classes of shares. The service fees paid
by the Class A shares will not be used to subsidize the sale of Class B shares;
similarly, the service fees and distribution fees paid by the Class B shares
will not be used to subsidize the sale of Class A shares.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreements and selling agreement were approved by the Trustees,
including a majority of the Trustees who are not interested persons (as defined
in the 1940 Act) of the Trust and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
each Plan ("Independent Trustees"). In approving each Plan in accordance with
the requirements of Rule 12b-1, the Trustees determined that there is a
reasonable likelihood that each Plan will benefit the Trust and its
shareholders.
Each Plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting shares of the
respective class. Any change in any of the Plans that would materially increase
the distribution or service expenses borne by the Trust requires shareholder
approval, voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as the Plan is in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
With respect to each Plan, the Trustees considered all compensation that
the Distributor would receive under the Plan and the Underwriting Agreement,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The Trustees also considered the
benefits that would accrue to the Distributor under each Plan in that the
Distributor would receive service fees and distribution fees and the Adviser
would receive advisory fees which are calculated based upon a percentage of the
average net assets of each Fund, which fees would increase if the Plans were
successful and each Fund attained and maintained significant asset levels.
For the Plan year ended June 30, 1994, the aggregate expenses for Common
Sense II Growth Fund under the Class A Plan were $430 or 0.04%, (not annualized)
respectively, of the Class A shares' average net assets. Such expenses were paid
to reimburse the Distributor for payments made to Service Organizations for
servicing Fund shareholders and for administering the Class A Plan. For the Plan
year ended June 30, 1994, the Fund's aggregate expenses under the Class B Plan
were $498 or 0.16% (not annualized) of the Class B shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$374 for commissions and transaction fees paid to broker-dealers and other
Service Organizations in respect of sales of Class B shares of the Fund and $124
for fees paid to Service Organizations for servicing Class B shareholders and
administering the Class B Plan.
For the Plan year ended June 30, 1994, the aggregate expenses for Common
Sense II Growth and Income Fund under the Fund's Class A Plan were $477 or
0.04%, (not annualized) respectively, of the Class A shares' average net assets.
Such expenses were paid to reimburse the Distributor for payments made to
Service Organizations for servicing Fund shareholders and for administering the
Class A Plan. For the Plan year ended June 30, 1994, the Fund's aggregate
expenses under the Class B Plan were $359 or 0.16% (not annualized) of the Class
B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $269 for commissions and transaction
fees paid to broker-dealers and other Service Organizations in respect of sales
of Class B shares of the Fund and $90 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B Plan.
For the Plan year ended June 30, 1994, the aggregate expenses for Common
Sense II Government Fund under the Fund's Class A Plan were $1,209 or 0.04%,
(not annualized) respectively, of the Class A shares' average net assets. Such
expenses were paid to reimburse the Distributor for payments made to Service
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Organizations for servicing Fund shareholders and for administering the Class A
Plan. For the Plan year ended June 30, 1994, the Fund's aggregate expenses under
the Class B Plan were $270 or 0.16% (not annualized) of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $203 for commissions and transaction fees paid to
broker-dealers and other Service Organizations in respect of sales of Class B
shares of the Fund and $67 for fees paid to Service Organizations for servicing
Class B shareholders and administering the Class B Plan.
The offering of Emerging Growth II Fund and International Equity II Fund
commenced after the Plan's fiscal year end and the Fund's fiscal year end.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser (and, in the case of the International Equity II Fund, the
Adviser and the Subadviser) are responsible for decisions to buy and sell
securities for the Trust and for the placement of its portfolio business and the
negotiation of any commissions paid on such transactions. It is the policy of
the Advisers to seek the best security price available with respect to each
transaction. In over-the-counter transactions, orders are placed directly with a
principal market maker unless it is believed that a better price and execution
can be obtained by using a broker. Except to the extent that the Trust may pay
higher brokerage commissions for brokerage and research services (as described
below) on a portion of its transactions executed on securities exchanges, the
Adviser (and, in the case of the International Equity II Fund, the Adviser and
the Subadviser) seek the best security price at the most favorable commission
rate. From time to time, the Fund may place brokerage transactions with
affiliated persons of the Adviser and/or the Subadviser. In selecting
broker/dealers and in negotiating commissions, the Adviser (and, in the case of
the International Equity II Fund, the Adviser and the Subadviser) considers the
firm's reliability, the quality of its execution services on a continuing basis
and its financial condition. When more than one firm is believed to meet these
criteria, preference may be given to firms which also provide research services
to the Trust or the Adviser or Subadviser.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody), and (d)
furnishing other products or services that assist the Adviser or the Subadviser
in fulfilling their investment decision-making responsibilities.
Pursuant to provisions of the relevant Advisory Agreement, the Trustees
have authorized the Adviser and, with respect to the International Equity II
Fund, the Subadviser, to cause the Trust to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the Adviser and the Subadviser. The Adviser and the Subadviser are
of the opinion that the continued receipt of supplemental investment research
services from dealers is essential to their provision of high quality portfolio
management services to the Trust. The Adviser and the Subadviser undertake that
such higher commissions will not be paid by the Trust unless (a) the Adviser
(or, with respect to the International Equity II Fund, the Subadviser)
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Adviser's (or
the Subadviser's) overall responsibilities with respect to the accounts as to
which it exercises investment discretion, (b) such payment is made in compliance
with the provisions of Section 28(e) and other applicable state and federal
laws, and (c) in the opinion of the Adviser (or, with respect to the
International Equity II Fund, the Subadviser), the total commissions paid by the
Trust are reasonable in relation to the expected benefits to the Trust over the
long term. The investment advisory fee paid by the Fund under each Fund's
Advisory Agreement is not reduced as a result of the Adviser's (or the
Subadviser's) receipt of research services.
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<PAGE> 132
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Trust as a factor in the selection of firms to execute portfolio
transactions for the Trust.
The Adviser and, with respect to the International Equity II Fund, the
Subadviser, place portfolio transactions for other advisory accounts including
other investment companies. Research services furnished by firms through which
the Trust effects its securities transactions may be used by the Adviser and the
Subadviser in servicing all of their accounts; not all of such services may be
used by the Advisers in connection with the Trust. In the opinion of the Adviser
and the Subadviser, the benefits from research services to the Funds of the
Trust and to the accounts managed by the Adviser or the Subadviser cannot be
measured separately. Because the volume and nature of the trading activities of
the accounts are not uniform, the amount of commissions in excess of the lowest
available rate paid by each account for brokerage and research services will
vary. However, in the opinion of the Adviser and the Subadviser, such costs to
the Trust will not be disproportionate to the benefits received by the Trust on
a continuing basis.
The Adviser and the Subadviser will seek to allocate portfolio transactions
equitably whenever concurrent decisions are made to purchase or sell securities
by the Trust and other accounts that the Adviser or the Subadviser may establish
in the future. In some cases, this procedure could have an adverse effect on the
price or the amount of securities available to the Trust. In making such
allocations among the Trust and other advisory accounts, the main factors
considered by the Adviser (or, with respect to the International Equity II Fund,
the Subadviser) are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
The following table summarizes for each Fund the total brokerage
commissions paid, the amount of commissions paid to brokers selected primarily
on the basis of research services provided to the Adviser (and its former
affiliate Common Sense Investment Advisers) and the value of these specific
transactions.
<TABLE>
<CAPTION>
INCEPTION (MAY 3, 1994) GROWTH AND
THROUGH OCTOBER 31, 1994 GROWTH II INCOME II GOVERNMENT II
------------------------ ---------- ---------- -------------
<S> <C> <C> <C>
Total Broker Commissions...................... $ 27,407 $ 29,637 --
Commissions for Research Services............. $ 16,362 $ 18,911 --
Value of Research Transactions................ $11,333,438 $11,602,644 --
</TABLE>
Each Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Subadviser, including Smith
Barney and Robinson Humphrey. The negotiated commission paid to an affiliated
broker on any transaction would be comparable to that payable to a non-
affiliated broker in a similar transaction.
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<PAGE> 133
The Funds paid the following commissions to these affiliated brokers during
the period May 3, 1994 (Inception) through October 31, 1994:
<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON HUMPHREY
------------ -----------------
<S> <C> <C>
COMMISSIONS PAID
Growth II Fund...................................... $198 $ 560
Growth and Income II Fund........................... $801 $ 364
Government II Fund.................................. -- --
COMMISSIONS WITH AFFILIATES TO TOTAL COMMISSIONS
Growth II Fund...................................... .72% 2.04%
Growth and Income II Fund........................... 2.7% 1.23%
Government II Fund.................................. -- --
VALUE OF TRANSACTIONS WITH AFFILIATES TO TOTAL
TRANSACTIONS
Growth II Fund...................................... 2.93% 1.06%
Growth and Income II Fund........................... 1.69% .75%
Government II Fund.................................. -- --
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined each day the
New York Stock Exchange (the "Exchange") is open (currently 4:00 p.m., New York
time). The Exchange is currently closed on weekends and on the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern trading generally or in a particular country
or countries may not take place on all business days in New York. Furthermore,
trading takes place on all business days in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days in
New York and on which the Funds' net asset values are not calculated and on
which the Trust does not effect sales, redemptions and repurchases of its
shares. There may be significant variations in the net asset value of Fund
shares on days when net asset value is not calculated and on which shareholders
cannot redeem on account of changes in prices of stocks traded in foreign stock
markets.
EMERGING GROWTH II FUND, INTERNATIONAL EQUITY II FUND, GROWTH II FUND AND GROWTH
AND INCOME II FUND NET ASSET VALUATION
The net asset value of each Fund is computed by (i) valuing securities
listed or traded on a national securities exchange at the last reported sales
price, or if there has been no sale that day at the last reported bid price,
using prices as of the close of trading on the Exchange, (ii) valuing unlisted
securities for which over-the-counter market quotations are readily available at
the most recent bid price as supplied by the National Association of Securities
Dealers Automated Quotations (NASDAQ) or by broker-dealers, and (iii) valuing
any securities for which market quotations are not readily available, and any
other assets at fair value as determined in good faith by the Trustees. Options
on stocks, options on stock indexes and stock index futures contracts and
options thereon, which are traded on exchanges, are valued at their last sales
or settlement price as of the close of such exchanges, or, if no sales are
reported, at the mean between the last reported bid and asked prices. Debt
securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value.
Foreign securities trading may not take place on all days on which the New
York Stock Exchange ("NYSE") is open. Further, trading takes place in various
foreign markets on days on which the NYSE is not open. Accordingly, the
determination of the net asset value of a Fund may not take place
contemporaneously with the determination of the prices of investments held by
such Fund. Events affecting the values of investments that occur between the
time their prices are determined and 4:00 p.m. on each day that the
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<PAGE> 134
NYSE is open will not be reflected in a Fund's net asset value unless the
Adviser or Subadviser, under the supervision of the Board of Trustees,
determines that the particular event would materially affect net asset value. As
a result, a Fund's net asset value may be significantly affected by such trading
on days when a shareholder has no access to the Funds.
GOVERNMENT II FUND NET ASSET VALUATION
U.S. Government securities are traded in the over-the-counter market and
are valued at the last available bid price. Such valuations are based on
quotations of one of more dealers that make markets in the securities as
obtained from such dealers or from a pricing service. Options and interest rate
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sales or settlement price as of the close of such exchanges, or,
if no sales are reported, at the mean between the last reported bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees. Such
valuations and procedures will be reviewed periodically by the Trustees.
GENERAL
The assets belonging to the Class A shares and the Class B shares of each
Fund will be invested together in a single portfolio. The net asset value of
each class will be determined separately by subtracting the expenses and
liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the SEC.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Funds'
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of each Fund are sold in a continuous offering and may be purchased
on any business day through PFS Investments.
MULTIPLE PRICING SYSTEM
Each Fund issues two classes of shares: Class A shares are subject to an
initial sales charge and Class B shares are sold at net asset value and are
subject to a contingent deferred sales charge. The two classes of shares each
represent interests in the same Fund's portfolio of investments, have the same
rights and are identical in all respects, except that Class B shares bear the
expenses of the deferred sales arrangements, distribution fees, and any expenses
(including any incremental transfer agency costs) resulting from such sales
arrangements, and have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the distribution fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times PFS Investments may be deemed to be an
underwriter for purposes of the 1933 Act.
INVESTMENTS BY MAIL
A Shareholder Investment Account may be opened by completing the
application included in the Prospectus and forwarding the application, through
PFS Investments to the Transfer Agent at 3100 Breckinridge Boulevard, Bldg. 200,
Duluth, Georgia 30199-0062. The account is opened only upon acceptance of the
application by the Transfer Agent. The minimum initial investment of $250 or
more in the form of a check payable to the Trust, must accompany the
application. This minimum may be waived by the Distributor for plans involving
continuing investments. Subsequent investments of $25 or more may be mailed
directly to the Transfer Agent. All such investments are made at the public
offering price of the Fund's shares next computed
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<PAGE> 135
following receipt of payment by the Transfer Agent. Confirmations of the opening
of an account and of all subsequent transactions in the account are forwarded by
the Transfer Agent to the shareholder.
In processing applications and investments, the Transfer Agent acts as
agent for the investor and for PFS Investments and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If the Transfer
Agent ceases to act as such, a successor company named by the Trust will act in
the same capacity so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales load reflected in the sales charge table as shown in the
Prospectus applies to purchases of Class A shares of Emerging Growth II Fund's,
International Equity II Fund's, Growth II Fund's and Growth and Income II Fund's
shares where the aggregate investment is $50,000 or more and to purchases of
Government II Fund's shares where the aggregate investment is $100,000 or more.
An aggregate investment includes all shares of all of the above Funds and shares
of other Common Sense Funds (except Common Sense Money Market Fund) previously
purchased and still owned, plus the shares being purchased. The current offering
price is used to determine the value of all such shares. If, for example, any
purchaser has previously purchased and still holds shares of one of the above
Funds having a current value of $25,000, and that person purchases $30,000 of
additional shares of Growth II Fund, Growth and Income II Fund, International
Equity II Fund or Emerging Growth II Fund, the sales charge applicable to the
$30,000 purchase would be 4.75% of the offering price. The same reduction is
applicable to purchases under a Letter of Intent as described in the next
paragraph. PFS Investments must notify the Distributor at the time an order is
placed for a purchase which would qualify for the reduced charge on the basis of
previous purchases. Similar notification must be given in writing when such an
order is placed by mail. The reduced sales charge will not be applied if such
notification is not furnished at the time of the order. The reduced sales charge
will also not be applied unless the records of the Distributor or the Transfer
Agent confirm the investor's representations concerning his or her holdings.
LETTER OF INTENT
A Letter of Intent applies to purchases of Class A shares of all Funds.
When an investor submits a Letter of Intent to attain an investment goal within
a 13-month period, the Transfer Agent escrows shares totaling five percent of
the dollar amount of the Letter of Intent in the name of the investor. The
Letter of Intent does not obligate the investor to purchase the indicated
amount. In the event the Letter of Intent goal is not achieved within the
13-month period, the investor is required to pay the difference between the
sales charge otherwise applicable to the purchases made during this period and
the sales charge actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrow
shares to obtain such difference. If the goal is exceeded in an amount which
qualifies for a lower sales charge, a price adjustment is made at the end of the
13-month period by refunding to the investor the amount of excess sales
commissions, if any, paid during the 13-month period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE ("CDSC")
The CDSC is waived on redemptions of Class B shares in the circumstances
described below:
(a) Redemption Upon Disability or Death
The Trust may waive the CDSC on redemptions following the death or
disability of a Class B shareholder. An individual will be considered disabled
for this purpose if he or she meets the definition thereof in Section 72(m)(7)
of the Code, which in pertinent part defines a person as disabled if such person
"is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or to be of long-continued and indefinite duration." While the
Trust does not specifically adopt the balance of the Code's definition which
pertains to furnishing the Secretary of Treasury with such proof as he or she
may require, the Distributor will require satisfactory proof of death or
disability before it determines to waive the CDSC.
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<PAGE> 136
In cases of disability or death, the CDSC may be waived where the decedent
or disabled person is either an individual shareholder or owns the shares as a
joint tenant with right of survivorship or is the beneficial owner of a
custodial or fiduciary account, and where the redemption is made within one year
of the death or initial determination of disability. This waiver of the CDSC
applies to a total or partial redemption, but only to redemptions of shares held
at the time of the death or initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement Plans
The Trust may waive the CDSC when a total or partial redemption is made in
connection with certain distributions from Retirement Plans. The charge may be
waived upon the tax-free rollover or transfer of assets to another Retirement
Plan invested in one or more of the Funds; in such event, as described below,
the Fund will "tack" the period for which the original shares were held on to
the holding period of the shares acquired in the transfer or rollover for
purposes of determining what, if any, CDSC is applicable in the event that such
acquired shares are redeemed following the transfer or rollover. The charge also
may be waived on any redemption which results from the return of an excess
contribution pursuant to Section 408(d)(4) or (5) of the Code, the return of
excess deferral amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from
the death or disability of the employee (see Code Section 72(m)(7) and
72(t)(2)(A)(ii)). In addition, the charge may be waived on any minimum
distribution required to be distributed in accordance with Code Section
401(a)(9).
The Trust does not intend to waive the CDSC for any distributions from IRAs
or other Retirement Plans not specifically described above.
(c) Redemption Pursuant to the Trust's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in a Fund. Under the Plan,
a dollar amount of a participating shareholder's investment in the Fund will be
redeemed systematically by the Fund on a periodic basis, and the proceeds mailed
to the shareholder. The amount to be redeemed and frequency of the systematic
withdrawals will be specified by the shareholder upon his or her election to
participate in the Plan. The CDSC may be waived on redemptions made under the
Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC may not
exceed a maximum of 12% annually of the shareholder's initial account balance.
The Trust reserves the right to change the terms and conditions of the Plan and
the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Trust reserves the right to redeem shareholder accounts with balances
of less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Trust may waive the CDSC upon such involuntary
redemption.
(e) Redemption by Adviser
The Trust may waive the CDSC when a total or partial redemption is made by
the Adviser with respect to its investments in a Fund.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment
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<PAGE> 137
therefor may be postponed for more than seven days during any period when (a)
the Exchange is closed for other than customary weekends or holidays; (b)
trading on the Exchange is restricted; (c) an emergency exists as a result of
which disposal by the Trust of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Trust to fairly
determine the value of its net assets; or (d) the SEC, by order, so permits.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Exchange Privilege" in the
Prospectus:
By use of the exchange privilege, the investor authorizes PFS Shareholder
Services (the "Transfer Agent") to act on written exchange instructions from any
person representing himself to be the investor or the agent of the investor and
believed by the Transfer Agent to be genuine. The Transfer Agent's records of
such instructions are binding.
For purposes of determining the sales charge rate previously paid on Class
A shares of a Fund, all sales charges paid on the exchanged security and on any
security previously exchanged for such security or for any of its predecessors
shall be included. If the exchanged security was acquired through reinvestment,
that security is deemed to have been sold with a sales charge rate equal to the
rate previously paid on the security on which the dividend or distribution was
paid. If a shareholder exchanges less than all of his securities, the security
upon which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of a
Fund involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in a fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the Funds involved in the request are priced will be processed on the
next business day in the manner described above.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Growth II Fund, the International Equity II Fund and the Emerging
Growth II Fund distribute dividends and capital gains annually; the Growth and
Income II Fund declares and pays dividends quarterly. The Government II Fund
declares dividends each business day and distributes monthly substantially all
of its net investment income to shareholders. The daily dividends of the
Government II Fund are a fixed amount determined for each class at least
monthly. The per share dividends on Class B shares of each Fund will be lower
than the per share dividends on Class A shares as a result of the distribution
fees and incremental transfer agency fees, if any, applicable to the Class B
shares. Each Fund intends similarly to distribute to shareholders any taxable
net realized capital gains. Taxable net realized capital gains are the excess,
if any, of the Fund's total profits on the sale of securities during the year
over its total losses on the sale of securities, including capital losses
carried forward from prior years in accordance with the tax laws. Such capital
gains, if any, are distributed at least once a year. All income dividends and
capital gains distributions are reinvested in shares of a Fund at net asset
value without sales charge on the record date, except that any shareholder may
otherwise instruct the shareholder service agent in writing and receive cash.
Shareholders are informed as to the sources of distributions at the time of
payment.
Each Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders and meet certain diversification and other requirements. By
qualifying as a regulated investment company, the Fund is not subject to federal
income taxes to the extent it distributes its taxable net investment income and
taxable net realized capital gains. If for any taxable year the Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders). Each Fund expects to be treated as a separate
entity for purposes of determining federal tax treatment.
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<PAGE> 138
Each Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least 98% of its
ordinary net investment income for the twelve months ended December 31, plus 98%
of its capital gains net income for the twelve months ended October 31 of such
calendar year. Each Fund intends to distribute sufficient amounts to avoid
liability for the excise tax.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income paid by Emerging Growth II Fund,
International Equity II Fund, Growth II Fund and Growth and Income II Fund
qualify for the 70% dividends received deduction for corporations. To qualify
for the dividends received deduction, a corporate shareholder must hold the
shares on which the dividend is paid for more than 45 days.
Dividends and distributions declared and payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year
are considered taxable income to shareholders on December 31 even though paid in
the next year.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such dividends and distributions from short-term capital gains are not
eligible for the dividends received deduction referred to above. Any loss on the
sale of Fund shares held for less than six months is treated as a long-term
capital loss to the extent of any long-term capital gain distribution paid on
such shares, subject to any exception that may be provided by IRS regulations
for losses incurred under certain systematic withdrawal plans. All dividends and
distributions are taxable to the shareholder whether or not reinvested in
shares. Shareholders are notified annually by the Fund as to the federal tax
status of dividends and distributions paid by the Fund.
If shares of each Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under an applicable
treaty. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING. The Trust is required to withhold and remit to the
United States Treasury 31% of (i) reportable taxable dividends and distributions
and (ii) the proceeds of any redemptions of Trust shares with respect to any
shareholder who is not exempt from withholding and who fails to furnish the
Trust with a correct taxpayer identification number, who fails to report fully
dividend or interest income or who fails to certify to the Trust that he has
provided a correct taxpayer identification number and that he is not subject to
withholding. (An individual's taxpayer identification number is his or her
social security number.) The 31% "Back-up withholding tax" is not an additional
tax and may be credited against a taxpayer's regular federal income tax
liability.
The Code includes special rules applicable to certain listed options
(excluding equity options as defined in the Code), futures contracts, and
options on futures contracts which the Funds may write, purchase or sell. Such
options and contracts are classified as Section 1256 contracts under the Code.
The character of gain or loss resulting from the sale, disposition, closing out,
expiration or other termination of Section 1256 contracts is generally treated
as long-term capital gain or loss to the extent of 60 percent thereof and
short-term capital gain or loss to the extent of 40 percent thereof ("60/40 gain
or loss"). Such contracts, when held by the Fund at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for federal income tax purposes ("marked-to-market").
Over-the-counter options are not classified as Section 1256 contracts and are
not subject to the marked-to-market rule or to 60/40 gain or loss treatment.
35
<PAGE> 139
Any gains or losses recognized by the Government II Fund from transactions in
over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by the Government II Fund are exercised, the gain or loss
realized on the sale of the underlying securities may be either short-term or
long-term, depending on the holding period of the securities. In determining the
amount of gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.
Certain of the Funds' transactions in options, futures contracts, and
options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle in which at least one (but not
all) of the positions are Section 1256 contracts is a "mixed straddle" under the
Code if certain conditions are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
OTHER INFORMATION
PERFORMANCE INFORMATION
The overall total return for the Growth II Fund, the Growth and Income II
Fund and the Government II Fund (computed in the manner described in the
Prospectus) for Class A shares for the period from inception (May 3, 1994)
through April 30, 1995 was 1.52%, 1.50% and -0.58%, respectively. The overall
total return for the Growth II Fund, the Growth and Income II Fund and the
Government II Fund (computed in the manner described in the Prospectus) for
Class B shares for the period from inception (May 3, 1994) through April 30,
1995 was 1.69%, 1.69% and -0.32%, respectively. The overall total return for
Emerging Growth II Fund and International Equity II Fund (computed in the manner
described in the Prospectus) for Class A shares for the period from inception
(March 17, 1995) through April 30, 1995 was -0.08% and 1.28%, respectively. The
overall total return for Emerging Growth II Fund and International Equity Fund
(computed in the manner described in the Prospectus) for Class B shares for the
period from inception (March 17, 1995) through April 30, 1995 was -0.16% and
1.20%, respectively. These results are based on historical earnings and asset
value fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objectives
and policies as well as the risks incurred in the Fund's investment practices.
The Government II Fund's annualized current yield (subsidized) for Class A
shares and Class B shares for the 30-day period ending April 30, 1995 was 4.77%
and 4.33%, respectively. The Government II Fund's annualized current yield
(non-subsidized) for Class A shares and Class B shares for the 30 day period
ending April 30, 1995 was 4.13% and 3.58%, respectively. The yield for Class A
and Class B shares is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield and total return for the Government II Fund are computed separately
for Class A and Class B shares.
36
<PAGE> 140
The Funds may illustrate in advertising materials the use of a Payroll
Deduction Plan as a convenient way for business owners to help their employees
set up either IRA or voluntary mutual fund accounts. The Funds may illustrate in
advertising materials retirement planning through employee contributions and/or
salary reductions. Such advertising material will illustrate that employees may
have the opportunity to save for retirement and reduce taxes by electing to
defer a portion of their salary into a special mutual fund IRA account. The
Funds may illustrate in advertising materials that Uniform Gift to Minors Act
accounts may be used as a vehicle for saving for a child's financial future.
Such illustrations will include statements to the effect that upon reaching the
age of majority, such custodial accounts become the child's property.
SHAREHOLDER SERVICES
UNIFORM GIFTS TO MINORS ACT. The Trust recognizes the importance to a child
of establishing a savings and investment plan early in life for education and
other purposes when the child becomes older. The advantages of regular
investment with interest or earnings compounding over a number of years are
great. In addition, taxes on these earnings are assessed against the income of
the child rather than the donor, usually at a lower bracket.
Investors wishing to establish a UGMA account should call the Trust for an
application. Individuals desiring to open an account under UGMA are also advised
to consult with a tax adviser before establishing the account.
INDIVIDUAL RETIREMENT ACCOUNT. Any individual who has compensation or
earned income from employment or self-employment and who is under age 70 1/2 may
establish an IRA. The limitation on the maximum annual contribution to an IRA is
the lesser of 100% of compensation or $2,000. An IRA may also be established for
a spouse who has no compensation (or who elects to be treated as having no
compensation), and the limitation on the maximum annual contributions to the two
IRAs is the lesser of 100% of compensation or $2,250.
Under the Tax Reform Act of 1986, whether contributions to an IRA are
deductible for federal income tax purposes depends on whether an individual (or
his/her spouse) is a participant in an employer-sponsored plan and on the
adjusted gross income of the individual.
In the case of an individual who is a participant in an employer-sponsored
plan, no deduction is available for IRA contributions if his or her adjusted
gross income reaches certain levels ($35,000 for a single individual, $50,000
for married individuals filing jointly and $10,000 for married individuals
filing separately) and the deduction is phased out ratably if his or her
adjusted gross income falls within certain ranges ($25,000 - $35,000 for a
single individual, $40,000 - $50,000 for married individuals filing jointly and
$0 - $10,000 for married individuals filing separately). IRA contributions, up
to the annual limit, remain fully deductible for all single individuals with
less than $25,000 of annual adjusted gross income and all married individuals
with less than $40,000 of annual adjusted gross income. Individuals who are
disqualified from making deductible IRA contributions can make non-deductible
contributions to their IRAs, subject to the same limitation on maximum annual
contribution discussed above.
In addition, any individual, regardless of age, may establish a rollover
IRA to receive an eligible rollover distribution from an employer-sponsored
plan.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP) AND SALARY REDUCTION SIMPLIFIED
EMPLOYEE PENSION PLAN (SARSEP). A SEP/SARSEP is a means for an employer to
provide retirement contributions to IRAs for all employees, without the
complicated reporting and record keeping involved in a qualified plan. Employees
covered by a SEP/SARSEP can use the same IRA to receive their own allowable IRA
contribution.
SECTION 403(B)(7) PLAN. Employees of certain exempt organizations and
schools can have a portion of their compensation set aside, and income taxes
attributable to such portion deferred, in a Section 403(b)(7) plan. Teachers,
school administrators, ministers, employees of hospitals, libraries, community
chests, funds, foundations, and many others may be eligible. The employer must
be an organization described in Section 501(c)(3) of the Internal Revenue Code
and must be exempt from tax under Section 501(a) of the Code. In addition, any
employee of most public educational institutions is eligible if his employer is
a state or a
37
<PAGE> 141
political subdivision of a state, or any agency or instrumentality of either.
The employee is not taxed on the amount set aside or the earnings thereon until
the funds are withdrawn, normally at retirement.
CUSTODY OF ASSETS
All securities owned by the Trust and all cash, including proceeds from the
sale of shares of the Trust and of securities in the Trust's investment
portfolio, are held by State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, as Custodian.
SHAREHOLDER REPORTS
Semi-annual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants whose selection is
ratified annually by shareholders or the Trustees.
INDEPENDENT AUDITORS
Ernst & Young LLP, 1221 McKinney, Suite 2400, Houston, Texas 77010, the
independent auditors for the Trust, perform annual examinations of the Trust's
financial statements.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY
Under the laws of certain states, including Massachusetts, where the Trust
was organized, and Texas, where the Trust's principal office is located,
shareholders of a Massachusetts business trust may, under certain circumstances,
be held personally liable as partners for the obligations of the Trust. However,
the risk of a shareholder incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. The Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Trust or Trustees. The
Declaration of Trust provides for indemnification out of Trust property to any
shareholder held personally liable for the obligations of the Trust and also
provides for the Trust to reimburse such shareholder for all legal and other
expenses reasonably incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees or Officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust will
provide indemnification to its Trustees and Officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
38
<PAGE> 142
FINANCIAL STATEMENTS
The attached financial statements, in the form of the Annual or Semi-Annual
Report to Shareholders including the related report of Independent Auditors on
such financial statements are hereby included in the Statement of Additional
Information.
GROWTH II FUND
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1994 1995
----------- ---------
<S> <C> <C>
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding).................... $11.89 $12.69
Offering price per share (100/94.5 of per share net asset
value)......................................................... $12.58 $13.43
GROWTH AND INCOME II FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding).................... $11.71 $12.53
Offering price per share (100/94.5 of per share net asset
value)......................................................... $12.39 $13.26
GOVERNMENT II FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding).................... $11.54 $11.87
Offering price per share (100/95.25 of per share)
(Net asset value)............................................. $12.12 $12.46
EMERGING GROWTH II FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding).................... -- $12.40
Offering price per share (100/94.5 of per share net asset
value)......................................................... -- $13.12
INTERNATIONAL EQUITY II FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding).................... -- $12.69
Offering price per share (100/94.5 of per share)
(Net asset value)............................................. -- $13.43
</TABLE>
The foregoing information was not available for the International Equity II
Fund and the Emerging Growth II Fund for the period ending October 31, 1994
since operations commenced on February 21, 1995.
39
<PAGE> 143
APPENDIX
(Commercial Paper, Bond and Other Short- and Long-Term Ratings)
Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's"), Fitch Investors Service, Inc. ("Fitch"),
Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc. ("IBCA").
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily well established industries,
high rates of return of funds employed, conservative well established
industries, high rates of return of funds employed, conservative capitalization
structures with moderate reliance on debt and ample asset protection, broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a strong
capacity for repayment of short-term promissory obligations. This ordinarily
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest and, in the majority of instances, differ only in small
degrees from issues rated AAA.
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds rated Aa by Moody's are judged by Moody's 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 Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2
and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in the higher
40
<PAGE> 144
end of this rating category, the modifier 2 indicates a mid-range ranking, and
the modifier 3 indicates a ranking in the lower end of the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds
rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Rating and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.
41
<PAGE> 145
-------------------------------------------------------------------------------
Growth Fund Statement of Net Assets
-------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 89.4%
CONSUMER DISTRIBUTION 5.9%
6,000 Arbor Drugs, Inc. ............................................................ $ 127,500
11,000 Big B, Inc. .................................................................. 136,125
*14,000 Burlington Coat Factory Corp. ................................................ 182,000
52,000 Claire's Stores, Inc. ........................................................ 604,500
175,000 Dayton Hudson Corp. .......................................................... 13,562,500
250,000 Dollar General Corp. ......................................................... 7,250,000
*350,000 Federated Department Stores, Inc. ............................................ 7,262,500
26,000 Fingerhut Companies, Inc...................................................... 422,500
*16,000 General Nutrition Companies, Inc. ............................................ 408,000
100,000 Home Depot, Inc. ............................................................. 4,550,000
21,000 Interface, Inc., Class A ..................................................... 238,875
350,000 May Department Stores Co. .................................................... 13,168,750
4,000 Medicine Shoppe International, Inc. .......................................... 95,000
*12,900 Meyer (Fred), Inc. ........................................................... 416,025
*35,000 Musicland Stores Corp. ....................................................... 476,875
10,000 New England Business Services, Inc. .......................................... 187,500
300,000 Nordstrom, Inc. .............................................................. 14,775,000
100,000 Penney (J.C.) Co., Inc. ...................................................... 5,062,500
250,000 Premark International, Inc. .................................................. 11,187,500
*5,000 Rex Stores Corp. ............................................................. 95,000
*5,000 Rykoff-Sexton, Inc. .......................................................... 100,625
*19,000 Sunglass Hut International, Inc. ............................................. 792,063
*39,000 Tech Data Corp. .............................................................. 770,250
*350,000 Toys R Us, Inc. .............................................................. 13,475,000
250,000 Walgreens Co. ................................................................ 10,375,000
975,000 Wal-Mart Stores, Inc. ........................................................ 22,912,500
--------------
TOTAL CONSUMER DISTRIBUTION................................................. 128,634,088
--------------
CONSUMER DURABLES 1.9%
*9,800 Brilliance China Automobile Holdings, Ltd. ................................... 118,825
*39,500 Castle & Cook Homes, Inc. .................................................... 617,187
*28,000 Clayton Homes, Inc. .......................................................... 507,500
300,000 Daimler Benz, AG, ADS......................................................... 15,262,500
331,000 Echlin, Inc. ................................................................. 10,178,250
380,000 Ford Motor Co. ............................................................... 11,210,000
120,000 Harley Davidson, Inc. ........................................................ 3,360,000
5,000 Harman International Industries, Inc. ........................................ 178,750
24,000 Lennar Corp. ................................................................. 363,000
25,000 Pulte Corp. .................................................................. 515,625
--------------
TOTAL CONSUMER DURABLES..................................................... 42,311,637
--------------
CONSUMER NON-DURABLES 9.0%
750,000 Archer Daniels Midland Co. ................................................... 21,468,750
7,000 Armor All Products Corp. ..................................................... 158,375
175,000 Avon Products, Inc. .......................................................... 11,068,750
200,000 Campbell Soup Co. ............................................................ 8,250,000
200,000 Coca-Cola Co. ................................................................ 10,050,000
187,500 Colgate Palmolive Co. ........................................................ 11,437,500
350,000 ConAgra, Inc. ................................................................ 10,893,750
</TABLE>
F-1
<PAGE> 146
-------------------------------------------------------------------------------
Growth Fund Statement of Net Assets, continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER NON-DURABLES - continued
150,000 CPC International, Inc. ...................................................... $ 8,025,000
*950,000 Dr Pepper/Seven-Up Companies, Inc. ........................................... 24,106,250
100,000 Duracell International, Inc. ................................................. 4,312,500
225,000 Heinz (H.J.) Co. ............................................................. 8,353,125
5,000 Hormel (George A.) & Co. ..................................................... 123,125
225,000 IBP, Inc. .................................................................... 7,678,125
200,000 Kellogg Co. .................................................................. 11,750,000
175,000 Nike, Inc., Class B........................................................... 10,653,125
*19,000 Paragon Trade Brands, Inc. ................................................... 456,000
425,000 Procter & Gamble Co. ......................................................... 26,562,500
125,000 Quaker Oats Co. .............................................................. 9,359,375
160,000 Ralston-Purina Group.......................................................... 6,800,000
19,000 Universal Foods Corp. ........................................................ 572,375
179,200 Whitman Corp. ................................................................ 2,956,800
--------------
TOTAL CONSUMER NON-DURABLES................................................. 195,035,425
--------------
CONSUMER SERVICES 5.5%
*5,200 American Medical Response..................................................... 141,050
25,000 Bowne & Co., Inc. ............................................................ 400,000
160,000 Capital Cities ABC, Inc. ..................................................... 13,300,000
152,500 CBS, Inc. .................................................................... 9,130,937
*17,240 Chris Craft Industries, Inc. ................................................. 650,810
7,000 Club Med, Inc. ............................................................... 156,625
*74,000 Comcast UK Partners, Ltd. .................................................... 1,480,000
185,000 Dun & Bradstreet Corp. ....................................................... 10,845,625
19,000 Equifax, Inc. ................................................................ 553,375
*775,000 Host Marriott Corp. .......................................................... 8,234,375
*5,000 Jones Intercable, Inc., Class A .............................................. 68,750
*33,000 Lone Star Steakhouse Saloon .................................................. 845,625
500,000 Marriott International, Inc. ................................................. 14,625,000
11,000 Ogden Corp. .................................................................. 236,500
75,000 Omnicom Group, Inc. .......................................................... 3,993,750
*200,000 Outback Steakhouse, Inc. ..................................................... 6,175,000
19,500 Sbarro, Inc. ................................................................. 485,063
10,000 Service Corp. International................................................... 266,250
61,000 Spelling Entertainment Group, Inc. ........................................... 732,000
*7,000 SPS Transactions Services..................................................... 379,750
600,000 Tele-Communications, Inc., Class A............................................ 13,575,000
400,000 Time Warner, Inc. ............................................................ 14,200,000
250,000 Tribune Co. .................................................................. 13,156,250
*70,000 Wolters Kluwer, NV, ADR....................................................... 5,057,500
--------------
TOTAL CONSUMER SERVICES..................................................... 118,689,235
--------------
ENERGY 7.9%
*5,000 Addington Resources, Inc. .................................................... 53,750
235,000 Amoco Corp. .................................................................. 14,893,125
425,000 Apache Corp. ................................................................. 11,953,125
175,000 British Petroleum Co., PLC, ADR............................................... 14,875,000
375,000 Chevron Corp. ................................................................ 16,875,000
330,000 Coastal Corp. ................................................................ 9,405,000
15,000 El Paso Natural Gas Co. ...................................................... 466,875
</TABLE>
F-2
<PAGE> 147
-------------------------------------------------------------------------------
Growth Fund Statement of Net Assets, continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY - continued
300,000 Exxon Corp. .................................................................. $ 18,862,500
250,000 Halliburton Co. .............................................................. 9,250,000
165,000 Mobil Corp. .................................................................. 14,190,000
8,000 New Jersey Resources Corp. ................................................... 174,000
8,000 Nicor, Inc. .................................................................. 195,000
800,000 Occidental Petroleum Corp. ................................................... 17,500,000
*17,000 Offshore Logistics, Inc. ..................................................... 223,125
22,000 Pacific Enterprises........................................................... 473,000
325,000 Repsol, S.A., ADR............................................................. 10,562,500
125,000 Royal Dutch Petroleum Co. .................................................... 14,562,500
150,100 Schlumberger, Ltd. ........................................................... 8,818,375
7,000 Southwestern Energy Co. ...................................................... 120,750
*150,000 Western Atlas, Inc. .......................................................... 6,900,000
*13,400 Wicor, Inc. .................................................................. 383,575
--------------
TOTAL ENERGY................................................................ 170,737,200
--------------
FINANCE 9.1%
17,000 Alex Brown, Inc............................................................... 469,625
*2,040 Alleghany Corp. .............................................................. 296,820
17,000 AMBAC, Inc. .................................................................. 595,000
750,000 American Express Co. ......................................................... 23,062,500
225,100 American International Group, Inc. ........................................... 21,074,987
7,000 Anchor Bancorp, Inc. ......................................................... 103,687
4,000 Argonaut Group, Inc. ......................................................... 113,000
12,000 Bankers Life Holding Corp. ................................................... 231,000
13,000 Banponce Corp. ............................................................... 396,500
300,000 Baybanks, Inc. ............................................................... 17,325,000
9,000 Capital Re Corp. ............................................................. 198,000
300,000 Citicorp ..................................................................... 14,325,000
5,000 CMAC Investment Corp. ........................................................ 137,500
*7,000 Commercial Federal............................................................ 148,750
12,500 Compass Bancshares, Inc. ..................................................... 278,125
25,000 Development Bank Singapore, ADR............................................... 1,056,250
120,000 Federal Home Loan Mortgage Corp. ............................................. 6,540,000
170,000 Federal National Mortgage Association......................................... 12,920,000
8,000 Fidelity National Financial, Inc. ............................................ 91,000
4,000 First American Financial Corp. ............................................... 74,500
400,000 First Bank System, Inc. ...................................................... 14,900,000
24,000 Firstfed Michigan Corp. ...................................................... 498,000
6,000 First Financial Corp. of Wisconsin............................................ 84,000
150,000 First Interstate Bancorp. .................................................... 12,000,000
9,000 Foothill Group, Inc., Class A................................................. 135,000
8,000 Fremont General Corp. ........................................................ 197,000
350,000 Great Western Financial Corp. ................................................ 6,256,250
70,000 Hibernia Corp., Class A ...................................................... 560,000
12,000 Integra Financial Corp. ...................................................... 520,500
10,000 Inter-Regional Financial Group, Inc. ......................................... 235,000
123,500 MBNA Corp. ................................................................... 3,303,625
17,000 Mercury General Corp. ........................................................ 510,000
23,000 MGIC Investment Corp. ........................................................ 721,625
</TABLE>
F-3
<PAGE> 148
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Growth Fund Statement of Net Assets, continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE - continued
600,000 Midlantic Corp. .............................................................. $ 16,800,000
200,000 NationsBank Corp. ............................................................ 9,900,000
12,250 Orion Capital Corp. .......................................................... 375,156
24,000 PaineWebber Group, Inc. ...................................................... 366,000
19,000 Regions Financial Corp. ...................................................... 602,063
33,000 Southtrust Corp. ............................................................. 633,188
14,300 Star Banc Corp. .............................................................. 564,850
105,000 St. Paul Companies, Inc. ..................................................... 4,580,625
850,000 West One Bancorp. ............................................................ 23,375,000
*7,500 White River Corp. ............................................................ 243,750
6,000 Zenith National Insurance Corp. .............................................. 141,750
--------------
TOTAL FINANCE............................................................... 196,940,626
--------------
HEALTH CARE 12.3%
680,000 Abbott Laboratories........................................................... 21,080,000
100,000 American Home Products Corp. ................................................. 6,350,000
*180,000 Amgen, Inc. .................................................................. 10,035,000
400,000 Baxter International, Inc. ................................................... 10,400,000
100,000 Bristol Myers Squibb Co. ..................................................... 5,837,500
300,000 Columbia/HCA Healthcare Corp. ................................................ 12,487,500
*35,000 Datascope Corp. .............................................................. 612,500
*125,000 Forest Laboratories, Inc. .................................................... 5,750,000
*350,000 Genentech, Inc. .............................................................. 17,762,500
*18,000 Genetic Therapy, Inc. ........................................................ 126,000
*57,000 Gilead Sciences, Inc. ........................................................ 484,500
*650,000 Healthcare & Retirement Corp. ................................................ 17,468,750
*600,000 Humana, Inc. ................................................................. 14,625,000
375,000 Johnson & Johnson............................................................. 20,484,375
300,000 Lilly (Eli) & Co. ............................................................ 18,600,000
200,000 Mallinckrodt Group, Inc. ..................................................... 6,075,000
325,000 Merck & Co., Inc. ............................................................ 11,618,750
347,300 Mylan Labs, Inc. ............................................................. 9,724,400
*32,000 National Intergroup........................................................... 532,000
*13,000 Pacificare Health System, Inc., Class A....................................... 968,500
240,000 Pfizer, Inc. ................................................................. 17,790,000
*19,000 Quantum Health Resources, Inc. ............................................... 698,250
162,500 Schering-Plough Corp. ........................................................ 11,578,125
*26,000 Thermo Cardiosystems.......................................................... 458,250
765,000 Upjohn Co. ................................................................... 25,245,000
*25,000 Vivra, Inc. .................................................................. 706,250
225,000 Warner-Lambert Co. ........................................................... 17,156,250
125,000 Watson Pharmaceuticals, Inc. ................................................. 3,289,063
--------------
TOTAL HEALTH CARE........................................................... 267,943,463
--------------
PRODUCER MANUFACTURING 7.9%
*200,000 Akzo, N.V., ADR .............................................................. 12,525,000
400,000 Allied Signal, Inc. .......................................................... 13,850,000
*100,000 BBC Brown Boveri Ltd., ADR ................................................... 8,550,000
490,000 Browning-Ferris Industries, Inc. ............................................. 15,557,500
300,000 Caterpillar, Inc. ............................................................ 17,925,000
</TABLE>
F-4
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Growth Fund Statement of Net Assets, continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING - continued
11,000 Dames & Moore,Inc. ........................................................... $ 162,250
13,000 Danaher Corp. ................................................................ 638,625
125,000 Deere & Co. .................................................................. 8,968,750
225,000 General Electric Co. ......................................................... 10,996,875
4,000 Granite Construction, Inc. ................................................... 87,500
200,000 Illinois Tool Works, Inc. .................................................... 8,975,000
*50,000 Manville Corp. ............................................................... 450,000
200,000 Minnesota Mining & Manufacturing Co. ......................................... 11,075,000
*12,000 Mueller Industries, Inc. ..................................................... 379,500
14,000 Ogden Projects, Inc. ......................................................... 245,000
*8,000 PEC Israel Economic .......................................................... 232,000
700,000 Philip N.V., ADR ............................................................. 22,925,000
8,000 Ruddick Corp. ................................................................ 156,000
6,000 Saint Joe Paper Co. .......................................................... 340,500
*61,700 SKF AB, ADR................................................................... 1,118,313
*450,030 Thermo Fibertek, Inc. ........................................................ 6,919,211
*17,000 Thermo Instrument System, Inc. ............................................... 537,625
100,000 TRW, Inc. .................................................................... 7,125,000
6,000 Watts Industries, Inc., Class A .............................................. 144,000
750,000 WMX Technologies, Inc. ....................................................... 22,031,250
--------------
TOTAL PRODUCER MANUFACTURING................................................ 171,914,899
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 6.6%
50,000 Aluminum Co. of America....................................................... 4,262,500
7,400 Amcast Industrial Corp. ...................................................... 148,925
250,000 Dow Chemical Co. ............................................................. 18,375,000
200,000 DuPont (E.I.) de Nemours & Co., Inc. ......................................... 11,925,000
68,100 Eastman Chemical Co. ......................................................... 3,677,400
31,000 Ecolab, Inc. ................................................................. 662,625
*100,000 Georgia Gulf Corp. ........................................................... 3,875,000
140,000 Georgia Pacific Corp. ........................................................ 10,342,500
19,500 Hanna (M.A.) Co. ............................................................. 499,688
200,000 International Paper Co. ...................................................... 14,900,000
28,000 Justin Industries, Inc. ...................................................... 364,000
11,000 Mineral Technologies, Inc. ................................................... 327,250
250,000 Monsanto Co. ................................................................. 19,031,250
275,000 Newmont Mining Corp. ......................................................... 11,378,125
*55,000 Owens-Illinois, Inc. ......................................................... 618,750
100,000 Phelps Dodge Corp. ........................................................... 6,137,500
500,000 Praxair, Inc. ................................................................ 11,562,500
*105,000 Royal Oak Mines, Inc. ........................................................ 426,563
150,000 Scott Paper Co. .............................................................. 9,918,750
*8,000 Sealed Air Corp. ............................................................. 273,000
400,000 Sherwin Williams Co. ......................................................... 13,050,000
21,000 Vigoro Corp. ................................................................. 645,750
6,333 Wausau Paper Mills Co. ....................................................... 145,659
37,500 Worthington Industries, Inc. ................................................. 834,375
--------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES................................... 143,382,110
--------------
</TABLE>
F-5
<PAGE> 150
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Growth Fund Statement of Net Assets, continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 19.1%
*300,000 3Com Corp. $ 12,075,000
250,000 Adobe Systems, Inc. .......................................................... 9,000,000
*225,000 Analog Devices, Inc. ......................................................... 8,043,750
*550,000 Applied Materials, Inc. ...................................................... 28,600,000
*225,000 Cabletron System, Inc. ....................................................... 11,306,250
*138,900 Chipcom Corp. ................................................................ 8,368,725
*500,000 Cisco System, Inc. ........................................................... 15,062,500
*350,000 Compaq Computer Corp. ........................................................ 14,043,750
*368,500 Compuware Corp. .............................................................. 14,417,562
*650,000 DSC Communications Corp. ..................................................... 19,987,500
200,000 Ericsson (L.M.), ADR, Class B................................................. 12,187,500
*650,000 General Instruments Corp. .................................................... 21,775,000
150,000 Hewlett-Packard Co. .......................................................... 14,662,500
*400,000 Integrated Device Technology, Inc. ........................................... 11,350,000
300,000 Intel Corp. .................................................................. 18,637,500
450,000 International Business Machines Corp. ........................................ 33,525,000
175,000 Linear Technology Corp........................................................ 8,400,000
*450,000 LSI Logic Corp. .............................................................. 19,125,000
250,000 Micron Technology, Inc. ...................................................... 9,906,250
*175,000 Microsoft Corp. .............................................................. 11,025,000
320,000 Motorola, Inc. ............................................................... 18,840,000
250,000 Northern Telecom, Ltd. ....................................................... 9,031,250
*200,000 Oracle System Corp. .......................................................... 9,200,000
200,000 Rockwell International Corp. ................................................. 6,975,000
*419,000 Silicon Graphics, Inc. ....................................................... 12,727,125
*600,000 Sun Microsystems, Inc. ....................................................... 19,650,000
*300,000 Symantec Corp. ............................................................... 5,325,000
*100,000 Synopsys, Inc. ............................................................... 4,612,500
200,000 United Technologies Corp. .................................................... 12,600,000
125,000 Xerox Corp. .................................................................. 12,812,500
--------------
TOTAL TECHNOLOGY............................................................ 413,272,162
--------------
TRANSPORTATION 0.7%
35,000 Arkansas Best Corp. .......................................................... 452,812
10,000 Arnold Industries, Inc. ...................................................... 233,125
*6,000 Chicago & North Western Holdings Corp. ....................................... 122,250
*225,000 Federal Express Corp. ........................................................ 13,668,750
--------------
TOTAL TRANSPORTATION........................................................ 14,476,937
--------------
UTILITIES 3.5%
*112,000 ALC Communications Corp. ..................................................... 4,242,000
225,000 Alltel Corp. ................................................................. 5,821,875
*3,000 Associated Communication, Class B............................................. 77,250
400,000 AT&T Corp. ................................................................... 22,000,000
450,000 Baltimore Gas & Electric Co. ................................................. 10,462,500
23,100 Boston Edison Co. ............................................................ 539,962
*7,000 C Tec Corp. .................................................................. 196,000
*327,500 Cellular Communications, Inc., Class A........................................ 17,439,375
5,300 Central Hudson Gas & Electric Co.............................................. 129,850
34,000 Delmarva Power & Light Co. ................................................... 641,750
</TABLE>
F-6
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Growth Fund Statement of Net Assets, continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - continued
21,000 DQE Inc. ..................................................................... $ 635,250
32,000 Illinova Corp. ............................................................... 632,000
11,000 Lincoln Telecommunications.................................................... 178,750
21,000 Oklahoma Gas & Electric Co. .................................................. 708,750
150,000 PT Indosat, ADS............................................................... 5,943,750
325,000 Southern Co. ................................................................. 6,418,750
14,200 Southern NE Telecommunications................................................ 502,325
--------------
TOTAL UTILITIES............................................................. 76,570,137
--------------
TOTAL COMMON STOCK (Cost $1,814,494,379).................................... 1,939,907,919
--------------
Convertible Preferred Stock 1.0%
*400,000 Cellular Communications, Inc., (Cost $13,201,982)............................. 21,300,000
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Short-Term Investments** 7.2%
---------------
<S> <C> <C>
$ 26,575,000 Repurchase Agreement with Salomon Brothers, Inc., dated 10/31/94, 4.85%,
due 11/1/94 (collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $26,578,580..................................... 26,575,000
130,000,000 United States Treasury Bills, 4.82% to 4.85%, 12/22/94 to 12/29/94............ 129,056,784
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $155,632,187)............................ 155,631,784
--------------
TOTAL INVESTMENTS (Cost $1,983,328,548) 97.6%................................. 2,116,839,703
Receivable for investments sold 8.8%.......................................... 191,288,167
Payable for investments purchased (6.3%)...................................... (136,845,593)
Other assets and liabilities, net (0.1%)...................................... (1,374,975)
--------------
NET ASSETS, equivalent to $15.31 per share 100%............................... $2,169,907,302
==============
</TABLE>
<TABLE>
<S> <C>
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited shares authorized;
141,740,595 shares outstanding.............................................................. $ 1,417,406
Capital surplus............................................................................... 1,872,033,485
Undistributed net realized gain on securities................................................. 141,726,556
Net unrealized appreciation of securities
Investments................................................................................. 133,511,155
Futures contracts........................................................................... 2,601,436
Undistributed net investment income........................................................... 18,617,264
--------------
NET ASSETS at October 31, 1994................................................................ $2,169,907,302
==============
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $151.2 million were placed as
collateral for futures contracts (Note 1B).
See Notes to Financial Statements.
F-7
<PAGE> 152
--------------------------------------------------------------------------------
Growth Fund Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED
OCTOBER 31, 1994
----------------
<S> <C>
INVESTMENT INCOME
Dividends........................................................................................ $ 33,707,723
Interest ........................................................................................ 8,414,728
------------
Investment income ............................................................................. 42,122,451
------------
EXPENSES
Advisory fees ................................................................................... 13,176,814
Shareholder service agent's fees and expenses ................................................... 8,131,604
Reports to shareholders ......................................................................... 1,039,184
Accounting services ............................................................................. 257,665
Trustees' fees and expenses ..................................................................... 144,565
Insurance ....................................................................................... 134,222
Custodian fees .................................................................................. 112,617
Registration and filing fees .................................................................... 112,330
Audit fees ...................................................................................... 24,653
Legal fees ...................................................................................... 22,882
Miscellaneous ................................................................................... 15,995
------------
Total expenses ................................................................................ 23,172,531
------------
Net investment income ......................................................................... 18,949,920
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on investments ................................................................ 141,852,104
Net realized gain on futures contracts .......................................................... 8,608,290
Net unrealized depreciation of investments during the year ...................................... (124,015,302)
Net unrealized depreciation of futures contracts during the year ................................ (1,252,038)
------------
Net realized and unrealized gain on securities ................................................ 25,193,054
------------
Increase in net assets resulting from operations............................................... $ 44,142,974
============
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31
----------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
NET ASSETS, beginning of year ................................................ $2,065,704,741 $1,647,992,300
-------------- --------------
OPERATIONS
Net investment income ....................................................... 18,949,920 15,094,471
Net realized gain on securities ............................................. 150,460,394 146,793,313
Net unrealized appreciation (depreciation) of securities during the year .... (125,267,340) 80,462,633
-------------- --------------
Increase in net assets resulting from operations ........................... 44,142,974 242,350,417
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income .................................................. (14,476,435) (12,065,041)
From net realized gain on securities ........................................ (151,147,388) (146,793,313)
In excess of book-basis net realized gain on securities (Note 1F) ........... -- (38,581,071)
-------------- --------------
Total dividends and distributions .......................................... (165,623,823) (197,439,425)
-------------- --------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold ................................................... 394,956,323 462,986,983
Proceeds from shares issued for dividends and distributions reinvested ...... 164,787,271 196,532,249
Cost of shares redeemed ..................................................... (334,060,184) (286,717,783)
-------------- --------------
Increase in net assets resulting from Fund share transactions .............. 225,683,410 372,801,449
-------------- --------------
INCREASE IN NET ASSETS ....................................................... 104,202,561 417,712,441
-------------- --------------
NET ASSETS, end of year ...................................................... $2,169,907,302 $2,065,704,741
============== ==============
FUND SHARE TRANSACTIONS
Shares sold ................................................................. 25,712,863 29,324,812
Shares issued for dividends and distributions reinvested .................... 10,798,656 12,989,568
Shares redeemed ............................................................. (21,793,543) (18,171,368)
-------------- --------------
Increase in Fund shares outstanding ........................................ 14,717,976 24,143,012
============== ==============
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE> 153
--------------------------------------------------------------------------------
Growth and Income Fund Statement of Net Assets
--------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------
Common Stock 87.3%
CONSUMER DISTRIBUTION 4.9%
<S> <C>
75,000 Dayton Hudson Corp. .............. $ 5,812,500
200,000 K Mart Corp. ..................... 3,275,000
140,000 May Department Stores Co. ........ 5,267,500
*110,000 Michael's Stores, Inc. ........... 4,461,875
75,000 Nordstrom, Inc. .................. 3,693,750
245,000 Sears, Roebuck & Co. ............. 12,127,500
-----------
TOTAL CONSUMER DISTRIBUTION ...... 34,638,125
-----------
CONSUMER DURABLES 3.2%
180,000 Black & Decker Corp. ............. 4,522,500
70,000 Daimler Benz, AG, ADS ............ 3,561,250
110,000 Dana Corp. ....................... 2,818,750
95,000 Echlin, Inc. ..................... 2,921,250
150,000 General Motors Corp. ............. 5,925,000
82,000 Stanley Works .................... 3,259,500
-----------
TOTAL CONSUMER DURABLES .......... 23,008,250
-----------
CONSUMER NON-DURABLES 7.5%
80,000 Clorox Co. ....................... 4,320,000
125,000 Coca-Cola Co. .................... 6,281,250
*100,000 Dr Pepper/Seven-Up Companies, Inc. 2,537,500
80,000 Duracell International, Inc. ..... 3,450,000
60,000 Gillette Co. ..................... 4,462,500
250,000 Liz Claiborne, Inc. .............. 5,781,250
175,000 Pet, Inc. ........................ 3,018,750
140,000 Procter & Gamble Co. ............. 8,750,000
45,000 Quaker Oats Co. .................. 3,369,375
95,000 Ralston-Purina Group ............. 4,037,500
117,000 Reebok International, Ltd. ....... 4,665,375
175,000 U.S. Shoe Corp. .................. 3,128,125
-----------
TOTAL CONSUMER NON-DURABLES ...... 53,801,625
-----------
CONSUMER SERVICES 5.1%
40,000 Capital Cities ABC, Inc. ......... 3,325,000
100,000 Dun & Bradstreet Corp. ........... 5,862,500
160,000 Gaylord Entertainment Co., Class A 3,140,000
200,000 McDonald's Corp. ................. 5,750,000
83,571 Omnicom Group, Inc. .............. 4,450,155
105,000 Readers Digest Association, Inc. . 4,606,875
35,000 Tribune Co. ...................... 1,841,875
89,000 Walt Disney Co. .................. 3,504,375
280,000 Wendy's International, Inc. ...... 4,130,000
-----------
TOTAL CONSUMER SERVICES .......... 36,610,780
-----------
</TABLE>
F-9
<PAGE> 154
--------------------------------------------------------------------------------
Growth and Income Fund Statement of Net Assets continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
--------------------------------------------------------------------------
ENERGY 9.4%
<S> <C>
90,000 Amoco Corp. ......................... $ 5,703,750
150,000 British Petroleum Co., PLC, ADR ..... 12,750,000
85,000 Exxon Corp. ......................... 5,344,375
80,000 Mobil Corp. ......................... 6,880,000
470,000 Occidental Petroleum Corp. .......... 10,281,250
400,000 Pacific Enterprises ................. 8,600,000
85,000 Royal Dutch Petroleum Co. ........... 9,902,500
150,000 Sun, Inc. ........................... 4,818,750
147,500 USX-Marathon Group .................. 2,765,625
-----------
TOTAL ENERGY ........................ 67,046,250
-----------
FINANCE 11.0%
200,000 Ahmanson (H.F.) & Co. ............... 3,825,000
75,000 American International Group, Inc. .. 7,021,875
190,000 BankAmerica Corp. ................... 8,265,000
175,000 Bank of Boston Corp. ................ 5,031,250
60,000 Baybanks, Inc. ...................... 3,465,000
90,000 Boatmens Bancshares, Inc. ........... 2,666,250
50,000 Carr Realty Corp. ................... 975,000
40,000 Charles E. Smith Residential Realty . 990,000
75,000 Crestar Financial Corp. ............. 3,093,750
130,000 Dean Witter, Discover & Co. ......... 5,021,250
30,000 Equity Residential Properties Trust . 896,250
115,000 Federal National Mortgage Association 8,740,000
140,000 First Bank System, Inc. ............. 5,215,000
40,000 First Interstate Bancorp ............ 3,200,000
100,000 Liberty Property Trust .............. 1,900,000
50,000 Manufactured Home Communities, Inc. . 931,250
75,000 MBIA, Inc. .......................... 4,059,375
135,000 NationsBank Corp. ................... 6,682,500
120,000 St. Paul Companies, Inc. ............ 5,235,000
25,000 Weingarten Realty Investors ......... 856,250
-----------
TOTAL FINANCE ....................... 78,070,000
-----------
HEALTH CARE 10.3%
200,000 Abbott Laboratories ................. 6,200,000
115,000 American Home Products Corp. ........ 7,302,500
*100,000 Amgen, Inc. ......................... 5,575,000
240,000 Baxter International, Inc. .......... 6,240,000
117,500 Bristol Myers Squibb Co. ............ 6,859,063
80,000 Columbia/HCA Healthcare Corp. ....... 3,330,000
*70,000 Genetics Instrument, Inc. ........... 2,835,000
93,400 Lilly (Eli) & Co. ................... 5,790,800
*120,000 Nellcor, Inc. ....................... 3,720,000
95,000 Pfizer, Inc. ........................ 7,041,875
100,000 Schering-Plough Corp. ............... 7,125,000
</TABLE>
F-10
<PAGE> 155
--------------------------------------------------------------------------------
Growth and Income Fund Statement of Net Assets continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
--------------------------------------------------------------------------
HEALTH CARE-continued
<S> <C>
215,000 Upjohn Co. .............................. $ 7,095,000
60,000 Warner-Lambert Co. ...................... 4,575,000
------------
TOTAL HEALTH CARE ....................... 73,689,238
------------
PRODUCER MANUFACTURING 6.9%
170,000 Allied-Signal, Inc. ..................... 5,886,250
210,000 Browning-Ferris Industries, Inc. ........ 6,667,500
125,000 Fluor Corp. ............................. 6,187,500
155,000 General Electric Co. .................... 7,575,625
85,000 Illinois Tool Works, Inc. ............... 3,814,375
225,000 Philip N.V., ADR ........................ 7,368,750
96,000 Trinova Corp. ........................... 3,360,000
*88,000 Varity Corp. ............................ 3,366,000
175,000 WMX Technologies, Inc. .................. 5,140,625
------------
TOTAL PRODUCER MANUFACTURING ............ 49,366,625
------------
RAW MATERIALS/PROCESSING INDUSTRIES 7.2%
20,500 Ball Corp. .............................. 579,125
160,000 Cabot Corp. ............................. 4,560,000
75,000 Dow Chemical Co. ........................ 5,512,500
130,000 DuPont (E.I.) de Nemours & Co., Inc. .... 7,751,250
65,000 Eastman Chemical Co. .................... 3,510,000
110,000 Ethyl Corp. ............................. 1,251,250
*110,000 Georgia Gulf Corp. ...................... 4,262,500
65,000 International Paper Co. ................. 4,842,500
44,000 Monsanto Co. ............................ 3,349,500
140,000 PPG Industries, Inc. .................... 5,705,000
93,000 Scott Paper Co. ......................... 6,149,625
120,000 Union Carbide Corp. ..................... 3,975,000
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES 51,448,250
------------
TECHNOLOGY 11.0%
100,000 Adobe Systems, Inc. ..................... 3,600,000
75,000 Boeing Co. .............................. 3,290,625
80,000 Computer Associates International, Inc. . 3,970,000
*29,800 DSC Communications Corp. ................ 916,350
60,000 Ericsson (L.M.), ADR, Class B ........... 3,656,250
85,000 First Data Corp. ........................ 4,260,625
40,000 Hewlett-Packard Co. ..................... 3,910,000
202,500 International Business Machines Corp. ... 15,086,250
45,000 Linear Technology Corp. ................. 2,160,000
110,000 Loral Corp. ............................. 4,358,750
*70,000 Microsoft Corp. ......................... 4,410,000
140,000 Motorola, Inc. .......................... 8,242,500
115,000 Northern Telecom, Ltd. .................. 4,154,375
</TABLE>
F-11
<PAGE> 156
--------------------------------------------------------------------------------
Growth and Income Fund Statement of Net Assets continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------
<S> <C>
TECHNOLOGY-continued
90,000 Rockwell International Corp. ....................... $ 3,138,750
100,000 United Technologies Corp. .......................... 6,300,000
65,000 Xerox Corp. ........................................ 6,662,500
------------
TOTAL TECHNOLOGY ................................... 78,116,975
------------
TRANSPORTATION 0.5%
60,000 Conrail, Inc. ...................................... 3,262,500
------------
UTILITIES 10.3%
110,000 AT&T Corp. ......................................... 6,050,000
75,000 Bellsouth Corp. .................................... 3,993,750
220,000 GTE Corp. .......................................... 6,765,000
*174,000 Huaneng Power International, ADR ................... 3,219,000
130,000 NYNEX Corp. ........................................ 5,102,500
540,000 Pacificorp ......................................... 9,517,500
120,000 Pacific Telesis Group .............................. 3,795,000
260,000 Peco Energy Co. .................................... 6,662,500
250,000 Public Service Enterprise Group .................... 6,562,500
360,000 Sprint Corp. ....................................... 11,745,000
100,000 Telefonos de Mexico, SA, ADR ....................... 5,512,500
140,000 Texas Utilities Co. ................................ 4,567,500
------------
TOTAL UTILITIES .................................... 73,492,750
------------
TOTAL COMMON STOCK (COST $564,994,679) ............. 622,551,368
------------
Convertible Preferred Stock 2.8%
40,000 Bethlehem Steel Corp., $3.50 ....................... 2,140,000
40,000 Citicorp, $5.375 ................................... 5,305,000
112,500 Cooper Industries, Inc., $1.60 ..................... 2,559,375
11,700 Corning Glass Works, $3.00 ......................... 598,163
15,000 Enron Corp., Series J, $10.50 ...................... 6,450,000
184,900 Westinghouse Electric Corp., $1.30 ................. 2,681,050
------------
TOTAL CONVERTIBLE PREFERRED STOCK (COST $14,105,184) 19,733,588
------------
</TABLE>
F-12
<PAGE> 157
--------------------------------------------------------------------------------
Growth and Income Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
------------------------------------------------------------------------------------------------------------------------------
Convertible Corporate Obligations 1.2%
<S> <C>
$ 111,092 Atlantic Richfield Corp., 9.00%, 9/15/97 ........................................... $ 4,160,467
3,000,000 General Instrument Corp., 5.00%, 6/15/00 ........................................... 4,470,000
-------------
Total Convertible Corporate Obligations (Cost $7,916,101) .......................... 8,630,467
-------------
Short-Term Investments 7.9%
5,685,000 Federal Home Loan Mortgage Corp., 4.69%, 11/1/94 ................................... 5,684,260
20,460,000 Repurchase Agreement with Goldman, Sachs & Co., Inc., dated 10/31/94, 4.70%,
due 11/1/94 (collateralized by U.S. Government obligations in a pooled cash account)
repurchase proceeds $20,462,671 .................................................... 20,460,000
**30,000,000 United States Treasury Bills, 4.47% to 4.82%, 11/3/94 to 12/22/94 .................. 29,819,007
-------------
Total Short-Term Investments (Cost $55,963,267) .................................... 55,963,267
-------------
TOTAL INVESTMENTS (Cost $642,979,231) 99.2% ......................................... 706,878,690
Other assets and liabilities, net 0.8% .............................................. 6,016,594
-------------
NET ASSETS, equivalent to $15.77 per share 100% .................................... $ 712,895,284
=============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited shares authorized:
45,213,652 shares outstanding ................................................................. $ 452,137
Capital surplus .................................................................................... 574,528,275
Undistributed net realized gain on securities ...................................................... 71,730,507
Net unrealized appreciation (depreciation) of securities
Investments ...................................................................................... 63,899,459
Futures contracts ................................................................................ (47,742)
Undistributed net investment income ................................................................ 2,332,648
-------------
NET ASSETS at October 31, 1994 ..................................................................... $ 712,895,284
=============
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $25.1 million were placed as
collateral for futures contracts (Note 1B).
See Notes to Financial Statements.
F-13
<PAGE> 158
--------------------------------------------------------------------------------
Growth and Income Fund Financial Statements
--------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
October 31, 1994
----------------
<S> <C>
INVESTMENT INCOME
Dividends ...................................................... $ 17,878,155
Interest ....................................................... 2,327,641
------------
Investment income ........................................... 20,205,796
------------
EXPENSES
Advisory fees .................................................. 4,599,033
Shareholder service agent's fees and expenses .................. 1,993,649
Reports to shareholders ........................................ 251,089
Accounting services ............................................ 122,188
Trustees' fees and expenses .................................... 72,703
Registration and filing fees ................................... 49,097
Custodian fees ................................................. 42,174
Audit fees ..................................................... 20,151
Legal fees ..................................................... 11,797
Miscellaneous .................................................. 50,853
------------
Total expenses ................................................. 7,212,734
------------
Net investment income .......................................... 12,993,062
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on investments ............................... 72,275,885
Net realized gain on futures contracts ......................... 50,675
Net unrealized depreciation of investments during the year ..... (81,136,250)
Net unrealized depreciation of futures contracts during the year (520,508)
------------
Net realized and unrealized loss on securities .............. (9,330,198)
------------
Increase in net assets resulting from operations ............ $ 3,662,864
============
</TABLE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31
----------------------------------
1994 1993
------------- -------------
<S> <C> <C>
NET ASSETS, beginning of year ............................................ $ 712,367,257 $ 590,972,597
------------- -------------
OPERATIONS
Net investment income .................................................. 12,993,062 11,624,815
Net realized gain on securities ........................................ 72,326,560 48,005,904
Net unrealized appreciation (depreciation) of securities during the year (81,656,758) 26,398,476
------------- -------------
Increase in net assets resulting from operations ..................... 3,662,864 86,029,195
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ............................................. (12,164,102) (11,152,369)
From net realized gain on securities ................................... (48,603,788) (11,590,915)
------------- -------------
Total dividends and distributions ........................................ (60,767,890) (22,743,284)
------------- -------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold .............................................. 124,276,586 151,995,429
Proceeds from shares issued for dividends and distributions reinvested . 59,928,843 22,392,846
Cost of shares redeemed ................................................ (126,572,376) (116,279,526)
------------- -------------
Increase in net assets resulting from Fund share transactions ........ 57,633,053 58,108,749
------------- -------------
INCREASE IN NET ASSETS ................................................... 528,027 121,394,660
------------- -------------
NET ASSETS, end of year .................................................. $ 712,895,284 $ 712,367,257
============= =============
FUND SHARE TRANSACTIONS
Shares sold ............................................................ 7,820,632 9,291,637
Shares issued for dividends and distributions reinvested ............... 3,781,949 1,385,370
Shares redeemed ........................................................ (7,984,398) (7,099,278)
------------- -------------
Increase in Fund shares outstanding .................................. 3,618,183 3,577,729
============= =============
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE> 159
--------------------------------------------------------------------------------
Government Fund Statement of Net Assets
--------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
--------------------------------------------------------------------------------------------------------------------
United States Government Obligations 38.3%
United States Treasury Notes
<S> <C>
**$ 40,000,000 3.875%, 8/31/95.................................................................. $ 39,293,600
2,750,000 8.25%, 11/15/94.................................................................. 2,752,585
40,000,000 8.50%, 5/15/95................................................................... 40,556,400
10,000,000 8.875%, 2/15/96.................................................................. 10,292,200
**17,500,000 9.25%, 1/15/96................................................................... 18,063,325
700,000 10.50%, 8/15/95.................................................................. 723,625
4,000,000 11.25%, 2/15/95.................................................................. 4,065,640
12,300,000 11.25%, 5/15/95.................................................................. 12,649,812
---------------
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS (Cost $132,391,758)................. 128,397,187
---------------
United States Government Agencies 55.1%
Federal Home Loan Mortgage Corp.
**6,719,926 6.50%, 4/1/98.................................................................... 6,554,012
672,822 7.00%, 12/1/96................................................................... 662,938
5,165,547 7.00%, 7/1/24.................................................................... 4,708,706
10,092,232 7.50%, 9/1/24.................................................................... 9,474,083
**10,099,997 8.00%, 10/1/24................................................................... 9,755,990
Federal National Mortgage Association
**5,168,281 7.00%, 4/1/24.................................................................... 4,706,392
10,099,995 8.00%, 5/1/22.................................................................... 9,743,365
Government National Mortgage Association
11,220,851 7.00%, 3/15/24................................................................... 10,049,730
**39,763,584 7.50%, 1/15/24................................................................... 36,893,050
**43,914,399 8.00%, 6/15/24................................................................... 42,089,317
**10,279,795 8.50%, 12/15/05.................................................................. 10,148,108
**29,058,909 9.00%, 10/15/08.................................................................. 29,549,417
3,513,673 9.50%, 7/15/09................................................................... 3,672,878
4,115,141 10.00%, 4/15/16.................................................................. 4,400,646
1,852,352 10.50%, 2/15/16.................................................................. 2,012,693
---------------
TOTAL UNITED STATES GOVERNMENT AGENCIES (Cost $192,343,272)...................... 184,421,325
---------------
</TABLE>
F-15
<PAGE> 160
--------------------------------------------------------------------------------
Government Fund Statement of Net Assets continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------------------
Forward Purchase Commitments 16.8%
Federal Home Loan Mortgage Corp.
<S> <C>
*$ 10,000,000 7.00%, settling 11/94............................................................ $ 9,115,600
*10,000,000 7.50%, settling 12/94............................................................ 9,365,100
Federal National Mortgage Association
*10,000,000 8.00%, settling 12/94............................................................ 9,622,100
*10,000,000 7.50%, settling 12/94............................................................ 9,321,900
*10,000,000 8.00%, settling 11/94............................................................ 9,646,900
*10,000,000 7.50%, settling 11/94............................................................ 9,381,300
---------------
TOTAL FORWARD PURCHASE COMMITMENTS (COST $56,584,375).......................... 56,452,900
---------------
Repurchase Agreement 5.8%
19,280,000 Goldman, Sachs & Co., dated 10/31/94, 4.70%, due 11/1/94
(collateralized by U.S. Government obligations in a pooled cash account)
repurchase proceeds $19,282,517 (Cost $19,280,000)............................... 19,280,000
---------------
TOTAL INVESTMENTS (Cost $400,599,405) 116.0%...................................... 388,551,412
Receivable for investments sold 21.5%............................................. 71,963,750
Payable for investments purchased (35.7%)......................................... (119,630,450)
Other assets and liabilities, net (1.8%).......................................... (5,923,066)
--------------
NET ASSETS, equivalent to $9.99 per share 100%................................... $ 334,961,646
==============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited shares authorized;
33,535,250 shares outstanding.................................................................. $ 335,353
Capital surplus.................................................................................. 379,698,565
Accumulated net realized loss on securities...................................................... (33,141,920)
Unrealized appreciation (depreciation) of securities
Investments.................................................................................... (12,047,993)
Forward commitments............................................................................ 26,693
Futures contracts.............................................................................. (3,981)
Undistributed net investment income.............................................................. 94,929
---------------
NET ASSETS at October 31, 1994................................................................... $ 334,961,646
===============
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $118.2 million were placed as
collateral for futures contracts and forward commitments.
See Notes to Financial Statements.
F-16
<PAGE> 161
-------------------------------------------------------------------------------
Government Fund Financial Statements
-------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
October 31, 1994
----------------
INVESTMENT INCOME
<S> <C>
Interest......................................................................................... $ 28,144,179
-------------
EXPENSES
Advisory fees.................................................................................... 2,122,662
Shareholder service agent's fees and expenses.................................................... 651,687
Accounting services.............................................................................. 98,937
Registration and filing fees..................................................................... 78,272
Reports to shareholders.......................................................................... 68,420
Custodian fees................................................................................... 42,870
Trustees' fees and expenses...................................................................... 50,952
Audit fees....................................................................................... 12,866
Legal fees....................................................................................... 10,511
Miscellaneous.................................................................................... 26,257
-------------
Total expenses................................................................................ 3,163,434
-------------
Net investment income......................................................................... 24,980,745
-------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities
Investments................................................................................... (21,790,084)
Forward commitments........................................................................... (9,157,343)
Futures contracts............................................................................. (3,083,193)
Net unrealized depreciation of securities during the year
Investments................................................................................... (10,067,639)
Forward commitments........................................................................... (316,382)
Futures contracts............................................................................. (832,294)
-------------
Net realized and unrealized loss on securities................................................ (45,246,935)
-------------
Decrease in net assets resulting from operations.............................................. $ (20,266,190)
=============
</TABLE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31
--------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
NET ASSETS, beginning of period................................................. $ 370,213,049 $ 281,996,254
-------------- --------------
OPERATIONS
Net investment income.......................................................... 24,980,745 24,245,816
Net realized gain (loss) on securities......................................... (34,030,620) 12,455,008
Net unrealized depreciation of securities during the year...................... (11,216,315) (3,767,109)
-------------- --------------
Increase (decrease) in net assets resulting from operations..................... (20,266,190) 32,933,715
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income..................................................... (22,822,040) (21,487,060)
From net realized gain on securities........................................... -- (4,700,971)
In excess of book-basis net realized gain on securities (Note 1F).............. (16,458,421) --
-------------- --------------
Total dividends and distributions............................................... (39,280,461) (26,188,031)
-------------- --------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold...................................................... 82,600,565 131,207,777
Proceeds from shares issued for dividends and distributions reinvested......... 34,396,895 22,757,835
Cost of shares redeemed........................................................ (92,702,212) (72,494,501)
-------------- --------------
Increase in net assets resulting from Fund share transactions................... 24,295,248 81,471,111
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS............................................... (35,251,403) 88,216,795
-------------- --------------
NET ASSETS, end of year......................................................... $ 334,961,646 $ 370,213,049
============== ==============
FUND SHARE TRANSACTIONS
Shares sold.................................................................... 7,689,030 11,210,078
Shares issued for dividends and distributions reinvested....................... 3,189,561 1,951,398
Shares redeemed................................................................ (8,707,829) (6,185,816)
-------------- --------------
Increase in Fund shares outstanding........................................... 2,170,762 6,975,660
============== ==============
</TABLE>
See Notes to Financial Statements.
F-17
<PAGE> 162
-------------------------------------------------------------------------------
Municipal Bond Fund Statement of Net Assets
-------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bonds 93.3%
EDUCATION 11.6%
$ 500,000 Chicago, Illinois, Public Building Commission, Building Rev., Series A-1990, MBIA,
7.125%, 1/1/15............................................................................. $ 522,710
500,000 Connecticut State Health & Educational Facilities Authority Rev. (University of
Hartford), Series D, 6.75%, 7/1/12......................................................... 477,160
500,000 Cook County, Illinois, Community College, District #508, Certificates of Participation,
FGIC, 8.75%, 1/1/07........................................................................ 600,575
500,000 Corona - Norco, California, University School District Lease Rev., 6.00%, 4/15/19 455,935
500,000 District of Columbia Rev. (Howard University), Series A, MBIA, 8.00%, 10/1/17................ 536,720
500,000 Erie, Pennsylvania, Higher Education Building Authority, College Rev., Series A,
8.50%, 6/1/15.............................................................................. 569,990
Frenship, Texas, Independent School District, Refunding
500,000 5.50%, 2/15/03............................................................................. 488,845
500,000 5.50%, 2/15/04............................................................................. 483,795
200,000 Huron Valley, Michigan, School District, FGIC, 7.10%, 5/1/08................................. 218,952
Illinois Educational Facilities Authority Rev.
1,000,000 Illinois State University, Auxiliary Facilities System, MBIA, 5.75%, 4/1/14................ 890,630
320,000 Loyola University, 7.125%, 7/1/11.......................................................... 331,450
680,000 Loyola University, Series A, 7.125%, 7/1/11................................................ 746,191
1,000,000 University of Chicago, 5.70%, 12/1/25...................................................... 855,000
500,000 Merriville, Indiana, Multi-School Building Corp., 1st Mtg. Bonds, 7.50%, 7/15/09............. 555,680
500,000 New Jersey State Educational Facilities Authority Rev. (Fairleigh Dickinson University),
Series C, 6.625%, 7/1/23................................................................... 439,915
350,000 New York City, New York, Industrial Development Agency, Civil Facility Rev.
(Marymount Manhattan College Project), 7.00%, 7/1/23....................................... 322,532
New York State Dormitory Authority Rev.
100,000 City University System, Series A, 8.00%, 7/1/07............................................ 109,146
500,000 City University System, Series C, 6.00%, 7/1/16............................................ 444,600
750,000 State University Educational Facilities, Series A, 7.70%, 5/15/12.......................... 842,775
750,000 Ohio State Higher Educational Facilities, Community College Rev. (Case Western Reserve
Project), Series A, 7.70%, 10/1/18......................................................... 815,130
Pennsylvania State Higher Educational Facilities Authority Rev.
500,000 Hahnemann University Project, Series 1989, MBIA, 7.20%, 7/1/19............................. 531,640
250,000 Medical College of Pennsylvania, Series A, 8.375%, 3/1/11.................................. 269,885
150,000 Thomas Jefferson University, 8.00%, 1/1/18................................................. 164,420
500,000 Shenandoah Valley School District, Pennsylvania, Series B, Zero Coupon, 2/1/12............... 150,820
250,000 State Public School Building Authority, Pennsylvania School Rev. (Shenandoah Valley
School District), AMBAC, 7.375%, 9/15/10................................................... 269,880
1,000,000 Wisconsin State Health & Educational Facilities Rev. (Marquette University Project),
6.45%, 12/1/19............................................................................. 943,200
-------------
TOTAL EDUCATION............................................................................ 13,037,576
-------------
HEALTH CARE 2.8%
1,250,000 Harris County, Texas Health Facilities (TECO Projects), Series A, 7.25%, 2/15/15............. 1,293,325
250,000 Illinois Development Finance Authority Rev., Refunding (Columbus-Cuneo-Cabrini
Medical Center), 8.50%, 2/1/15............................................................. 265,265
1,000,000 Indiana Health Facilities Finance Authority, 6.85%, 7/1/22................................... 1,003,370
500,000 New York State Medical Care Facilities Finance Agency Rev. (Montefiore Medical
Center), 7.25%, 2/15/24.................................................................... 525,400
-------------
TOTAL HEALTH CARE............................................................................ 3,087,360
-------------
</TABLE>
F-18
<PAGE> 163
-------------------------------------------------------------------------------
Municipal Bond Fund Statement of Net Assets, continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS 17.5%
$ 500,000 Ames, Iowa, Hospital Rev. (Mary Greeley Medical Center Project), AMBAC,
5.75%, 8/15/22............................................................................ $ 427,080
500,000 Bexar County, Texas, Health Facilities Development Rev. (St. Lukes Lutheran Hospital
Project), 7.90%, 5/1/18................................................................... 512,405
500,000 Boston, Massachusetts, Rev. (Boston City Hospital) FHA, 7.625%, 2/15/21..................... 559,190
1,000,000 Charleston County, South Carolina, Hospital Facilities Rev. (Bon Secours Health System
Project), FSA, 5.625%, 8/15/25............................................................ 833,190
250,000 Clarksville, Tennessee, Hospital Rev., Refunding & Improvement (Clarksville Memorial
Project), 6.25%, 7/1/13................................................................... 221,815
250,000 Delaware State, Economic Development Authority Rev. (Osteopathic Hospital
Association), Series A, 6.75%, 1/1/13..................................................... 218,572
500,000 District of Columbia Hospital Rev. (National Rehabilitation Hospital Melanhc), Series A,
MBIA, 7.10%, 11/1/11...................................................................... 525,535
500,000 Ector County, Texas, Hospital District (Medical Center Hospital), 7.125%, 4/15/02........... 503,415
250,000 Erie County, Pennsylvania, Hospital Authority Rev. (Metro Health Center), Series 1992,
7.25%, 7/1/12............................................................................. 247,755
250,000 Harris County, Texas, Health Facilities Development Corp. (Memorial Hospital System
Project), 7.125%, 6/1/15.................................................................. 254,840
Illinois Health Facilities Authority Rev.
40,000 Community Pooled Program, Refunding, Series A, MBIA, 7.90%, 8/15/03....................... 46,403
106,000 Community Pooled Program, Unrefunding, Series A, MBIA, 7.90%, 8/15/03..................... 110,347
500,000 Delnor Community Hospital, 8.00%, 5/15/19................................................. 559,550
500,000 Lutheran Health Systems, Series B, MBIA, 6.00%, 4/1/18.................................... 451,810
500,000 Masonic Medical Center, Series 1989-B, 7.70%, 10/1/19..................................... 556,740
250,000 Memorial Hospital, 7.25%, 5/1/24.......................................................... 236,410
300,000 Mercy Center For Health Care Services, 6.625%, 10/1/12.................................... 287,259
500,000 Northwestern Memorial Hospital, 6.75%, 8/15/11............................................ 502,230
500,000 Kent Hospital Finance Authority, Michigan (Butterworth Hospital), Series A,
7.25%, 1/15/12............................................................................ 546,625
250,000 Laramie County, Wyoming, Hospital Rev. (Memorial Hospital Project), AMBAC,
6.70%, 5/1/12............................................................................. 250,722
100,000 Leesburg, Florida, Hospital Rev., 8.40%, 7/1/08............................................. 105,209
500,000 Louisiana Public Facilities Authority, Hospital Rev. (Southern Baptist Hospital Project),
FSA, 6.80%, 5/15/12....................................................................... 504,865
500,000 McKeesport, Pennsylvania, Hospital Authority Rev. (McKeesport Hospital Project),
6.50%, 7/1/08............................................................................. 454,070
250,000 Michigan State Hospital Finance Authority Rev. (Detroit Medical Center), Series A,
8.125%, 8/15/12........................................................................... 276,934
Mississippi, Hospital Equipment and Facilities, Series A
500,000 Magnolia Hospital Project, 7.375%, 10/1/21................................................ 508,760
250,000 Wesley Health System Inc., Connie Lee, 6.05%, 4/1/12...................................... 227,458
Missouri State Health and Educational Facilities Authority Rev.
500,000 Heartland Health Systems Project, 6.875%, 11/15/04........................................ 500,695
250,000 Heartland Health Systems Project, 8.125%, 10/1/10......................................... 277,273
500,000 Lake of the Ozarks Hospital, 8.00%, 2/15/11............................................... 525,005
280,000 Montgomery County, Pennsylvania, IDR (Pennsburg Nursing & Rehabilitation Center),
7.625%, 7/1/18............................................................................ 249,315
250,000 Newton, Kansas Hospital Rev. (Newton Healthcare Corp.), Series A, 7.375%, 11/15/14.......... 240,400
250,000 North Carolina Medical Care Community Health Care Facility Rev. (Stanley Memorial
Hospital Project), 7.80%, 10/1/19......................................................... 266,035
</TABLE>
F-19
<PAGE> 164
-------------------------------------------------------------------------------
Municipal Bond Fund Statement of Net Assets, continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS - continued
Northeastern Pennsylvania Hospital Authority Rev.
$ 100,000 Nesbitt Memorial Hospital, Series A, 7.50%, 7/1/12....................................... $ 103,934
500,000 Wilkes Barre General Hospital, 8.375%, 7/1/06............................................ 535,230
500,000 Royal Oak, Michigan, Hospital Finance Authority Rev. (William Beaumont Hospital),
Series D, 6.75%, 1/1/20.................................................................. 489,285
250,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev. (Henderson Memorial
Hospital Project), 7.75%, 4/1/13......................................................... 235,545
1,000,000 Sayre, Pennsylvania, Health Care Facility Authority Rev., Series H-2, AMBAC,
7.625%, 12/1/15.......................................................................... 1,081,010
250,000 Scranton-Lackawanna, Pennsylvania, Health & Welfare Authority Rev. (Moses Taylor
Hospital Project), Series B, 8.50%, 7/1/20............................................... 266,500
South Dakota State Health & Educational Facility Authority Rev.
500,000 Huron Regional Medical Center, 7.25%, 4/1/20............................................. 465,290
500,000 Rapid City Regional Hospital, MBIA, 7.00%, 9/1/14........................................ 523,365
250,000 Sioux Valley Hospital, 7.625%, 11/1/13................................................... 274,110
500,000 St. Joseph County, Indiana, Hospital Authority Rev. (Memorial Hospital South Bend
Project), MBIA, 6.25%, 8/15/22........................................................... 465,800
500,000 St. Petersburg, Florida, Health Facilities Authority Rev., Allegany Health System
(St. Mary's Hospital), Series B, 7.75%, 12/1/15.......................................... 559,220
500,000 Tarrant County, Texas, Health Facilities Development Corp., Hospital Rev.,
Refunding & Improvement (Fort Worth Osteopathic Hospital), 7.00%, 5/15/28................ 464,875
500,000 Tulsa, Oklahoma, Industrial Authority, Hospital Rev. (Tulsa Regional Medical Center),
7.20%, 6/1/17............................................................................ 475,940
100,000 Tyler, Texas, Health Facilities Development Corp., Hospital Rev. (East Texas Hospital
Project), Series A, 8.375%, 11/1/11...................................................... 112,752
200,000 University of North Carolina, Chapel Hill, Board of Governors, 6.00%, 2/15/24.............. 181,168
500,000 Warren County, Pennsylvania, Hospital Authority Rev. (Warren General Hospital Project),
Series A, 6.90%, 4/1/11.................................................................. 475,060
1,000,000 Weslaco, Texas, Health Facilities Development (Knapp Medical Center Project),
Series-A, 5.25%, 6/1/16.................................................................. 818,040
100,000 Wisconsin State Health & Educational Facilities Authority Rev. (Wheaton Franciscan
Services, Inc.), Series 88, 8.20%, 8/15/18............................................... 111,648
------------
TOTAL HOSPITALS.......................................................................... 19,626,684
------------
HOUSING 8.1%
685,000 Austin, Texas, Housing Finance Corp., Multi-Family Housing Rev., 6.50%, 10/1/10............ 656,812
90,000 East Baton Rouge, Louisiana, Mtg. Finance Authority, Single Family Mtg. Rev., Series C,
8.375%, 2/1/17........................................................................... 91,974
1,000,000 Greater Cincinnati, Ohio (FHA Cambridge Apartments), Series A, 6.60%, 8/1/25............... 971,250
220,000 Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev., Series A,
FSA, 5.95%, 12/1/10...................................................................... 206,980
Illinois Housing Development Authority
1,000,000 Multi-Family Program, Series 3, 6.10%, 9/1/13............................................ 919,210
95,000 Residential Mtg. Rev., 8.10%, 8/1/17..................................................... 97,203
395,000 Juneau, Alaska, City & Borough Home, Refunding, Mtg. Backed Securities Program,
8.00%, 2/1/09............................................................................ 401,359
500,000 Lebanon County, Pennsylvania, Health Facilities (United Church of Christ Homes Project),
Series A, 6.75%, 10/1/10................................................................. 475,670
250,000 Maine State Housing Authority, Mtg. Purchase Rev., Series B, 7.90%, 11/15/06............... 253,750
400,000 Maricopa County, Arizona, IDR, Multi-Family Rev., Refunding (Laguna Point
Apartments Project), 6.50%, 7/1/09....................................................... 387,124
</TABLE>
F-20
<PAGE> 165
Municipal Bond Fund Statement of Net Assets, continued
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING - continued
$ 250,000 Massachusetts State, Housing, Single Family, Series 31, 6.45%, 12/1/16.......................... $ 244,062
150,000 Minneapolis, Minnesota, Health Care Facility (Ebenezer Society Project), Series A,
7.00%, 7/1/12................................................................................. 137,902
155,000 New York State Mtg. Agency Rev., Adjustable Rate-Homeowner Mtg., Series BB2,
7.95%, 10/1/15................................................................................ 162,938
500,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd. Project) Series A,
7.75%, 12/1/15................................................................................ 475,155
500,000 South Carolina State Housing Finance and Development Authority, Homeownership
Mtg., Series A, 7.625%, 7/1/16................................................................ 505,000
1,000,000 Tennessee Housing Development Agency, 6.80%, 7/1/17............................................. 977,300
Texas Housing Agency
485,000 Residential Development Rev., Adjustable Mtg., Series A, 7.60%, 7/1/16........................ 492,876
455,000 Single Family Mtg., Refunding, Series A, 7.15%, 9/1/12........................................ 464,783
Texas State Veterans Association
210,000 8.30%, 12/1/16................................................................................ 236,744
130,000 8.30%, 12/1/16, Un-refunded................................................................... 137,024
485,000 Texas State Veterans Housing Assistance, MBIA, 6.80%, 12/1/23................................... 479,510
115,000 Utah State Housing Finance Agency, Single Family Mtg., Series G-1, 8.10%, 7/1/16................ 116,869
150,000 Wisconsin Housing & Economical Development Authority Rev., Series B,
8.00%, 11/1/18................................................................................ 154,125
----------
TOTAL HOUSING................................................................................. 9,045,620
----------
MISCELLANEOUS 11.0%
250,000 Berry Creek Metropolitan District, Eagle, Colorado, G.O., Refunding &
Improvement, 8.25%, 12/1/11................................................................... 260,640
100,000 California Special Districts Finance Authority, Certificates of Participation Rev., Series A,
8.50%, 7/1/18................................................................................. 107,864
2,000,000 Clark County, Nevada (Nevada Power Co. Project), IDR, 7.20%, 10/1/22............................ 2,056,860
500,000 Compton, California, Certificates of Participation, Refunding, Series B, 7.50%, 8/1/15.......... 522,450
500,000 Cook County, Illinois, MBIA, 7.00%, 11/1/10..................................................... 545,110
500,000 Detroit, Michigan, Tax Increment (Development Area No. 1) Series A, 7.60%, 7/1/10............... 514,890
500,000 District of Columbia, Series A, AMBAC, 7.50%, 6/1/10............................................ 554,870
500,000 Du Page County, Illinois, Alternative Rev. (Stormwater Project) 6.55%, 1/1/21................... 531,355
1,000,000 El Paso County, Texas, Parking Facilities Rev., 6.50%, 8/15/11.................................. 1,061,270
250,000 Emmaus, Pennsylvania, General Authority, Local Government Pool Program Rev.,
Series A, BIG, 8.15%, 5/15/18................................................................. 267,720
500,000 Highlands Ranch, Colorado, Metropolitan District No. 1, Refunding & Improvement,
Series A, 7.30%, 9/1/12....................................................................... 528,705
1,500,000 Irving, Texas, Flood Control District, Section #3, AMBAC, Zero Coupon, 9/1/08................... 643,695
500,000 Milwaukee County, Wisconsin, Refunding, Series A, 5.25%, 9/1/00................................. 493,790
400,000 Mountain Village Metropolitan District, San Miguel County, Colorado, Refunding,
Series 1992, 7.95%, 12/1/03................................................................... 403,812
125,000 North Slope Borough, Alaska, Series G, 8.35%, 6/30/98........................................... 136,670
1,500,000 Philadelphia, Pennsylvania, Municipal Authority Rev., Refunding Lease, Series A,
5.625%, 11/15/14.............................................................................. 1,334,805
50,000 Pocahontas, Iowa, IDR (International Harvester Co.) 10.25%, 10/1/00............................. 52,377
500,000 San Saba County, Texas, Limited Tax, 8.625%, 2/15/19............................................ 514,970
100,000 Tampa, Florida, Capital Improvement Project Rev., Series B, 8.375%, 10/1/18..................... 104,474
Texas General Services, Community Partner Interests, (Office Building and Land
Acquisition Project)
130,000 7.00%, 8/1/14................................................................................. 123,465
330,000 7.00%, 8/1/24................................................................................. 310,781
</TABLE>
F-21
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Municipal Bond Fund Statement of Net Assets, continued
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS - continued
$ 250,000 Utah State Building Ownership Authority Lease Rev. (Dept. of Employment Security)
7.80%, 8/15/10.............................................................................. $ 271,618
1,000,000 Valdez, Alaska, Marine Term Rev., Refunding, (Sohio Pipeline), 7.125%, 12/1/25................ 1,034,790
------------
TOTAL MISCELLANEOUS......................................................................... 12,376,981
------------
MUNICIPAL UTILITY DISTRICT (MUD) 1.5%
250,000 Brazoria County, Texas, MUD No. 2, Refunding, 7.00%, 9/1/08................................... 242,025
Harris County, Texas
250,000 #90, Refunding, 7.50%, 10/1/97.............................................................. 254,012
100,000 #151, 8.65%, 3/1/07......................................................................... 105,375
500,000 #322, 6.25%, 5/1/17......................................................................... 430,635
Louetta North Public Utility District, Texas
215,000 10.10%, 4/1/98.............................................................................. 230,411
25,000 10.10%, 4/1/98; Pre-refunded, 4/1/96........................................................ 26,792
265,000 10.20%, 4/1/99.............................................................................. 284,353
100,000 Western Oaks, Texas, MUD, Contract Rev., 8.40%, 11/15/01; Pre Refunded, 11/15/96.............. 108,272
------------
TOTAL MUD................................................................................... 1,681,875
------------
NURSING HOMES 0.5%
100,000 Carmel, Indiana, Retirement Rent Housing Rev., Refunding (Beverly Enterprises, Inc.
Project), Series 1992, 8.75%, 12/1/08....................................................... 105,875
240,000 Louisiana Public Facilities Authority, IDR, Refunding (Beverly Enterprises, Inc.),
8.25%, 9/1/08............................................................................... 242,693
250,000 Massachusetts, Industrial Finance Agency, IDR, Refunding (Beverly Enterprises/
Gloucester and Lexington Projects), Series 1992, 8.00%, 5/1/02.............................. 256,352
------------
TOTAL NURSING HOMES......................................................................... 604,920
------------
POLLUTION CONTROL REVENUE (PCR) 8.5%
Brazos River Authority, Texas, Rev., PCR (Houston Power & Light Co. Project),
500,000 Series B, 8.25%, 5/1/15..................................................................... 543,835
1,000,000 Series C, BIG, 8.10%, 5/1/19................................................................ 1,083,660
500,000 Capital Industrial Development Corp., Texas, PCR (International Business Machines
Corp.), 7.40%, 5/1/12....................................................................... 532,825
250,000 County of Coshocton, Ohio, Solid Waste Disposal Rev., Refunding (Stone Container Corp.
Project), Series 1992, 7.875%, 8/1/13....................................................... 239,817
1,000,000 Emery County, Utah, PCR, Refunding (Pacificorp Project), Series A, 5.65%, 11/1/23............. 847,240
1,000,000 Farmington, New Mexico, PCR, Refunding, 7.20%, 4/1/21......................................... 1,028,460
1,000,000 Mercer County, North Dakota, PCR (Basin Electric Power), Series E, 7.00%, 1/1/19.............. 1,003,470
570,000 Ohio State Air Quality Development Authority Rev., PCR (Cleveland Co. Project),
FGIC, 8.00%, 12/1/13........................................................................ 642,048
500,000 Parish of St. Charles, Louisiana, PCR(Louisiana Power &Light Co.), 8.25%, 6/1/14.............. 545,560
1,000,000 Petersburg, Indiana, PCR, Refunding (Indianapolis Power & Lighting), Series 1993-A,
6.10%, 1/1/16............................................................................... 911,530
1,500,000 Skowhegan, Maine, PCR, Refunding (Scott Paper Company Project), 5.90%, 11/1/13................ 1,328,055
400,000 Stevens County, Washington, Public Corp., PCR (Washington Water & Power Co.,
Kettle Project), 6.00%, 12/1/23............................................................. 340,544
500,000 Sweetwater County, Wyoming, PCR (Idaho Power Co.), Series C, 7.625%, 12/1/13.................. 530,760
------------
TOTAL PCR................................................................................... 9,577,804
------------
</TABLE>
F-22
<PAGE> 167
Municipal Bond Fund Statement of Net Assets, continued
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
POOL FINANCING PROGRAM 1.6%
Indianapolis, Indiana, Local Public Improvement
$ 660,000 Series C, 6.70%, 1/1/17..................................................................... $ 637,784
1,000,000 Series D, 6.50%, 2/1/22..................................................................... 927,980
250,000 Series D, 6.75%, 2/1/20..................................................................... 239,755
-----------
TOTAL POOL FINANCING PROGRAM................................................................ 1,805,519
-----------
RESOURCE RECOVERY REVENUE 2.5%
455,000 Broward County, Florida, Resource Recovery Rev. (North Project), 7.95%, 12/1/08............... 489,525
1,000,000 Delaware County, Pennsylvania, Industrial Development Authority Rev., Resource
Recovery, 8.10%, 12/1/13.................................................................... 1,064,740
1,000,000 Montgomery County, Pennsylvania, Industrial Development Authority Rev., Resource
Recovery, 7.50%, 1/1/12..................................................................... 1,026,190
250,000 Regional Waste Systems, Inc., Maine, Solid Waste Resource Recovery Rev., 7.95%, 7/1/10........ 267,335
-----------
TOTAL RESOURCE RECOVERY REVENUE............................................................. 2,847,790
-----------
SALES TAX REVENUE 1.7%
500,000 Arvada, Colorado, Sales & Use Tax Rev., Refunding & Improvement, FGIC,
6.25%, 12/1/12.............................................................................. 491,475
250,000 Crestwood, Illinois, Tax Increment Rev., Refunding, 7.25%, 12/1/08............................ 234,702
400,000 Edgewater, Colorado, Redevelopment Authority Tax Increment Rev., Refunding
(Edgewater Development Project), 6.75%, 12/1/08............................................. 363,812
100,000 Illinois State Sales Tax Rev., Series F, 8.00%, 6/15/18....................................... 110,613
100,000 Jefferson County, Colorado, Southeast Jefferson County Local Improvement District,
8.20%, 12/1/13.............................................................................. 110,709
500,000 Rhode Island Depositors' Economic Corp., Special Obligation, Series A, FSA,
6.625%, 8/1/19.............................................................................. 534,905
-----------
TOTAL SALES TAX REVENUE..................................................................... 1,846,216
-----------
TRANSPORTATION 5.4%
500,000 Cleveland, Ohio, Parking Facilities Improvement Rev., 8.00%, 9/15/12.......................... 513,645
500,000 Delaware Transportation Authority Rev., 5.50%, 7/1/16......................................... 431,365
250,000 Denver, Colorado, City & County Airport Rev., 8.875%, 8/1/15.................................. 254,450
1,000,000 Des Moines, Iowa, Parking Facilities Rev., 7.25%, 7/1/15...................................... 1,059,830
250,000 Harris County, Texas, Toll Road Rev., Senior Lien, Series 85-D, 8.25%, 8/15/07................ 281,597
500,000 Kentucky State Turnpike Authority, Toll Road Rev., Series A, 5.50%, 7/1/07.................... 462,935
1,000,000 New Jersey State Turnpike Authority, Series C, 6.50%, 1/1/16.................................. 984,090
1,000,000 Regional Transportation Authority, Illinois, Series A, AMBAC, 6.125%, 6/1/22.................. 919,220
Triborough Bridge & Tunnel Authority, New York, Rev.
150,000 Series A, 8.00%, 1/1/18..................................................................... 164,244
500,000 Series R, 7.375%, 1/1/16.................................................................... 549,540
500,000 Wayne County, Michigan, Airport Rev., Sub. Lien, Series B, AMBAC, 6.00%, 12/1/20.............. 443,665
-----------
TOTAL TRANSPORTATION........................................................................ 6,064,581
-----------
UTILITIES - COMBINATION ELECTRIC, GAS AND/OR WATER 5.7%
Austin, Texas, Utility System Rev., Refunding
250,000 FGIC, 7.75%, 11/15/06....................................................................... 265,455
250,000 Series C, 7.30%, 5/15/17.................................................................... 274,435
500,000 Brownsville, Texas, Utility System Rev., 6.50%, 9/1/17........................................ 486,055
2,500,000 Chicago, Illinois, Gas Supply Rev. (Peoples Gas), Series B, 7.50%, 3/1/15..................... 2,669,725
500,000 Chicago, Illinois, Metropolitan Water District, G.O., 7.00%, 1/1/11........................... 525,235
250,000 Jefferson, Wisconsin, Sewer System, Waterworks, 7.40%, 7/1/16................................. 274,722
1,000,000 Los Angeles, California, Dept. of Water & Power, Electric Plan Rev., 5.375%, 9/1/23........... 800,100
</TABLE>
F-23
<PAGE> 168
Municipal Bond Fund Statement of Net Assets, continued
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - COMBINATION ELECTRIC, GAS AND/OR WATER - continued
$ 1,000,000 Orlando, Florida, Utilities Commission Water & Electric Rev., Refunding, 8.625%,
10/1/05; Pre-refunded 10/1/95................................................................ $ 1,056,660
------------
TOTAL UTILITIES - COMBINATION ELECTRIC, GAS AND/OR WATER..................................... 6,352,387
------------
UTILITIES - ELECTRIC 11.8%
1,000,000 Alaska Energy Authority Power Rev., First Series (Bradley Lake Hydroelectric Project),
BIG, 6.25%, 7/1/21........................................................................... 938,420
1,000,000 Florida State Municipal Power Agency, Refunding (St. Lucie Project), FGIC,
5.00%, 10/1/01............................................................................... 962,050
Intermountain Power Agency, Utah
500,000 1st Crossover Series, Special Obligation 7.875%, 7/1/14...................................... 527,540
1,000,000 Power Supply Rev., Series B, 7.00%, 7/1/21................................................... 1,018,480
250,000 Lower Colorado River Authority, Texas, Rev., 8.25%, 1/1/06..................................... 264,377
100,000 Massachusetts Municipal Wholesale Electric Co., Power Supply System Rev., Series A,
8.75%, 7/1/18................................................................................ 111,271
250,000 Michigan Public Power Agency Rev., Refunding (Belle River Project) 7.00%, 1/1/18............... 258,510
225,000 Municipal Electric Authority, Georgia, Special Obligation, 2nd Crossover Series Rev.,
8.125%, 1/1/17............................................................................... 245,338
1,000,000 Nebraska Public Power District Rev., (Power Supply System), 5.75%, 1/1/20...................... 874,180
North Carolina Eastern Municipal Power Agency, Power System Rev.
500,000 Series A, 4.50%, 1/1/24...................................................................... 385,195
50,000 8.00%, 1/1/21................................................................................ 54,807
400,000 8.00%, 1/1/21, Pre-refunded, 11/1/98......................................................... 438,452
1,000,000 North Carolina Municipal Power Agency, Catawba Electric Rev., MBIA, 5.75%, 1/1/20.............. 876,350
250,000 North Carolina Municipal Power Agency #1, Catawba Electric Rev., 7.875%, 1/1/19................ 273,098
1,000,000 Northern Minnesota Municipal Power Agency, Series A, AMBAC, 7.25%, 1/1/16...................... 1,064,810
500,000 Piedmont Municipal Power Agency, South Carolina Electric Rev., 8.00%, 1/1/23................... 524,990
775,000 Sam Rayburn, Texas, Municipal Power Agency, Refunding, Series A, 6.75%, 10/1/14................ 714,566
300,000 South Carolina State Public Service Authority, Electric System Expansion Rev.,
7.875%, 7/1/21............................................................................... 314,459
Washington State Public Power Supply System Rev.
250,000 Nuclear Project #1, Series B, 7.125%, 7/1/16................................................. 253,288
250,000 Nuclear Project #2, Series 1990-C, 7.625%, 7/1/10............................................ 279,558
1,500,000 Nuclear Project #3, MBIA 5.60%, 7/1/17....................................................... 1,264,395
1,500,000 Refunding, Series B, 7.00%, 7/1/12........................................................... 1,528,245
------------
TOTAL UTILITIES - ELECTRIC................................................................... 13,172,379
------------
UTILITIES - WATER AND SEWER 3.1%
500,000 Chicago, Illinois, Wastewater Transmission, Rev., FGIC, 6.30%, 1/1/12.......................... 522,300
500,000 Dallas, Texas, Waterworks and Sewer System Rev., Series A, 5.50%, 10/1/06...................... 476,405
500,000 Houston, Texas, Water System Rev., 7.25%, 12/1/07.............................................. 538,845
500,000 Massachusetts State Water Resource Authority, Series A, 7.50%, 4/1/16.......................... 553,715
500,000 New York City Municipal Water Finance Authority, New York, Water & Sewer System
Rev., Series C, 7.75%, 6/15/20............................................................... 566,925
500,000 Texas Water Resource Finance Authority Rev., AMBAC, 7.50%, 8/15/13............................. 520,430
250,000 Winters, Texas, Water Works & Sewer Rev., 8.50%, 8/1/17........................................ 295,773
------------
TOTAL UTILITIES - WATER AND SEWER............................................................ 3,474,393
------------
TOTAL MUNICIPAL BONDS (COST $105,985,446).................................................... 104,602,085
------------
</TABLE>
F-24
<PAGE> 169
------------------------------------------------------------------------------
Municipal Bond Fund Statement of Net Assets continued
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Variable Rate Demand Notes +4.8%
$ 300,000 Anchorage Alaska, Higher Education Rev. (Alaska Pacific University) 3.50%, 7/1/17 $ 300,000
785,000 Gainesville & Hall County, Georgia, Default Rev. (Gainesville Association Project),
4.10%, 5/1/95.................................................................. 785,000
100,000 Indiana Hospital Equipment Financing Authority Rev., Series A, 3.50%, 12/1/15.... 100,000
100,000 Ingalls Memorial Hospital, Illinois, Series 85-C, 3.50%, 1/1/16.................. 100,000
1,500,000 Kentucky Development Finance Authority Rev., 3.65%, 12/1/15...................... 1,500,000
100,000 Lubbock, Texas, Health Facilities Development Corp. Rev. (St. Joseph Health System)
3.60%, 7/1/13.................................................................. 100,000
100,000 Mississippi Hospital Equipment and Facilities Authority Rev. (Mississippi Baptist Medical
Center), 3.30%, 7/1/12......................................................... 100,000
New York City, New York, G.O.
300,000 Subseries A-7, 3.80%, 8/1/20................................................... 300,000
300,000 Subseries E-5, 3.60%, 8/1/09................................................... 300,000
100,000 Subseries E-5, 3.60%, 8/1/15................................................... 100,000
200,000 Subseries E-5, 3.60%, 8/1/17................................................... 200,000
100,000 Subseries E-5, 3.60%, 8/1/18................................................... 100,000
200,000 Subseries E-2, 3.60%, 8/1/19................................................... 200,000
100,000 Subseries E-2, 3.60%, 8/1/20................................................... 100,000
800,000 Subseries E-5, 3.60%, 8/1/19................................................... 800,000
100,000 North Carolina, Educational Facilities Finance (Bowman Grey School Medical
Project) 3.40%, 9/1/20......................................................... 100,000
100,000 Perry County, Mississippi (Leaf River Forest Project), PCR, 3.55%, 3/1/02........ 100,000
100,000 Uinta County, Wyoming, PCR, Refunding (Chevron U.S.A., Inc. Project),
3.50%, 12/1/22................................................................. 100,000
------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES (Cost $5,385,000)................... 5,385,000
------------
Principal
Amount
------------ Repurchase Agreement 0.1%
$ 135,000 Goldman, Sachs & Co., Inc., dated 10/31/94, 4.70%, due 11/1/94
(Collateralized by U.S. Government obligations in a pooled cash account)
repurchase proceeds $135,018 (Cost $135,000)..................................... 135,000
------------
TOTAL INVESTMENTS (Cost $111,505,446) 98.2%....................................... 110,122,085
Other assets and liabilities, net 1.8%............................................ 1,966,334
------------
NET ASSETS, equivalent to $12.89 per share 100%................................... $112,088,419
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited shares authorized;
8,692,763 shares outstanding.................................................................. $ 86,928
Capital surplus................................................................................. 113,380,467
Accumulated net realized loss on securities..................................................... (26,773)
Net unrealized depreciation of investments...................................................... (1,383,361)
Undistributed net investment income............................................................. 31,158
------------
NET ASSETS at October 31, 1994.................................................................. $112,088,419
============
</TABLE>
<TABLE>
<S> <C>
Insurers:
+Interest rates are as of October 31, 1994 AMBAC - AMBAC Indemnity Corp.
FHA - Federal Housing Administration BIG - Bond Investors Guaranty Insurance Co.
G.O. - General obligation bond FGIC - Financial Guaranty Insurance Corp.
Rev. - Revenue bond FSA - Financial Security Assurance, Inc.
IDR - Industrial Development Revenue Bond MBIA - Municipal Bond Investor's Assurance Corp.
</TABLE>
See Notes to Financial Statements.
F-25
<PAGE> 170
--------------------------------------------------------------------------------
Municipal Bond Fund Financial Statements
--------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1994
----------------
<S> <C>
INVESTMENT INCOME
Interest............................................................................................ $ 6,674,225
------------
EXPENSES
Advisory fees....................................................................................... 639,343
Shareholder service agent's fees and expenses....................................................... 182,970
Accounting services................................................................................. 95,639
Registration and filing fees........................................................................ 37,726
Trustees' fees and expenses......................................................................... 36,648
Reports to shareholders............................................................................. 30,036
Audit fees.......................................................................................... 16,274
Custodian fees...................................................................................... 6,018
Legal fees.......................................................................................... 6,841
Miscellaneous....................................................................................... 8,721
------------
Total expenses.................................................................................... 1,060,216
------------
Net investment income............................................................................. 5,614,009
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities..................................................................... 14,380
Net unrealized depreciation of securities during the year........................................... (9,413,118)
------------
Net realized and unrealized loss on securities.................................................... (9,398,738)
------------
Decrease in net assets resulting from operations.................................................. $ (3,784,729)
============
</TABLE>
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
------------------------------
1994 1993
------------- ------------
<S> <C> <C>
NET ASSETS, beginning of year..................................................... $ 95,903,641 $ 60,268,156
------------- ------------
OPERATIONS
Net investment income............................................................ 5,614,009 4,074,681
Net realized gain (loss) on securities........................................... 14,380 (20,277)
Net unrealized appreciation (depreciation) of securities during the year......... (9,413,118) 5,606,096
------------- ------------
Increase (decrease) in net assets resulting from operations.................... (3,784,729) 9,660,500
------------- ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME.............................. (5,586,734) (4,070,799)
------------- ------------
NET EQUALIZATION CREDITS (NOTE 1G)................................................ 34,076 34,628
------------- ------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold........................................................ 46,071,557 43,287,241
Proceeds from shares issued for dividends reinvested............................. 4,883,341 3,495,925
Cost of shares redeemed.......................................................... (25,432,733) (16,772,010)
------------- ------------
Increase in net assets resulting from Fund share transactions.................. 25,522,165 30,011,156
------------- ------------
INCREASE IN NET ASSETS............................................................ 16,184,778 35,635,485
------------- ------------
NET ASSETS, end of year........................................................... $ 112,088,419 $ 95,903,641
============= ============
FUND SHARE TRANSACTIONS
Shares sold...................................................................... 3,404,943 3,160,525
Shares issued for dividends reinvested........................................... 363,194 254,616
Shares redeemed.................................................................. (1,889,648) (1,226,119)
------------- ------------
Increase in Fund shares outstanding............................................ 1,878,489 2,189,022
============= ============
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE> 171
--------------------------------------------------------------------------------
Money Market Fund Statement of Net Assets
--------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
------------------------------------------------------------------------------------------------------------------
United States Agency and Government Obligations 63.0%
<S> <C>
$ 3,000,000 Federal Home Loan Banks, 4.91%, 11/21/94........................................... $ 2,991,477
Federal Home Loan Mortgage Corp.,
3,000,000 4.56%, 11/7/94................................................................... 2,997,369
5,000,000 4.70%, 11/2/94................................................................... 4,998,697
4,800,000 4.95%, 11/2/94................................................................... 4,798,686
3,000,000 5.31%, 1/19/95................................................................... 2,965,067
2,917,000 5.38%, 1/24/95................................................................... 2,880,428
Federal National Mortgage Association
2,000,000 4.57%, 11/7/94................................................................... 1,998,246
2,000,000 4.70%, 12/16/94.................................................................. 1,988,193
5,000,000 4.84%, 11/23/94.................................................................. 4,984,603
3,000,000 5.32%, 1/20/95................................................................... 2,964,563
2,000,000 United States Treasury Bill, 3.47%, 1/12/95........................................ 1,986,394
--------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS (Cost $35,553,723)......... 35,553,723
--------------
Commercial Paper 28.8%
2,700,000 Chevron Oil Finance Co., 4.85%, 11/18/94........................................... 2,693,506
2,700,000 General Electric Capital Corp., 4.86%, 11/18/94.................................... 2,693,493
2,700,000 General Electric Co., 4.84%, 11/18/94.............................................. 2,693,520
2,000,000 Metlife Funding, Inc., 4.83%, 11/28/94............................................. 1,992,533
767,000 Metlife Funding, Inc., 4.85%, 11/17/94............................................. 765,251
2,700,000 Raytheon Co., 4.87%, 11/21/94...................................................... 2,692,361
2,700,000 Wal-Mart Stores, Inc., 4.76%, 11/8/94.............................................. 2,697,150
--------------
TOTAL COMMERCIAL PAPER (Cost $16,227,814)........................................ 16,227,814
--------------
Repurchase Agreement 9.1%
5,130,000 Salomon Brothers, Inc., dated 10/31/94, 4.85%, due 11/1/94
(collateralized by U.S. Government obligations in a pooled cash account)
repurchase proceeds $5,130,691 (Cost $5,130,000)................................. 5,130,000
--------------
TOTAL INVESTMENTS (Cost $56,911,537) 100.9%....................................... 56,911,537
Other assets and liabilities, net (0.9%).......................................... (510,187)
--------------
NET ASSETS, equivalent to $1.00 per share 100%.................................... $ 56,401,350
==============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par value $.01 per share; unlimited shares authorized;
56,400,415 shares outstanding................................................................... $ 564,004
Capital surplus................................................................................... 55,836,155
Undistributed net investment income............................................................... 1,191
--------------
NET ASSETS at October 31, 1994.................................................................... $ 56,401,350
==============
</TABLE>
See Notes to Financial Statements.
F-27
<PAGE> 172
--------------------------------------------------------------------------------
Money Market Fund Financial Statements
--------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1994
----------------
<S> <C>
INVESTMENT INCOME
Interest........................................................................................... $ 2,187,317
------------
EXPENSES
Advisory fees (net of expense reimbursement of $282,897)........................................... --
Shareholder service agent's fees and expenses...................................................... 553,877
Accounting services................................................................................ 59,296
Reports to shareholders............................................................................ 54,295
Registration and filing fees....................................................................... 26,526
Trustees' fees and expenses........................................................................ 33,690
Audit fees......................................................................................... 12,156
Custodian fees..................................................................................... 7,157
Legal fees......................................................................................... 5,919
Miscellaneous...................................................................................... 5,379
Expense reimbursement in excess of advisory fees................................................... (192,501)
------------
Total expenses................................................................................... 565,794
------------
Net investment income............................................................................ 1,621,523
------------
Increase in net assets resulting from operations................................................. $ 1,621,523
============
</TABLE>
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
--------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
NET ASSETS, beginning of year..................................................... $ 59,198,092 $ 72,516,693
-------------- --------------
OPERATIONS
Net investment income............................................................ 1,621,523 1,513,577
-------------- --------------
Increase in net assets resulting from operations................................ 1,621,523 1,513,577
-------------- --------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME.............................. (1,621,596) (1,513,743)
-------------- --------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold........................................................ 59,396,624 59,731,954
Proceeds from shares issued for dividends reinvested............................. 1,600,922 1,476,322
Cost of shares redeemed.......................................................... (63,794,215) (74,526,711)
-------------- --------------
Decrease in net assets resulting from Fund share transactions................... (2,796,669) (13,318,435)
-------------- --------------
DECREASE IN NET ASSETS............................................................ (2,796,742) (13,318,601)
-------------- --------------
NET ASSETS, end of year........................................................... $ 56,401,350 $ 59,198,092
============== ==============
FUND SHARE TRANSACTIONS
Shares sold...................................................................... 59,396,624 59,731,954
Shares issued for dividends reinvested........................................... 1,600,922 1,476,322
Shares redeemed.................................................................. (63,794,215) (74,526,711)
-------------- --------------
Decrease in Fund shares outstanding............................................. (2,796,669) (13,318,435)
============== ==============
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE> 173
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies
Common Sense Trust (the "Trust"), is registered under the Investment Company Act
of 1940, as amended, as a diversified open-end management investment company
which offers shares in nine separate portfolios, five of which are described in
this report: Growth Fund ("Growth"), Growth and Income Fund ("Growth and
Income"), Government Fund ("Government"), Municipal Bond Fund ("Municipal Bond")
and Money Market Fund ("Money Market"). Each Fund is accounted for as a separate
entity. The following is a summary of significant accounting policies
consistently followed by the Trust in the preparation of its financial
statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are valued
at the last sales price. Unlisted securities and listed securities for
which the last sales price is not available are valued at the most recent
bid price. U.S. Government securities are valued at the last reported bid
price. Municipal bonds are valued at the last quoted bid prices or at bid
prices based on a matrix system (which considers such factors as security
prices, yields, maturities and ratings) furnished by dealers and an
independent pricing service. Variable rate securities are valued at par;
periodic rate changes reflect current market conditions. Securities for
which market quotations are not readily available are valued at fair value
under a method approved by the Board of Trustees.
Short-term investments with a maturity of more than 60 days when purchased
are valued based on market quotations until the remaining days to maturity
become less than 61 days. From such time, until maturity, such investments
are valued at amortized cost. For Money Market, all investments are valued
at amortized cost.
Municipal Bond investments include lower rated debt securities which may
be more susceptible to adverse economic conditions than other investment
grade holdings. These securities are often subordinated to the prior
claims of other senior lenders and uncertainties exist as to an issuer's
ability to meet principal and interest payments. At October 31, 1994, debt
securities rated below investment grade and comparable unrated securities
represented approximately 8% of Municipal Bond's investment portfolio.
Issuers of certain securities owned by Municipal Bond have obtained
insurance guaranteeing their timely payment of principal at maturity and
interest. The insurance reduces financial risk but not market risk of the
securities.
B. Futures Contracts and Forward Commitments
Transactions in futures contracts are utilized in strategies to manage the
market risk of the Trust's investments by increasing or decreasing the
percentage of assets effectively invested. The purchase of a futures
contract increases the impact of changes in the market price of
investments on net asset value. There is also a risk that the market
movement of such instruments may not be in the direction forecasted.
Futures Contracts - Upon entering into futures contracts, the Trust
maintains, in a segregated account with its custodian, securities with a
value equal to its obligation under the futures contracts. A portion of
these funds is held as collateral in an account in the name of the broker,
the Trust's agent in acquiring the futures position. During the period the
futures contract is open, changes in the value of the contract ("variation
margin") are recognized by marking the contract to market on a daily
basis. As unrealized gains or losses are incurred, variation margin
payments are received from or made to the broker. Upon the closing or cash
settlement of a contract, gains and losses are realized. The cost of
securities acquired through delivery under a contract is adjusted by the
unrealized gain or loss on the contract.
Forward Commitments - The Trust trades certain securities under the terms
of forward commitments whereby the settlement for payment and delivery
occurs at a specified future date. Forward commitments are privately
negotiated transactions between the Trust and dealers. The Trust is
exposed to a risk of loss due to nonperformance by the dealers. Upon
executing a forward commitment and during the period of obligation, the
Trust maintains collateral of cash or securities in a segregated account
with its custodian in an amount sufficient to relieve the obligation. If
the intent of the Trust is to accept delivery of a security traded under a
forward purchase commitment, the commitment is recorded as a long-term
purchase. For forward purchase commitments entered into for temporary
investment strategies for which security settlement is not intended by the
Trust, and all forward sale commitments, changes in the value of the
commitment are recognized by marking the commitment to market on a daily
basis. During the commitment, the Trust may either resell or repurchase
the forward commitment and enter into a new forward
F-29
<PAGE> 174
--------------------------------------------------------------------------------
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
commitment, the effect of which is to extend the settlement date. In
addition, the Trust may occasionally close such forward commitments prior
to delivery. Gains and losses are realized upon the closing or cash
settlement of these commitments.
C. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Trust
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Trust may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised or sub-advised by American Capital Asset Management, Inc.
("ACAM"), the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are collateralized by the underlying
debt security. The Trust will make payment for such securities only upon
physical delivery or evidence of book entry transfer to the account of the
custodian bank. The seller is required to maintain the value of the
underlying security at not less than the repurchase proceeds due the
Trust.
D. Federal Income Taxes
No provision for federal income taxes is required because the Trust has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all taxable net investment income and taxable net realized
capital gains to its shareholders. It is anticipated that no distributions
of capital gains will be made until tax basis capital loss carryovers, if
any, expire or are offset by net realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of identified
cost. Dividend income is recorded on the ex-dividend date. Interest income
is accrued daily.
F. Dividends and Distributions
The Trust, excluding Money Market, declares annual distributions from
long-term gains. Government may distribute short-term capital gains
quarterly. Dividends from net investment income are declared daily for
Government, Municipal Bond and Money Market, quarterly for Income and
annually for Growth. Dividends and distributions to shareholders are
recorded on the record date.
The Trust distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ
from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
Municipal Bond intends to continue to invest principally in tax-exempt
obligations sufficient in amount to qualify it to pay "exempt-interest
dividends" as defined in the Internal Revenue Code. However, a portion of
such dividends may represent tax preference items subject to alternative
minimum tax.
G. Equalization
At October 31, 1994, the Municipal Bond discontinued the accounting
practice of equalization, which it had used since its inception.
Equalization is a practice whereby a portion of the proceeds from sales
and the costs of redemptions of Trust shares, equivalent on a per-share
basis to the amount of the undistributed net investment income, is charged
or credited to undistributed net investment income. Government
discontinued equalization in 1987.
The balances of equalization included in undistributed net investment
income at the date of change, which were approximately $245,000 and
$18,000 for Municipal Bond and Government, respectively, were reclassified
to capital surplus. Such reclassification had no effect on net assets,
results of operations, or net asset value per share.
F-30
<PAGE> 175
--------------------------------------------------------------------------------
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
H. Debt Discount or Premium
The Trust accounts for debt discounts or premiums on the same basis as is
followed for federal income tax reporting. Accordingly, original issue
discounts on long-term debt securities purchased are amortized over the
life of the security. For Money Market and Municipal Bond, all premiums
are amortized. Market discounts and premiums are recognized at the time of
sale as realized gains and realized losses, respectively, for book
purposes, and ordinary income and ordinary loss, respectively, for tax
purposes.
Note 2 - Advisory Fees and Other Transactions with Affiliates
Common Sense Investment Advisers (the "Adviser") is a partnership owned equally
by affiliates of ACAM and Primerica Financial Services, Inc. ("PFS"). Advisory
fees to Adviser are paid monthly, based on the average daily net assets of each
fund at an annual rate as indicated by the following graduated fee schedules.
<TABLE>
<CAPTION>
Growth Fund &
Growth and Income Government Municipal Bond Money Market
------------------------- ------------------------- -------------------------- -------------------------
Average Daily Annual Average Daily Annual Average Daily Annual Average Daily Annual
Net Assets Rate Net Assets Rate Net Assets Rate Net Assets Rate
---------------- ------ ---------------- ------ ---------------- ------ ---------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
First $1 billion .65% First $1 billion .60% First $1 billion .60% First $2 billion .50%
Next $1 billion .60% Next $1 billion .55% Next $1 billion .55% Next $2 billion .475%
Next $1 billion .55% Next $1 billion .50% Next $1 billion .50% Over $4 billion .45%
Next $1 billion .50% Next $1 billion .45% Over $3 billion .45%
Over $4 billion .45% Next $1 billion .40%
Over $5 billion .35%
</TABLE>
The Adviser and ACAM have entered into a sub-advisory agreement whereby ACAM
provides investment advisory services to the Adviser at cost. The Adviser has
voluntarily elected to reimburse Money Market for any ordinary business expenses
in excess of 1.00% of its average daily net assets. The Adviser may modify or
terminate this election at any time without prior notice. For the year ended
October 31, 1994, the Adviser reimbursed $475,398 of Money Market's expenses.
Accounting services include the salaries and overhead expenses of the Trust's
Treasurer and the personnel operating under his direction. Charges are allocated
among all investment companies advised or sub-advised by ACAM. These charges
include the employee costs attributable to the Trust's accounting officers. A
portion of the accounting services expense was paid to ACAM in reimbursement of
personnel, facilities and equipment costs attributable to the provision of
accounting services. The services provided by ACAM are at cost.
Common Sense Shareholder Services ("CSSS") serves as the Trust's shareholder
service agent. CSSS is a partnership owned equally by affiliates of ACAM and
PFS. Common Sense Distributors, a partnership owned equally by affiliates of
ACAM and PFS, serves as Distributor of the Trust's shares through an exclusive
selling agreement with PFS Investments Inc. (the "Retail Dealer"). The Retail
Dealer is an indirect wholly-owned subsidiary of PFS. During the year, the Trust
paid $33,630 for printing services to an affiliate of PFS and brokerage
commissions of $395,672 to companies which are deemed affiliates of ACAM's
parent because it owns more than 5% of the company's outstanding voting
securities. Certain officers and trustees of the Trust are officers and
directors of the Adviser or its affiliates.
Amounts paid by the Trust to affiliates during the year were as follows:
<TABLE>
<CAPTION>
Growth Municipal Money
Growth and Income Government Bond Market
------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Accounting services.............................. $ 31,863 $ 14,530 $ 10,227 $ 7,217 $ 6,599
Shareholder service agent fees................... 6,241,238 1,427,361 429,979 132,698 364,659
Sales of Trust shares:
Distributor commissions........................ 4,911,391 1,262,647 516,793 197,479 --
Retail Dealer commissions...................... 22,880,924 5,971,371 3,013,346 1,520,707 --
</TABLE>
F-31
<PAGE> 176
--------------------------------------------------------------------------------
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
Note 3 - Investment Activity
During the year, the cost of purchases and proceeds from sales and maturities of
investments, excluding short-term investments, forward commitments and variable
rate demand notes were:
<TABLE>
<CAPTION>
Growth Municipal
Growth and Income Government Bond
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Purchases.............................. $ 3,254,027,450 $ 577,284,027 $ 913,365,313 $ 29,830,786
Sales.................................. 3,113,790,126 571,248,137 880,422,315 4,015,629
</TABLE>
The following table presents the identified cost of investments at October 31,
1994 for federal income tax purposes with the associated net unrealized
appreciation and depreciation.
<TABLE>
<CAPTION>
Growth Municipal
Growth and Income Government Bond
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Identified cost..................... $ 1,986,167,789 $ 642,979,231 $ 400,625,888 $ 111,505,446
=============== ============== ============= =============
Gross unrealized appreciation....... $ 164,506,858 $ 78,613,650 $ 184,698 $ 2,896,015
Gross unrealized depreciation....... (33,834,944) (14,714,191) (12,259,174) (4,279,376)
--------------- -------------- ------------- -------------
Net unrealized appreciation
(depreciation).................... $ 130,671,914 $ 63,899,459 $ (12,074,476) $ (1,383,361)
=============== ============== ============= =============
</TABLE>
Money Market held only short-term investments.
During the year, the cost of purchases and proceeds from sales of investments
resulting from transactions between Municipal Bond and investment companies
advised by the Adviser were $1,585,000 and $2,200,000, respectively. Such
transactions were made at current market prices on the dates of the transactions
for cash payment against prompt delivery, with no brokerage commissions. The
sales transactions resulted in no net realized gain or loss to the Trust.
The net realized capital loss carryforward at October 31, 1994 for Municipal
Bond was approximately $27,000, which will expire in 1997 and 2001. Government
had a capital loss carryforward of approximately $33.1 million, which will
expire in 2002. The net realized capital loss carryforwards may be utilized to
offset future capital gains until expiration.
At October 31, 1994, the Trust held the following futures contracts expiring in
December 1994:
<TABLE>
<CAPTION>
Market Unrealized
Number of Value at Appreciation
Fund Description Contracts October 31, 1994 (Depreciation)
----------------- ---------------------------------- --------- ---------------- --------------
<S> <C> <C> <C> <C>
Growth Standard & Poor's 500 Index (long) 640 $151,184,000 $2,601,436
============ ==========
Growth and Income Standard & Poor's 500 Index (long) 106 $ 25,039,850 $ (47,742)
============ ==========
Government U.S. Treasury Bond (long) 5,400 $ 5,310,563 $ (97,429)
U.S. Treasury Bond (short) 2,400 (2,360,250) 93,448
------------ ----------
$ 2,950,313 $ (3,981)
============ ==========
</TABLE>
F-32
<PAGE> 177
--------------------------------------------------------------------------------
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
At October 31, 1994, Government held the following forward commitments:
<TABLE>
<CAPTION>
Market Unrealized
Principal Value at Appreciation
Amount Security October 31, 1994 (Depreciation)
----------- -------- ---------------- --------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corp.
$10,000,000 8.50%, settling 1/95 (purchase) $ 9,875,000 $ (14,063)
Federal National Mortgage Association
10,000,000 8.50%, settling 1/95 (purchase) 9,887,500 6,250
Government National Mortgage Association
11,000,000 7.00%, settling 11/94 (sale) (9,851,930) 18,851
10,000,000 8.00%, settling 11/94 (purchase) 9,584,400 (90,600)
5,000,000 8.50%, settling 1/95 (purchase) 4,908,600 21,100
20,000,000 8.50%, settling 2/95 (purchase) 19,582,800 85,155
------------ ---------
(Net obligation $43,959,677) $ 43,986,370 $ 26,693
============ =========
</TABLE>
Note 4 - Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Trust at
the annual rate of $19,480 plus a fee of $1,299 per day for the Board meetings
attended.
<TABLE>
<CAPTION>
Growth
and Municipal Money
Growth Income Government Bond Market
-------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Trustees' fees for the year $129,554 $ 66,512 $ 46,460 $ 34,392 $ 30,688
======== ======== ======== ======== ========
</TABLE>
F-33
<PAGE> 178
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
--------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Growth Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year ......................... $ 16.26 $ 16.02 $ 15.47 $ 11.26 $ 13.15
----------- ----------- ----------- ----------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income .......................................... .29 .281 .30 .36 .38
Expenses ................................................... (.16) (.165) (.17) (.17) (.175)
----------- ----------- ----------- ----------- ----------
Net investment income ...................................... .13 .116 .13 .19 .205
Net realized and unrealized gain or losses on securities(1) .2075 2.0065 1.3925 4.2425 (1.25)
----------- ----------- ----------- ----------- ----------
Total from investment operations ........................... .3375 2.1225 1.5225 4.4325 (1.045)
----------- ----------- ----------- ----------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income ....................... (.1125) (.115) (.17) (.2225) (.2025)
Distributions from net realized gain on securities ......... (1.175) (1.3996) (.8025) -- (.6425)
Distributions in excess of book-basis net realized gain
on securities(1) ........................................... -- (.3679) -- -- --
----------- ----------- ----------- ----------- ----------
Total distributions ........................................ (1.2875) (1.8825) (.9725) (.2225) (.845)
----------- ----------- ----------- ----------- ----------
Net asset value, end of year ............................... $ 15.31 $ 16.26 $ 16.02 $ 15.47 $ 11.26
=========== =========== =========== =========== ==========
TOTAL RETURN(2) ............................................ 2.04% 14.27% 9.83% 39.90% (8.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) ......................... $2,169.9 $2,065.7 $1,648.0 $1,311.5 $ 866.1
Average net assets (millions) .............................. $2,123.1 $1,894.0 $1,479.7 $1,127.8 $ 878.0
Ratios to average net assets
Expenses .................................................. 1.09% 1.14% 1.18% 1.26% 1.53%
Net investment income ..................................... .89% .80% .91% 1.44% 1.79%
Portfolio turnover rate .................................... 164% 166% 134% 100% 99%
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year ......................... $ 17.13 $ 15.54 $ 14.70 $ 11.49 $ 12.51
----------- ----------- ----------- ----------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income .......................................... .45 .46 .435 .46 .47
Expenses ................................................... (.16) (.17) (.16) (.155) (.165)
----------- ----------- ----------- ----------- ----------
Net investment income ...................................... .29 .29 .275 .305 .305
Net realized and unrealized gain or losses on securities.... (.2125) 1.8775 1.2875 3.2225 (.9975)
----------- ----------- ----------- ----------- ----------
Total from investment operations ........................... .0775 2.1675 1.5625 3.5275 (.6925)
----------- ----------- ----------- ----------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income ....................... (.275) (.2775) (.295) (.3175) (.325)
Distributions from net realized gain on securities ......... (1.1625) (.30) (.4275) -- (.0025)
----------- ----------- ----------- ----------- ----------
Total distributions ........................................ (1.4375) (.5775) (.7225) (.3175) (.3275)
----------- ----------- ----------- ----------- ----------
Net asset value, end of year ............................... $ 15.77 $ 17.13 $ 15.54 $ 14.70 $ 11.49
=========== =========== =========== =========== ==========
TOTAL RETURN(2) ............................................ .51% 14.13% 10.85% 31.68% (5.84%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) ......................... $ 712.9 $ 712.4 $ 591.0 $ 499.6 $ 366.6
Average net assets (millions) .............................. $ 707.5 $ 659.5 $ 545.0 $ 449.4 $ 351.5
Ratios to average net assets
Expenses .................................................. 1.02% 1.05% 1.09% 1.14% 1.37%
Net investment income ..................................... 1.84% 1.76% 1.84% 2.29% 2.55%
Portfolio turnover rate .................................... 88% 51% 32% 42% 48%
</TABLE>
(1) Effective November 1, 1992, the Trust adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Prior year financial information has not been restated.
(2) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-34
<PAGE> 179
--------------------------------------------------------------------------------
Financial Highlights, continued
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
--------------------------------------------------
1994 1993 1992 1991 1990
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Government Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year........................... $11.80 $11.56 $11.47 $10.79 $11.46
------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................ .78 .8536 .97 1.012 1.073
Expenses..................................................... (.09) (.0920) (.11) (.107) (.118)
------- -------- -------- -------- --------
Net investment income........................................ .69 .7616 .86 .905 .955
Net realized and unrealized gain or loss on securities....... (1.358) .4249 .1639 .6788 (.4421)
------- -------- -------- -------- --------
Total from investment operations............................. (.668) 1.1865 1.0239 1.5838 .5129
------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income......................... (.6878) (.7615) (.8639) (.9038) (.9579)
Distributions from net realized gain on securities........... -- (.185) (.07) -- (.225)
Distributions in excess of book-basis net realized gains
on securities(1) (.4542) -- -- -- --
------- -------- -------- -------- --------
Total distributions.......................................... (1.142) (.9465) (.9339) (.9038) (1.1829)
------- -------- -------- -------- --------
Net asset value, end of year................................. $ 9.99 $11.80 $11.56 $11.47 $10.79
======= ======== ======== ======== ========
TOTAL RETURN(2).............................................. (5.45%) 10.55% 9.32% 15.16% 4.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)........................... $335.0 $370.2 $282.0 $189.0 $140.9
Average net assets (millions)................................ $353.8 $330.1 $229.5 $161.2 $120.0
Ratios to average net assets
Expenses.................................................... .89% .89% .95% .96% 1.09%
Net investment income....................................... 7.06% 7.35% 7.46% 8.15% 8.78%
Portfolio turnover rate...................................... 256% 218% 112% 39% 28%
</TABLE>
(1) Effective November 1, 1992, the Trust adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Prior year financial information has not been restated.
(2) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-35
<PAGE> 180
--------------------------------------------------------------------------------
Financial Highlights, continued
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-------------------------------------------------
1994 1993 1992 1991 1990
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Muncipal Bond Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year........................... $14.07 $13.03 $12.84 $12.18 $12.37
------- ------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................ .84 .859 .875 .905 .91
Expenses..................................................... (.13) (.141) (.15) (.145) (.16)
Expense reimbursement(2)..................................... -- .01 -- -- .01
------- ------- -------- ------- -------
Net investment income........................................ .71 .728 .725 .76 .76
Net realized and unrealized gain or loss on securities....... (1.182) 1.038 .2175 .648 (.185)
------- ------- -------- ------- -------
Total from investment operations............................. (.472) 1.766 .9425 1.408 .575
------- ------- -------- ------- -------
DIVIDENDS FROM NET INVESTMENT INCOME......................... (.708) (.726) (.7525) (.748) (.765)
------- ------- -------- ------- -------
Net asset value, end of year................................. $12.89 $14.07 $13.03 $12.84 $12.18
======= ======= ======== ======= =======
TOTAL RETURN(1).............................................. (3.38%) 13.84% 7.57% 11.79% 4.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)........................... $112.1 $95.9 $60.3 $42.5 $37.1
Average net assets (millions)................................ $106.6 $77.1 $50.0 $39.2 $31.7
Ratios to average net assets(2)
Expenses.................................................... .99% .96% 1.14% 1.15% 1.25%
Expenses, without expense reimbursement..................... -- 1.04% -- -- 1.28%
Net investment income....................................... 5.27% 5.29% 5.56% 6.08% 6.21%
Net investment income, without expense reimbursement........ -- 5.21% -- -- 6.18%
Portfolio turnover rate...................................... 4% 4% 6% 1% 4%
</TABLE>
--------------------------------------------------------------------------------
Money Market Fund
<TABLE>
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................ .0388 .033 .0424 .0647 .0839
Expenses..................................................... (.0184) (.0174) (.016) (.014) (.014)
Expense reimbursement(2)..................................... .0084 .0074 .006 .0041 .004
-------- -------- -------- -------- --------
Net investment income........................................ .0288 .023 .0324 .0548 .0739
DIVIDENDS FROM NET INVESTMENT INCOME......................... (.0288) (.023) (.0324) (.0548) (.0739)
-------- -------- -------- -------- --------
Net asset value, end of year................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
TOTAL RETURN(1).............................................. 2.91% 2.31% 3.29% 5.65% 7.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(millions)............................ $56.4 $59.2 $72.5 $84.8 $95.7
Average net assets (millions)................................ $56.6 $65.8 $77.9 $92.6 $81.6
Ratios to average net assets(2)
Expenses.................................................... 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, without expense reimbursement..................... 1.84% 1.74% 1.60% 1.41% 1.36%
Net investment income....................................... 2.87% 2.30% 3.27% 5.53% 7.37%
Net investment income, without expense reimbursement........ 2.03% 1.56% 2.67% 5.12% 7.01%
</TABLE>
(1) Total return does not consider the effect of sales charges.
(2) See Note 2.
See Notes to Financial Statements.
F-36
<PAGE> 181
--------------------------------------------------------------------------------
Report of Independent Auditors
--------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of Common Sense Trust
We have audited the accompanying statements of net assets of Common Sense Growth
Fund, Common Sense Growth and Income Fund, Common Sense Government Fund, Common
Sense Municipal Bond Fund, and Common Sense Money Market Fund (cumulatively the
"Funds"), five of the nine portfolios constituting the series of the Common
Sense Trust (the "Trust"), as of October 31, 1994, and for each of the Funds,
the related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective funds of the Common Sense Trust listed above at October
31, 1994, the results of their operations, the changes in their net assets, and
the financial highlights for each of the periods identified above, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 2, 1994
F-37
<PAGE> 182
--------------------------------------------------------------------------------
Growth Fund II Statement of Net Assets
--------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stock 82.8%
CONSUMER DISTRIBUTION 5.7%
1,000 Dayton Hudson Corp. ............................................................... $ 77,500
2,000 Dollar General Corp. .............................................................. 58,000
*2,500 Federated Department Stores, Inc. ................................................. 51,875
1,000 Home Depot, Inc. .................................................................. 45,500
1,000 May Department Stores Co. ......................................................... 37,625
1,200 Nordstrom, Inc..................................................................... 59,100
1,500 Premark International, Inc......................................................... 67,125
*1,200 Toys R Us, Inc..................................................................... 46,200
3,800 Wal Mart Stores, Inc............................................................... 89,300
1,000 Walgreens Co....................................................................... 41,500
-------------
TOTAL CONSUMER DISTRIBUTIONS..................................................... 573,725
-------------
CONSUMER DURABLES 1.2%
1,100 Daimler Benz, AG, ADS.............................................................. 55,962
1,500 Ford Motor Co. .................................................................... 44,250
600 Harley Davidson, Inc. ............................................................. 16,800
-------------
TOTAL CONSUMER DURABLES.......................................................... 117,012
-------------
CONSUMER NON-DURABLES 8.4%
1,200 American Greetings Corp., Class A.................................................. 32,850
3,000 Archer Daniels Midland Co. ........................................................ 85,875
300 Avon Products, Inc. ............................................................... 18,975
700 Campbell Soup Co. ................................................................. 28,875
1,000 Coca-Cola Co. ..................................................................... 50,250
1,000 Colgate Palmolive Co. ............................................................. 61,000
1,000 ConAgra, Inc. ..................................................................... 31,125
1,000 CPC International, Inc. ........................................................... 53,500
*4,500 Dr Pepper/Seven Up Companies, Inc.................................................. 114,187
500 Duracell International, Inc........................................................ 21,562
600 Heinz (H.J.) Co.................................................................... 22,275
2,000 IBP, Inc........................................................................... 68,250
500 Kellogg Co......................................................................... 29,375
600 Nike, Inc., Class B................................................................ 36,525
1,800 Procter & Gamble Co................................................................ 112,500
400 Quaker Oats Co. ................................................................... 29,950
*2,000 Ralcorp Holdings, Inc.............................................................. 41,500
1,000 Whitman Corp. ..................................................................... 16,500
-------------
TOTAL CONSUMER NON-DURABLES...................................................... 855,074
-------------
</TABLE>
F-38
<PAGE> 183
--------------------------------------------------------------------------------
Growth Fund II Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C>
CONSUMER SERVICES 5.1%
400 Capital Cities ABC, Inc............................................................ $ 33,250
1,000 CBS, Inc........................................................................... 59,875
*2,000 Comcast UK Partners, Ltd........................................................... 40,000
1,000 Dun & Bradstreet Corp.............................................................. 58,625
*2,500 Host Marriott Corp................................................................. 26,562
1,800 Marriott International, Inc........................................................ 52,650
500 Omnicom Group, Inc................................................................. 26,625
*1,500 Outback Steakhouse, Inc. .......................................................... 46,313
*1,500 Tele-Communications, Inc., Class A................................................. 33,938
900 Time Warner, Inc................................................................... 31,950
1,200 Tribune Co......................................................................... 63,150
*600 Wolters Kluwer, NV, ADR............................................................ 43,350
-------------
TOTAL CONSUMER SERVICES.......................................................... 516,288
-------------
ENERGY 7.4%
900 Amoco Corp......................................................................... 57,038
2,200 Apache Corp........................................................................ 61,875
200 Atlantic Richfield Co.............................................................. 21,675
700 British Petroleum Co., PLC, ADR.................................................... 59,500
1,500 Chevron Corp....................................................................... 67,500
1,500 Coastal Corp....................................................................... 42,750
1,300 Exxon Corp......................................................................... 81,737
1,500 Halliburton Co..................................................................... 55,500
700 Mobil Corp......................................................................... 60,200
3,000 Occidental Petroleum Corp.......................................................... 65,625
1,000 Repsol, SA, ADR.................................................................... 32,500
500 Royal Dutch Petroleum Co., ADR..................................................... 58,250
900 Schlumberger, Ltd.................................................................. 52,875
*700 Western Atlas, Inc................................................................. 32,200
-------------
TOTAL ENERGY..................................................................... 749,225
-------------
FINANCE 7.4%
3,000 American Express Co................................................................ 92,250
800 American International Group, Inc.................................................. 74,900
1,200 Baybanks, Inc...................................................................... 69,300
1,500 Citicorp........................................................................... 71,625
800 Federal Home Loan Mortgage Corp.................................................... 43,600
500 Federal National Mortgage Association.............................................. 38,000
1,800 First Bank System, Inc............................................................. 67,050
700 First Interstate Bancorp........................................................... 56,000
1,000 Great Western Financial Corp....................................................... 17,875
900 MBNA Corp.......................................................................... 24,075
2,500 MidAtlantic Corp................................................................... 70,000
900 NationsBank Corp. ................................................................. 44,550
3,000 West One Bancorp................................................................... 82,500
-------------
TOTAL FINANCE.................................................................... 751,725
-------------
</TABLE>
F-39
<PAGE> 184
--------------------------------------------------------------------------------
Growth Fund II Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C>
HEALTH CARE 11.2%
2,200 Abbott Laboratories, Inc........................................................... $ 68,200
*800 Amgen, Inc......................................................................... 44,600
2,500 Baxter International, Inc.......................................................... 65,000
700 Bristol Myers Squibb Co............................................................ 40,862
600 Columbia/HCA Healthcare Corp....................................................... 24,975
*1,000 Community Health Systems, Inc...................................................... 26,250
1,400 Eli Lilly & Co..................................................................... 86,800
*1,000 Forest Labs, Inc................................................................... 46,000
*900 Genentech, Inc..................................................................... 45,675
*2,000 Healthcare & Retirement Corp....................................................... 53,750
*3,000 Humana, Inc........................................................................ 73,125
1,600 Johnson & Johnson.................................................................. 87,400
1,000 Mallinckrodt Group, Inc............................................................ 30,375
1,000 Merck & Co., Inc................................................................... 35,750
2,000 Mylan Labs, Inc.................................................................... 56,000
900 Pfizer, Inc........................................................................ 66,713
900 Schering-Plough Corp............................................................... 64,125
3,000 Upjohn Co.......................................................................... 99,000
800 Warner Lambert Co.................................................................. 61,000
*2,500 Watson Pharmaceuticals, Inc. ...................................................... 65,781
-------------
TOTAL HEALTH CARE................................................................ 1,141,381
-------------
PRODUCER MANUFACTURING 7.5%
*800 Akzo, NV, ADR...................................................................... 50,100
1,000 Allied-Signal, Inc................................................................. 34,625
*500 BBC Brown Boveri Ltd., ADR......................................................... 42,750
2,500 Browning Ferris Industries, Inc.................................................... 79,375
1,200 Caterpillar, Inc................................................................... 71,700
900 Deere & Co......................................................................... 64,575
1,600 General Electric Co................................................................ 78,200
1,000 Illinois Tool Works, Inc........................................................... 44,875
1,000 Minnesota Mining & Manufacturing Co................................................ 55,375
3,000 Philip NV, ADR..................................................................... 98,250
*1,500 Thermo Fibertek, Inc............................................................... 23,063
500 TRW, Inc........................................................................... 35,625
3,000 WMX Technologies, Inc.............................................................. 88,125
-------------
TOTAL PRODUCER MANUFACTURING..................................................... 766,638
-------------
RAW MATERIALS/PROCESSING INDUSTRIES 7.0%
500 Air Products & Chemical, Inc....................................................... 23,875
300 Aluminum Co. of America............................................................ 25,575
1,000 Dow Chemical Co.................................................................... 73,500
1,000 DuPont (E.I.) de Nemours & Co...................................................... 59,625
600 Eastman Chemical Co................................................................ 32,400
*300 Georgia Gulf Corp.................................................................. 11,625
</TABLE>
F-40
<PAGE> 185
--------------------------------------------------------------------------------
Growth Fund II Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES - continued
1,000 Georgia Pacific Corp............................................................... $ 73,875
300 Hercules, Inc...................................................................... 35,025
1,000 International Paper Co............................................................. 74,500
1,000 Monsanto Co........................................................................ 76,125
900 Newmont Mining Corp................................................................ 37,237
300 Phelps Dodge Corp.................................................................. 18,413
2,000 Praxair, Inc....................................................................... 46,250
1,000 Scott Paper Co..................................................................... 66,125
1,700 Sherwin Williams Co................................................................ 55,463
-------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES........................................ 709,613
-------------
TECHNOLOGY 18.7%
*1,200 3Com Corp.......................................................................... 48,300
900 Adobe Systems, Inc................................................................. 32,400
*1,000 Analog Devices, Inc................................................................ 35,750
*2,500 Applied Materials, Inc............................................................. 130,000
*1,000 Cabletron Systems, Inc............................................................. 50,250
*1,000 Chipcom Corp....................................................................... 60,250
*2,000 Cisco Systems, Inc................................................................. 60,250
*1,600 Compaq Computer Corp............................................................... 64,200
*1,500 Compuware Corp..................................................................... 58,687
*3,000 DSC Communications Corp............................................................ 92,250
600 Ericsson (L.M.), Class B, ADR...................................................... 36,562
*3,000 General Instruments Corp........................................................... 100,500
500 Hewlett-Packard Co................................................................. 48,875
*3,000 Integrated Device Technologies..................................................... 85,125
*1,000 Intel Corp......................................................................... 62,125
2,000 International Business Machines Corp............................................... 149,000
700 Linear Technology Corp............................................................. 33,600
*1,500 LSI Logic Corp..................................................................... 63,750
1,000 Micron Technology, Inc............................................................. 39,625
*1,000 Microsoft Corp..................................................................... 63,000
800 Motorola, Inc...................................................................... 47,100
900 Northern Telecom, Ltd.............................................................. 32,512
*800 Oracle System Corp................................................................. 36,800
*3,000 Read-Rite Corp..................................................................... 52,125
1,500 Rockwell International Corp........................................................ 52,313
*2,000 Sequent Computer Systems, Inc...................................................... 38,000
*1,500 Silicon Graphics, Inc.............................................................. 45,563
*2,000 Sun Microsystems, Inc. ............................................................ 65,500
*3,000 Symantec Corp...................................................................... 53,250
*500 Synopsys, Inc...................................................................... 23,063
*500 Tellabs, Inc....................................................................... 24,375
1,100 United Technologies Corp........................................................... 69,300
500 Xerox Corp......................................................................... 51,250
-------------
TOTAL TECHNOLOGY................................................................. 1,905,650
-------------
</TABLE>
F-41
<PAGE> 186
--------------------------------------------------------------------------------
Growth Fund II Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION 0.6%
*1,000 Federal Express Corp............................................................... $ 60,750
-------------
UTILITIES 2.6%
*600 ALC Communications Corp............................................................ 22,725
1,100 AT&T Corp.......................................................................... 60,500
3,000 Cellular Communications, Inc., Class A............................................. 159,750
600 P.T. Indosat, ADS.................................................................. 23,775
-------------
TOTAL UTILITIES.................................................................. 266,750
-------------
TOTAL COMMON STOCK (Cost $8,142,378)............................................. 8,413,831
-------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Short-Term Investments 23.8%
------------
<S> <C> <C>
$ 490,000 Federal Home Loan Mortgage Corp., Discount Note, 4.70%, due 11/2/94................ 489,872
735,000 Repurchase Agreement with Goldman, Sachs & Co., dated 10/31/94,
4.70%, due 11/1/94 (collateralized by U.S. Government obligations in a pooled
cash account) repurchase proceeds $735,096....................................... 735,000
**1,200,000 United States Treasury Bills, 4.31% to 5.03%, due 12/22/94 to 1/5/95............... 1,194,097
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost $2,418,969)................................... 2,418,969
-------------
TOTAL INVESTMENTS (Cost $10,561,347) 106.6%....................................... 10,832,800
Receivable for investments sold 4.2%.............................................. 428,553
Payable for investments purchased (13.5%)......................................... (1,368,399)
Other assets and liabilities, net 2.7%............................................ 270,682
-------------
NET ASSETS, equivalent to $11.89 per share for Class A shares
and $11.85 per share for Class B shares 100%.................................... $ 10,163,636
=============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 368,584 Class A and 487,917 Class B shares outstanding..... $ 8,565
Capital surplus................................................................................... 10,071,848
Accumulated net realized loss on investments...................................................... (195,878)
Net unrealized appreciation of securities
Investments .................................................................................... 271,453
Futures .................................................................................... 16,488
Accumulated net investment loss................................................................... (8,840)
-------------
NET ASSETS at October 31, 1994.................................................................... $ 10,163,636
=============
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $1.2 million were placed as
collateral for futures contracts (Note 1B).
See Notes to Financial Statements.
F-42
<PAGE> 187
--------------------------------------------------------------------------------
Growth II Fund Statement of Operations
--------------------------------------------------------------------------------
May 3, 1994* through October 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends.............................................................................................. $ 78,405
Interest............................................................................................... 25,784
---------
Investment income.................................................................................... 104,189
---------
EXPENSES
Shareholder service agent's fees and expenses.......................................................... 52,141
Registration and filing fees........................................................................... 17,599
Advisory fees ......................................................................................... 13,644
Audit fees............................................................................................. 12,000
Service fees - Class A................................................................................. 2,602
Distribution and service fees - Class B................................................................ 10,580
Legal Fees............................................................................................. 4,380
Miscellaneous.......................................................................................... 83
---------
Total expenses....................................................................................... 113,029
---------
Net investment loss.................................................................................. (8,840)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments.......................................................................................... (217,013)
Futures contracts.................................................................................... 21,135
Net unrealized appreciation of securities
Investments.......................................................................................... 271,453
Futures contracts.................................................................................... 16,488
---------
Net realized and unrealized gain on securities....................................................... 92,063
---------
Increase in net assets resulting from operations..................................................... $ 83,223
=========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-43
<PAGE> 188
--------------------------------------------------------------------------------
Growth II Fund Statement of Changes in Net Assets
--------------------------------------------------------------------------------
May 3, 1994* through October 31, 1994
<TABLE>
<S> <C>
NET ASSETS, beginning of period .................................................................. $ 200
--------------
OPERATIONS
Net investment loss ............................................................................ (8,840)
Net realized loss on securities ................................................................ (195,878)
Net unrealized appreciation of securities ...................................................... 287,941
--------------
Increase in net assets resulting from operations ............................................... 83,223
--------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A ...................................................................................... 4,406,808
Class B ...................................................................................... 5,848,735
--------------
10,255,543
--------------
Cost of shares redeemed
Class A ...................................................................................... (63,815)
Class B ...................................................................................... (111,515)
--------------
(175,330)
--------------
Increase in net assets resulting from Fund share transactions .................................. 10,080,213
--------------
INCREASE IN NET ASSETS ........................................................................... 10,163,436
--------------
NET ASSETS, end of period ........................................................................ $ 10,163,636
==============
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-44
<PAGE> 189
--------------------------------------------------------------------------------
Growth and Income Fund II Statement of Net Assets
--------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
Number Market
of Shares Value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 77.8%
CONSUMER DISTRIBUTION 3.6%
700 Dayton Hudson Corp. ................................................................... $ 54,250
1,600 K Mart Corp. .......................................................................... 26,200
1,100 May Department Stores Co. ............................................................. 41,388
*800 Michael's Stores, Inc. ................................................................ 32,450
1,000 Nordstrom, Inc. ....................................................................... 49,250
1,100 Sears, Roebuck & Co. .................................................................. 54,450
------------
TOTAL CONSUMER DISTRIBUTION.......................................................... 257,988
------------
CONSUMER DURABLES 2.7%
1,300 Black & Decker Corp. .................................................................. 32,662
700 Daimler Benz, AG, ADS ................................................................. 35,613
1,000 Dana Corp. ............................................................................ 25,625
1,100 Ford Motor Co. ........................................................................ 32,450
800 General Motors Corp. .................................................................. 31,600
900 Stanley Works ......................................................................... 35,775
------------
TOTAL CONSUMER DURABLES.............................................................. 193,725
------------
CONSUMER NON-DURABLES 7.4%
1,000 American Greetings Corp., Class A...................................................... 27,375
700 Clorox Co. ............................................................................ 37,800
1,100 Coca-Cola Co. ......................................................................... 55,275
*2,000 Dr Pepper/Seven Up Companies, Inc. .................................................... 50,750
500 Duracell International, Inc. .......................................................... 21,563
700 Gillette Co. .......................................................................... 52,063
2,400 Liz Claiborne, Inc. ................................................................... 55,500
1,100 Pet, Inc. ............................................................................. 18,975
1,300 Procter & Gamble Co. .................................................................. 81,250
500 Quaker Oats Co. ....................................................................... 37,438
1,300 Reebok International, Ltd. ............................................................ 51,838
2,000 U.S. Shoe, Inc. ....................................................................... 35,750
------------
TOTAL CONSUMER NON-DURABLES.......................................................... 525,577
------------
CONSUMER SERVICES 4.8%
800 Capital Cities ABC, Inc. .............................................................. 66,500
600 Dun & Bradstreet Corp. ................................................................ 35,175
1,100 Gaylord Entertainment Co., Class A .................................................... 21,588
1,400 McDonald's Corp. ...................................................................... 40,250
700 Omnicom Group, Inc. ................................................................... 37,275
1,000 Readers Digest Association, Inc. ...................................................... 43,875
400 Tribune Co. ........................................................................... 21,050
1,200 Walt Disney Co. ....................................................................... 47,250
2,100 Wendy's International, Inc. ........................................................... 30,975
------------
TOTAL CONSUMER SERVICES.............................................................. 343,938
------------
</TABLE>
F-45
<PAGE> 190
--------------------------------------------------------------------------------
Growth and Income Fund II Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 8.7%
700 AMOCO CORP. ........................................................................... $ 44,362
1,200 British Petroleum Co., PLC, ADR ....................................................... 102,000
1,000 Enron Corp. ........................................................................... 32,375
700 Exxon Corp. ........................................................................... 44,013
700 Mobil Corp. ........................................................................... 60,200
3,700 Occidental Petroleum Corp. ............................................................ 80,938
3,800 Pacific Enterprises ................................................................... 81,700
800 Royal Dutch Petroleum Co., ADR ........................................................ 93,200
1,600 Sun, Inc. ............................................................................. 51,400
1,600 USX-Marathon Group .................................................................... 30,000
------------
TOTAL ENERGY......................................................................... 620,188
------------
FINANCE 9.4%
1,800 Ahmanson (H.F.) & Co. ................................................................. 34,425
600 American International Group, Inc. .................................................... 56,175
1,500 Bank of Boston Corp. .................................................................. 43,125
1,700 Bankamerica Corp. ..................................................................... 73,950
700 Baybanks, Inc. ........................................................................ 40,425
900 Boatmen's Bancshares, Inc.............................................................. 26,663
400 Carr Realty Corp. ..................................................................... 7,800
300 Charles E. Smith Residential Realty ................................................... 7,425
900 Crestar Financial Corp. ............................................................... 37,125
1,000 Dean Witter, Discover & Co. ........................................................... 38,625
300 Equity Residential Properties Trust.................................................... 8,963
800 Federal National Mortgage Association.................................................. 60,800
1,200 First Bank System, Inc. ............................................................... 44,700
400 First Interstate Bancorp............................................................... 32,000
700 Liberty Property Trust................................................................. 13,300
400 Manufactured Home Communities, Inc..................................................... 7,450
800 MBIA, Inc. ............................................................................ 43,300
700 NationsBank Corp. ..................................................................... 34,650
1,100 St. Paul Companies, Inc. .............................................................. 47,988
300 Weingarten Realty Investors ........................................................... 10,275
------------
TOTAL FINANCE........................................................................ 669,164
------------
HEALTH CARE 10.1%
1,400 Abbott Laboratories, Inc............................................................... 43,400
800 American Home Products Corp............................................................ 50,800
*900 Amgen, Inc. ........................................................................... 50,175
2,000 Baxter International, Inc. ............................................................ 52,000
1,000 Bristol Myers Squibb Co. .............................................................. 58,375
800 Columbia/HCA Healthcare Corp. ......................................................... 33,300
1,300 Eli Lilly & Co. ....................................................................... 80,600
*800 Genetics Instruments, Inc. ............................................................ 32,400
*900 Healthcare & Retirement Corp. ......................................................... 24,188
*1,500 Nellcor, Inc........................................................................... 46,500
700 Pfizer, Inc. .......................................................................... 51,888
800 Schering-Plough Corp. ................................................................. 57,000
2,200 Upjohn Co. ............................................................................ 72,600
800 Warner Lambert Co. .................................................................... 61,000
------------
TOTAL HEALTH CARE.................................................................... 714,226
------------
</TABLE>
F-46
<PAGE> 191
--------------------------------------------------------------------------------
Growth and Income Fund II Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING 6.6%
1,200 Allied-Signal, Inc..................................................................... $ 41,550
2,200 Browning-Ferris Industries, Inc. ...................................................... 69,850
1,000 Fluor Corp. ........................................................................... 49,500
1,700 General Electric Co. .................................................................. 83,088
1,200 Illinois Tool Works, Inc. ............................................................. 53,850
2,100 Philip NV, ADR......................................................................... 68,775
500 Trinova Corp. ......................................................................... 17,500
*900 Varity Corp. .......................................................................... 34,425
1,800 WMX Technologies, Inc. ................................................................ 52,875
------------
TOTAL PRODUCER MANUFACTURING......................................................... 471,413
------------
RAW MATERIALS/PROCESSING INDUSTRIES 7.6%
400 Ball Corp. ............................................................................ 11,300
1,700 Cabot Corp. ........................................................................... 48,450
700 Dow Chemical Co. ...................................................................... 51,450
1,100 Du Pont (E.I.) de Nemours & Co. ....................................................... 65,588
1,300 Eastman Chemical Co. .................................................................. 70,200
3,000 Ethyl Corp. ........................................................................... 34,125
*900 Georgia Gulf Corp. .................................................................... 34,875
1,000 International Paper Co. ............................................................... 74,500
300 Monsanto Co. .......................................................................... 22,838
1,000 PPG Industries, Inc. .................................................................. 40,750
800 Scott Paper Co. ....................................................................... 52,900
1,000 Union Carbide Corp. ................................................................... 33,125
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES............................................ 540,101
------------
TECHNOLOGY 9.8%
1,000 Adobe Systems, Inc. ................................................................... 36,000
*100 BMC Software, Inc. .................................................................... 4,525
700 Boeing Co. ............................................................................ 30,713
1,000 Computer Association International, Inc. .............................................. 49,625
*400 DSCCommunications Corp. ............................................................... 12,300
700 Ericsson (L.M.), Class B, ADR ......................................................... 42,656
*1,300 General Instruments Corp. ............................................................. 43,550
300 Hewlett-Packard Co..................................................................... 29,325
1,400 International Business Machines Corp. ................................................. 104,300
700 Linear Technology Corp. ............................................................... 33,600
*600 Microsoft Corp. ....................................................................... 37,800
1,300 Motorola, Inc. ........................................................................ 76,538
1,300 Northern Telecom, Ltd. ................................................................ 46,963
1,000 Rockwell International Corp. .......................................................... 34,875
1,000 United Technologies Corp............................................................... 63,000
500 Xerox Corp. ........................................................................... 51,250
------------
TOTAL TECHNOLOGY..................................................................... 697,020
------------
</TABLE>
F-47
<PAGE> 192
--------------------------------------------------------------------------------
Growth and Income Fund II Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION 0.6%
700 Conrail, Inc. ......................................................................... $ 38,063
------------
UTILITIES 6.5%
1,100 AT&T Corp. ............................................................................ 60,500
1,700 Duke Power Co. ........................................................................ 67,363
1,100 NYNEX Corp. ........................................................................... 43,175
2,700 Pacificorp ............................................................................ 47,588
1,100 Pacific Telesis Group ................................................................. 34,788
1,900 Peco Energy Co. ....................................................................... 48,688
1,600 Public Service Enterprise Group ....................................................... 42,000
2,100 Sprint Corp. .......................................................................... 68,513
900 Telefonos de Mexico SA, ADR ........................................................... 49,601
------------
TOTAL UTILITIES...................................................................... 462,216
------------
TOTAL COMMON STOCK (Cost $5,454,979)................................................. 5,533,619
------------
Convertible Preferred Stock 0.4%
100 Corning, Inc., 6.00%................................................................... 5,113
1,500 Westinghouse Electric Corp., $1.30..................................................... 21,750
------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $25,982)..................................... 26,863
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Convertible Corporate Obligations 0.5%
----------
<S> <C> <C>
$ 1,400 Atlantic Richfield Corp., 9.00%, 9/15/97 (Cost $35,944)................................ 37,560
------------
Short-Term Investments 20.5%
955,000 Repurchase Agreement with Goldman, Sachs & Co., dated 10/31/94, 4.70%,
due 11/1/94 (collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $955,125................................................ 955,000
**500,000 United States Treasury Bills, 4.31%, 11/3/94........................................... 499,821
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,454,821)....................................... 1,454,821
------------
TOTAL INVESTMENTS (Cost $6,971,726) 99.2%............................................. 7,052,863
Other assets and liabilities, net 0.8%................................................ 58,637
------------
NET ASSETS, equivalent to $11.71 per share for Class A shares and
$11.70 per share for Class B shares 100%.............................................. $ 7,111,500
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 296,465 Class A and 311,052 Class B shares outstanding...... $ 6,075
Capital surplus.................................................................................... 7,113,907
ACCUMULATED NET REALIZED LOSS ON SECURITIES........................................................ (121,393)
Net unrealized appreciation (depreciation) of securities
Investments...................................................................................... 81,137
Futures.......................................................................................... (4,125)
Undistributed net investment income................................................................ 35,899
------------
NET ASSETS at October 31, 1994..................................................................... $ 7,111,500
============
</TABLE>
*Non-incoming producing security.
**Security placed as collateral for futures contracts along with another
Treasury Bill purchased 11/1/94 (Note 1B).
See Notes to Financial Statements.
F-48
<PAGE> 193
--------------------------------------------------------------------------------
Growth and Income II Fund Statement of Operations
--------------------------------------------------------------------------------
May 3, 1994* through October 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends............................................................................................. $ 101,157
Interest.............................................................................................. 18,696
---------
Investment income................................................................................... 119,853
---------
EXPENSES
Registration and filing fees.......................................................................... 16,150
Shareholder service agent's fees and expenses......................................................... 13,047
Audit fees............................................................................................ 11,250
Advisory fees (net of expense reimbursement of $520).................................................. 10,464
Service fees - Class A................................................................................ 2,381
Distribution and service fees - Class B............................................................... 7,374
Legal fees............................................................................................ 4,380
Miscellaneous......................................................................................... 98
---------
Total expenses...................................................................................... 65,144
---------
Net investment income............................................................................... 54,709
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments.......................................................................................... (136,768)
Futures contracts.................................................................................... 15,375
Net unrealized appreciation (depreciation) of securities
Investments.......................................................................................... 81,137
Futures contracts.................................................................................... (4,125)
---------
Net realized and unrealized loss on securities.................................................... (44,381)
---------
Increase in net assets resulting from operations.................................................. $ 10,328
=========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-49
<PAGE> 194
--------------------------------------------------------------------------------
Growth and Income II Fund Statement of Changes in Net Assets
--------------------------------------------------------------------------------
May 3, 1994* through October 31, 1994
<TABLE>
<S> <C>
NET ASSETS, beginning of period.................................................................... $ 200
------------
OPERATIONS
Net investment income............................................................................ 54,709
Net realized loss on securities.................................................................. (121,393)
Net unrealized appreciation of securities........................................................ 77,012
------------
Increase in net assets resulting from operations................................................. 10,328
------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A.......................................................................................... (11,970)
Class B.......................................................................................... (6,840)
------------
(18,810)
------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A........................................................................................ 3,526,516
Class B........................................................................................ 3,654,518
------------
7,181,034
------------
Proceeds from shares issued for dividends reinvested
Class A........................................................................................ 11,544
Class B........................................................................................ 6,749
------------
18,293
------------
Cost of shares redeemed
Class A........................................................................................ (56,689)
Class B........................................................................................ (22,856)
------------
(79,545)
------------
Increase in net assets resulting from Fund share transactions.................................... 7,119,782
------------
INCREASE IN NET ASSETS............................................................................. 7,111,300
------------
NET ASSETS, end of period.......................................................................... $ 7,111,500
============
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-50
<PAGE> 195
--------------------------------------------------------------------------------
Government Fund II Statement of Net Assets
--------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
United States Agency Obligations 63.4%
Federal Home Loan Mortgage Corp.
$ 186,832 7.00%, 10/01/24................................................................... $ 170,309
383,762 7.50%, 10/01/24................................................................... 360,257
202,000 8.00%, 4/01/23.................................................................... 195,120
Federal National Mortgage Association
403,247 7.00%, 5/01/24.................................................................... 367,209
399,281 7.50%, 8/01/24.................................................................... 374,578
398,908 8.00%, 8/01/24.................................................................... 384,822
201,614 8.50%, 7/01/24.................................................................... 199,850
Government National Mortgage Association
186,626 7.00%, 6/15/22.................................................................... 167,148
841,472 7.50%, 9/15/23 to 10/15 23........................................................ 780,725
793,317 8.00%, 8/15/24 to 9/15/24......................................................... 760,347
272,865 8.50%, 8/15/24.................................................................... 269,370
614,657 9.00%, 9/15/24.................................................................... 625,033
-------------
TOTAL UNITED STATES AGENCY OBLIGATIONS (Cost $4,785,035).......................... 4,654,768
-------------
United States Government Obligations 31.5%
50,000 United States Treasury Bond, 8.125%, 8/15/19........................................ 50,031
United States Treasury Notes
600,000 8.875%, 2/15/96................................................................... 617,532
100,000 11.25%, 2/15/95................................................................... 101,641
1,500,000 11.25%, 5/15/95................................................................... 1,542,660
-------------
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS (Cost $2,328,375)...................... 2,311,864
-------------
Repurchase Agreement 2.4%
180,000 Goldman, Sachs & Co., dated 10/31/94, 4.70%, due 11/1/94 (collateralized by
U.S. Government obligations in a pooled cash account) repurchase proceeds
$180,024 (Cost $180,000).......................................................... 180,000
-------------
TOTAL INVESTMENTS (Cost $7,293,410) 97.3%.......................................... 7,146,632
Other assets and liabilities, net 2.7%............................................. 195,524
-------------
NET ASSETS, equivalent to $11.54 per share for Class A and Class B shares 100%..... $ 7,342,156
=============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 394,544 Class A and 241,885 Class B shares outstanding....... $ 6,364
Capital surplus .................................................................................... 7,512,764
Accumulated net realized loss on securities......................................................... (35,561)
Net unrealized depreciation of securities........................................................... (146,778)
Undistributed net investment income................................................................. 5,367
-------------
NET ASSETS at October 31, 1994...................................................................... $ 7,342,156
=============
</TABLE>
See Notes to Financial Statements.
F-51
<PAGE> 196
--------------------------------------------------------------------------------
Government II Fund Statement of Operations
--------------------------------------------------------------------------------
May 3, 1994* through October 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................................................................................. $ 153,102
-----------
EXPENSES
Registration and filing fees......................................................................... 16,424
Advisory fees........................................................................................ 14,964
Audit fees........................................................................................... 11,250
Shareholder service agent's fees and expenses........................................................ 6,219
Service fees - Class A............................................................................... 4,835
Distribution and service fees - Class B.............................................................. 5,639
Legal fees........................................................................................... 4,380
Miscellaneous........................................................................................ 177
-----------
Total expenses..................................................................................... 63,888
-----------
Net investment income.............................................................................. 89,214
-----------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities
Investments........................................................................................ (32,120)
Forward commitments................................................................................ (3,059)
Net unrealized depreciation of securities............................................................ (146,778)
-----------
Net realized and unrealized loss on securities..................................................... (181,957)
-----------
Decrease in net assets resulting from operations................................................... $ (92,743)
===========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-52
<PAGE> 197
--------------------------------------------------------------------------------
Government II Fund Statement of Changes in Net Assets
--------------------------------------------------------------------------------
May 3, 1994* through October 31, 1994
<TABLE>
<S> <C>
NET ASSETS, beginning of period.................................................................... $ 200
------------
OPERATIONS
Net investment income............................................................................ 89,214
Net realized loss on securities.................................................................. (35,179)
Net unrealized depreciation of securities........................................................ (146,778)
------------
Decrease in net assets resulting from operations................................................. (92,743)
------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A.......................................................................................... (66,280)
Class B.......................................................................................... (17,949)
------------
(84,229)
------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A........................................................................................ 5,138,916
Class B........................................................................................ 2,976,454
------------
8,115,370
------------
Proceeds from shares issued for dividends reinvested
Class A........................................................................................ 60,050
Class B........................................................................................ 17,072
------------
77,122
------------
Cost of shares redeemed
Class A........................................................................................ (516,794)
Class B........................................................................................ (156,770)
------------
(673,564)
------------
Increase in net assets resulting from Fund share transactions.................................... 7,518,928
------------
INCREASE IN NET ASSETS............................................................................. 7,341,956
------------
NET ASSETS, end of period.......................................................................... $ 7,342,156
============
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-53
<PAGE> 198
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies
Common Sense Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as a diversified open-end management investment company
which offers shares in nine separate portfolios, three of which are described in
this report: Common Sense II Growth Fund ("Growth II"), Common Sense II Growth
and Income Fund ("Growth and Income II") and Common Sense II Government Fund
("Government II"). Each Fund is accounted for as a separate entity. The
following is a summary of significant accounting policies consistently followed
by the Trust in the preparation of its financial statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are valued
at the last sale price. Unlisted securities and listed securities for
which the last sale price is not available are valued at the most recent
bid price. U.S. Government securities are valued at the last reported bid
price. Securities for which market quotations are not readily available
are valued at fair value under a method approved by the Board of Trustees.
Short-term investments with a maturity of more than 60 days when purchased
are valued based on market quotations until the remaining days to maturity
become less than 61 days. From such time, until maturity, the investments
are valued at amortized cost.
B. Futures Contracts and Forward Commitments
Transactions in futures contracts are utilized in strategies to manage the
market risk of the Trust's investments by increasing or decreasing the
percentage of assets effectively invested. The purchase of a futures
contract increases the impact of changes in the market price of
investments on net asset value. There is also a risk that the market
movement of such instruments may not be in the direction forecasted.
Futures Contracts - Upon entering into futures contracts, the Trust
maintains, in a segregated account with its custodian, securities with a
value equal to its obligation under the futures contracts. A portion of
these funds is held as collateral in an account in the name of the broker,
the Trust's agent in acquiring the futures position. During the period the
futures contract is open, changes in the value of the contract ("variation
margin") are recognized by marking the contract to market on a daily
basis. As unrealized gains or losses are incurred, variation margin
payments are received from or made to the broker. Upon the closing or cash
settlement of a contract, gains and losses are realized. The cost of
securities acquired through delivery under a contract is adjusted by the
unrealized gain or loss on the contract.
Forward Commitments - The Trust trades certain securities under the terms
of forward commitments whereby the settlement for payment and delivery
occurs at a specified future date. Forward commitments are privately
negotiated transactions between the Trust and dealers. The Trust is
exposed to a risk of loss due to nonperformance by the dealers. Upon
executing a forward commitment and during the period of obligation, the
Trust maintains collateral of cash or securities in a segregated account
with its custodian in an amount sufficient to relieve the obligation. If
the intent of the Trust is to accept delivery of a security traded under a
forward purchase commitment, the commitment is recorded as a long-term
purchase. For forward purchase commitments entered into for temporary
investment strategies for which security settlement is not intended by the
Trust, and all forward sale commitments, changes in the value of the
commitment are recognized by marking the commitment to market on a daily
basis. During the commitment, the Trust may either resell or repurchase
the forward commitment and enter into a new forward commitment, the effect
of which is to extend the settlement date. In addition, the Trust may
occasionally close such forward commitments prior to delivery. Gains and
losses are realized upon the closing or cash settlement of these
commitments.
C. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Trust
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Trust may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised by or subadvised by American Capital Asset Management, Inc.
("ACAM"), the daily aggre-
F-54
<PAGE> 199
--------------------------------------------------------------------------------
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
gate of which is invested in repurchase agreements. Repurchase agreements
are collateralized by the underlying debt security. The Trust will make
payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller is
required to maintain the value of the underlying security at not less than
the repurchase proceeds due the Trust.
D. Federal Income Taxes
No provision for federal income taxes is required because each Fund
intends to elect to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all taxable net investment income and taxable net
realized capital gains to shareholders. It is anticipated that no
distributions of capital gains will be made until tax basis capital loss
carryovers, if any, expire or are offset by net realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of identified
cost. Dividend income is recorded on the ex-dividend date. Interest income
is accrued daily.
F. Dividends and Distributions
The Trust declares annual distributions from net capital gains. Dividends
from net investment income are declared daily for Government II, quarterly
for Growth and Income II and annually for Growth II. Government II may
distribute short-term capital gains quarterly. Dividends and distributions
to shareholders are recorded on the record date.
The Trust distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ
from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
G. Debt Discount or Premium
The Trust accounts for debt discounts or premiums on the same basis as is
followed for federal income tax reporting. Accordingly, original issue
discounts on long-term debt securities purchased are amortized over the
life of the security. Premiums on debt securities are not amortized.
Market discounts are recognized at the time of sale as realized gains for
book purposes, and ordinary income for tax purposes.
Note 2 - Advisory Fees and Other Transactions with Affiliates
Common Sense Investment Advisers (the "Adviser") is a partnership owned equally
by affiliates of ACAM and Primerica Financial Services, Inc. ("PFS"). ACAM, as
subadviser, provides advisory services to the Adviser at cost. Advisory fees to
Adviser are paid monthly, based on the average daily net assets of each Fund at
an annual rate as indicated by the following graduated fee schedules.
<TABLE>
<CAPTION>
Growth II &
Growth and Income II Government II
-------------------------- -------------------------
Average Daily Annual Average Daily Annual
Net Assets Rate Net Assets Rate
------------- ------ ------------- ------
<S> <C> <C> <C>
First $1 billion .65% First $1 billion .60%
Next $1 billion .60% Next $1 billion .55%
Next $1 billion .55% Next $1 billion .50%
Next $1 billion .50% Next $1 billion .45%
Over $4 billion .45% Next $1 billion .40%
Over $5 billion .35%
</TABLE>
F-55
<PAGE> 200
Notes to Financial Statements, continued
The Adviser has agreed that it will reimburse the Trust for any expenses
(including the management fee, but excluding interest, brokerage commissions,
distribution and service fees, and other extraordinary expenses) in excess of
the most restrictive limitation imposed by state securities commissions. The
most restrictive expense limitation is presently believed to be 2.5% of the
Fund's average daily net assets up to $30 million, 2.0% of the next $70 million
of such net assets and 1.5% of the Fund's net assets in excess of $100 million.
For the period ended October 31, 1994, the Adviser reimbursed $520 to the Growth
and Income II due to such expense limitation. ACAM prepaid the Trust's initial
registration and filing expenses. The Trust is amortizing such expenses over a
ten month period ending April 1995. The Trust intends to reimburse ACAM for such
expenses in the fiscal year ending October 31, 1995.
Common Sense Shareholder Services ("CSSS") serves as the Trust's shareholder
service agent. CSSS is a partnership owned equally by affiliates of ACAM and
PFS. Common Sense Distributors (the "Distributor"), a partnership owned equally
by affiliates of ACAM and PFS, serves as Distributor of the Trust's shares
through an exclusive selling agreement with PFS Investments Inc. (the "Retail
Dealer"). The Retail Dealer is an indirect wholly-owned subsidiary of PFS.
Certain officers and trustees of the Trust are officers and directors of the
Adviser or its affiliates.
Under the Distribution Plans, each class of shares pays .25% per annum of its
average daily net assets to the Distributor as a service fee. The service fee is
intended to cover personal services provided to the shareholders by
representatives of the Retail Dealer. Class B shares pay an additional fee of
.75% per annum of their average daily net assets to reimburse the Distributor
for its distribution costs. Actual distribution expenses incurred by the
Distributor for Class B shares may exceed the amounts reimbursed to the
Distributor by the Fund. At October 31, 1994, the Trust was advised that the
unreimbursed expenses incurred by the Distributor under the Class B plan
aggregated approximately $280,000 for Growth II, $183,000 for Growth and Income
II and $141,000 for Government II, and may be carried forward and reimbursed
through either the collection of the contingent deferred sales charges from
share repurchases or, subject to the annual renewal of the plans, future Trust
reimbursements of distribution fees.
<TABLE>
<CAPTION>
Growth
Growth II and Income II Government II
---------- ------------- -------------
<S> <C> <C> <C>
Due to ACAM................................................. $ 44,611 $ 43,036 $ 43,536
Shareholder service agent fees.............................. 47,702 10,700 4,423
Sales of Fund shares:
Distributor commissions................................... 25,028 16,465 8,845
Retail Dealer commissions................................. 156,483 100,729 52,313
</TABLE>
Note 3 - Investment Activity
During the period, the cost of purchases and proceeds from sales and maturities
of investments, excluding short-term investments and forward commitments were:
<TABLE>
<CAPTION>
Growth
Growth II and Income II Government II
----------- ------------- -------------
<S> <C> <C> <C>
Purchases................................................... $13,602,484 $11,337,607 $11,326,780
Sales....................................................... 5,242,992 5,683,935 4,181,425
</TABLE>
At October 31, 1994, the Trust held the following long futures contracts:
<TABLE>
<CAPTION>
Market Unrealized
Number Value at Appreciation
Fund Description of Contracts October 31, 1994 (Depreciation)
---- ----------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Growth II Standard & Poor's 500 Index
expiring March 1995 5 $ 1,189,125 $16,488
=========== =======
Growth and Income II Standard & Poor's 500 Index
expiring December 1994 1 $ 236,225 $(1,012)
expiring March 1995 3 713,475 (3,113)
----------- -------
$ 949,700 $(4,125)
=========== =======
</TABLE>
F-56
<PAGE> 201
Notes to Financial Statements, continued
The following table presents the identified cost of investments at October 31,
1994 for federal income tax purposes, the associated net unrealized appreciation
and depreciation, and capital loss carryforward which will expire in 2002.
<TABLE>
<CAPTION>
Growth
Growth II and Income II Government II
--------- ------------- -------------
<S> <C> <C> <C>
Identified cost............................................ $10,562,933 $ 6,976,789 $ 7,293,410
=========== =========== ===========
Gross unrealized appreciation.............................. $ 395,803 $ 227,218 $ --
Gross unrealized depreciation.............................. (125,936) (151,144) (146,778)
----------- ----------- -----------
Net unrealized appreciation ............................... $ 269,867 $ 76,074 $ (146,778)
=========== =========== ===========
Capital loss carryforward ................................. $ 177,804 $ 120,455 $ 35,561
=========== =========== ===========
</TABLE>
Note 4 - Capital
Each Fund offers two classes of shares at their respective net asset values per
share, plus a sales charge which is imposed either at the time of purchase (the
Class A shares) or at the time of redemption on a contingent deferred basis (the
Class B shares). All classes of shares have the same rights, except that Class B
shares bear the cost of distribution fees and certain other class specific
expenses. Class B shares automatically convert to Class A shares six years after
purchase, subject to certain conditions. Realized and unrealized gains or
losses, investment income and expenses (other than class specific expenses) are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class.
The Trust has an unlimited number of each class of shares of $.01 par value
beneficial interest authorized. Transactions in shares of beneficial interest
for the period ended October 31, 1994 were as follows:
<TABLE>
<CAPTION>
Growth
Growth II and Income II Government II
--------- ------------- -------------
<S> <C> <C> <C>
Shares sold
Class A................................................ 373,998 300,262 433,958
Class B................................................ 497,430 312,434 253,982
------- ------- -------
871,428 612,696 687,940
------- ------- -------
Shares issued for dividends reinvested
Class A................................................ -- 999 5,134
Class B................................................ -- 584 1,471
------- ------- -------
-- 1,583 6,605
------- ------- -------
Shares redeemed
Class A................................................ (5,414) (4,796) (44,548)
Class B................................................ (9,513) (1,966) (13,568)
------- ------- -------
(14,927) (6,762) (58,116)
------- ------- -------
Shares outstanding 856,501 607,517 636,429
======= ======= =======
</TABLE>
F-57
<PAGE> 202
--------------------------------------------------------------------------------
Growth II Fund Financial Highlights
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout the
period indicated.
May 3, 1994(1) through October 31, 1994
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(2)
Net asset value, beginning of period................................................... $11.81 $11.81
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................................................................... .29 .28
Expenses............................................................................... (.29) (.32)
------ ------
Net investment loss.................................................................... .00 (.04)
Net realized and unrealized gain on securities......................................... .08 .08
------ ------
Total from investment operations....................................................... .08 .04
------ ------
Net asset value, end of period......................................................... $11.89 $11.85
====== ======
TOTAL RETURN(3)........................................................................ .76% .42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................................... $4.4 $5.8
Average net assets (millions).......................................................... $2.1 $2.1
Ratios to average net assets (annualized)
Expenses.............................................................................. 4.89% 5.79%
Net investment loss................................................................... (.05%) (.78%)
Portfolio turnover rate................................................................ 151% 151%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding
(3) Total return has not been annualized and does not consider the effect of
sales charges.
See Notes to Financial Statements.
F-58
<PAGE> 203
-------------------------------------------------------------------------------
Growth and Income II Fund Financial Highlights
-------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated.
May 3, 1994(1) through October 31, 1994
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(2)
Net asset value, beginning of period.................................................. $11.81 $11.81
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income.................................................................... .42 .42
Expenses............................................................................. (.21) (.25)
------ ------
Net investment income................................................................ .21 .17
Net realized and unrealized loss on securities....................................... (.26) (.251)
------ ------
Total from investment operations..................................................... (.05) (.081)
------ ------
DIVIDENDS FROM NET INVESTMENT INCOME................................................. (.05) (.029)
------ ------
Net asset value, end of period........................................................ $11.71 $11.70
====== ======
TOTAL RETURN(3)...................................................................... (.42%) (.68%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................................. $3.5 $3.6
Average net assets (millions)........................................................ $1.9 $1.5
Ratios to average net assets (annualized)(4)
Expenses........................................................................... 3.37% 4.42%
Expenses, without expense reimbursement............................................ 3.40% 4.45%
Net investment income.............................................................. 3.38% 3.00%
Net investment income, without expense reimbursement............................... 3.35% 2.97%
Portfolio turnover rate.............................................................. 215% 215%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding
(3) Total return has not been annualized and does not consider the effect of
sales charges.
(4) See Note 2.
See Notes to Financial Statements.
F-59
<PAGE> 204
-------------------------------------------------------------------------------
Government II Fund Financial Highlights, continued
-------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated.
May 3, 1994(1) through October 31, 1994
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(3)
Net asset value, beginning of period................................................... $11.91 $11.91
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................................................................... .38 .38
Expenses............................................................................... (.15) (.18)
------ ------
Net investment income.................................................................. .23 .20
Net realized and unrealized loss on securities......................................... (.40) (.41)
------ ------
Total from investment operations....................................................... (.17) (.21)
------ ------
DIVIDENDS FROM NET INVESTMENT INCOME................................................... (.20) (.16)
------ ------
Net asset value, end of period......................................................... $11.54 $11.54
====== ======
TOTAL RETURN(2)........................................................................ (1.53%) (1.83%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................................... $4.6 $2.8
Average net assets (millions).......................................................... $3.9 $1.1
Ratios to average net assets (annualized)
Expenses.............................................................................. 2.32% 3.25%
Net investment income................................................................. 3.54% 3.49%
Portfolio turnover rate................................................................ 155% 155%
</TABLE>
(1) Commencement of operations
(2) Total return has not been annualized and does not consider the effect of
sales charges.
(3) Based on average month-end shares outstanding
See Notes to Financial Statements.
F-60
<PAGE> 205
-------------------------------------------------------------------------------
Report of Independent Auditors
-------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of Common Sense Trust
We have audited the accompanying statements of net assets of Common Sense II
Growth Fund, Common Sense II Growth and Income Fund, and Common Sense II
Government Fund (cumulatively the "Funds"), three of nine portfolios
constituting the series of the Common Sense Trust (the "Trust"), as of October
31, 1994, and for each of the Funds, the related statements of operations, the
statements of changes in net assets and the financial highlights for the period
from inception (May 3, 1994) through October 31, 1994. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds of the Common Sense Trust listed above at October 31,
1994, the results of their operations, the changes in their net assets, and the
financial highlights for the period identified above, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 2, 1994
F-61
<PAGE> 206
--------------------------------------------------------------------------------
GROWTH FUND STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
APRIL 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 93.6%
CONSUMER DISTRIBUTION 3.7%
175,000 Albertsons, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,534,375
*600,000 Kroger Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,300,000
250,000 May Department Stores Co. . . . . . . . . . . . . . . . . . . . . . . . 9,062,500
225,000 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,206,250
400,000 Sysco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,200,000
225,000 Walgreen Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,575,000
850,000 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 20,187,500
--------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . 84,065,625
--------------
CONSUMER DURABLES 1.0%
264,100 Black & Decker Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,923,000
400,000 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,600,000
--------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . . . . 22,523,000
--------------
CONSUMER NON-DURABLES 8.0%
250,000 Campbell Soup Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,812,500
200,000 Coca-Cola Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,625,000
300,000 Colgate-Palmolive Co. . . . . . . . . . . . . . . . . . . . . . . . . . 21,075,000
500,000 ConAgra, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,625,000
250,000 CPC International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 14,656,250
200,000 General Mills, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,200,000
300,000 Heinz (H.J.) Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,600,000
450,000 PepsiCo, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,731,250
325,000 Procter & Gamble Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 22,709,375
250,000 Ralston-Ralston Purina Group . . . . . . . . . . . . . . . . . . . . . . 11,875,000
*400,000 RJR Nabisco Holdings Corp., Class A . . . . . . . . . . . . . . . . . . 11,150,000
500,000 Sara Lee Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,937,500
300,000 Whitman Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,475,000
--------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . . . . 185,471,875
--------------
CONSUMER SERVICES 8.0%
160,000 Capital Cities ABC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 13,520,000
200,000 CBS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,825,000
*350,000 Circus Circus Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . 11,593,750
*320,000 Cox Communications, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 4,880,000
325,000 Disney (Walt) Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,996,875
500,000 Marriott International, Inc. . . . . . . . . . . . . . . . . . . . . . . 18,000,000
500,000 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500,000
600,000 News Corp., Ltd., ADR . . . . . . . . . . . . . . . . . . . . . . . . . 11,700,000
500,000 Service Corp. International . . . . . . . . . . . . . . . . . . . . . . 14,125,000
*750,000 Tele-Communications, Inc., Class A . . . . . . . . . . . . . . . . . . . 14,343,750
450,000 Time Warner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,481,250
200,000 Tribune Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,825,000
*200,000 Viacom, Inc., Class B . . . . . . . . . . . . . . . . . . . . . . . . . 9,175,000
*125,000 Wolters Kluwer, NV, ADR . . . . . . . . . . . . . . . . . . . . . . . . 10,156,250
--------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 184,121,875
--------------
</TABLE>
F-62
<PAGE> 207
--------------------------------------------------------------------------------
GROWTH FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 8.7%
450,000 Amoco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,531,250
200,000 Ashland, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400,000
180,000 British Petroleum Co., PLC, ADR . . . . . . . . . . . . . . . . . . . . 15,502,500
700,000 Coastal Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,825,000
350,000 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,368,750
150,000 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,231,250
950,000 Panhandle Eastern Corp. . . . . . . . . . . . . . . . . . . . . . . . . 22,800,000
225,000 Repsol SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200,000
115,000 Royal Dutch Petroleum Co., ADR . . . . . . . . . . . . . . . . . . . . . 14,260,000
350,000 Texaco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,931,250
625,000 Williams Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,546,875
--------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,596,875
--------------
FINANCE 16.6%
375,000 Ahmanson (H.F.) & Co. . . . . . . . . . . . . . . . . . . . . . . . . . 7,875,000
6,565,075 American Capital Small Capitalization Fund, Inc. (see Note 2) . . . . . 67,423,319
600,000 American Express Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 20,850,000
200,000 American International Group, Inc. . . . . . . . . . . . . . . . . . . . 21,350,000
500,000 Bank of Boston Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,750,000
300,000 BayBanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,750,000
600,000 Chase Manhattan Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 26,250,000
500,000 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 20,875,000
300,000 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . 9,787,500
600,000 Federal National Mortgage Association . . . . . . . . . . . . . . . . . 52,950,000
300,000 First Bank System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 12,150,000
300,000 First Chicago Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,575,000
500,000 Green Point Financial Corp. . . . . . . . . . . . . . . . . . . . . . . 11,968,750
600,000 Great Western Financial Corp. . . . . . . . . . . . . . . . . . . . . . 12,675,000
300,000 Green Tree Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . 12,262,500
250,000 MBNA Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,562,500
600,000 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,900,000
850,000 West One Bancorp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,481,250
--------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381,435,819
--------------
HEALTH CARE 11.0%
500,000 Abbott Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . . 19,687,500
250,000 American Home Products Corp. . . . . . . . . . . . . . . . . . . . . . . 19,281,250
*150,000 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,903,125
*400,000 Astra, AB, Series A, ADR . . . . . . . . . . . . . . . . . . . . . . . . 11,500,000
500,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . . . . . 17,375,000
150,000 Becton Dickinson & Co. . . . . . . . . . . . . . . . . . . . . . . . . . 8,362,500
600,000 Caremark International, Inc. . . . . . . . . . . . . . . . . . . . . . . 10,500,000
350,000 Columbia/HCA Healthcare Corp. . . . . . . . . . . . . . . . . . . . . . 14,700,000
*100,000 Forest Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,500,000
*125,000 Genentech, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,296,875
*400,000 Healthcare & Retirement Corp. . . . . . . . . . . . . . . . . . . . . . 11,300,000
200,000 Healthsouth Rehabilitation . . . . . . . . . . . . . . . . . . . . . . . 3,950,000
125,000 Integrated Health Services, Inc. . . . . . . . . . . . . . . . . . . . . 4,328,125
200,000 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000,000
</TABLE>
F-63
<PAGE> 208
--------------------------------------------------------------------------------
GROWTH FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE-continued
225,000 Mallinckrodt Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . $ 8,100,000
400,000 Mylan Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 12,300,000
125,000 Pfizer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,828,125
*225,000 Scherer (R.P.) Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,743,750
300,000 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 22,612,500
400,000 Upjohn Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,500,000
225,000 Warner Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,943,750
--------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . . 252,712,500
--------------
PRODUCER MANUFACTURING 8.3%
550,000 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . . . . . . 18,150,000
500,000 Corning, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,687,500
225,000 Deere & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,450,000
360,000 General Electric Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 20,160,000
700,000 Honeywell, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,037,500
200,000 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . . . . . . . 10,025,000
225,000 ITT Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,512,500
250,000 Philip NV, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,625,000
400,000 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . 17,450,000
*450,030 Thermo Fibertek, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 8,269,301
295,600 Wheelabrator Technologies, Inc. . . . . . . . . . . . . . . . . . . . . 4,286,200
650,000 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 17,712,500
--------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . 191,365,501
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 5.1%
200,000 Air Products & Chemicals, Inc. . . . . . . . . . . . . . . . . . . . . . 10,075,000
350,000 Du Pont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . . . . 23,056,250
200,000 Eastman Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 11,350,000
145,000 Engelhard Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,564,375
300,000 Grace (W.R.) & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,087,500
300,000 James River Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,137,500
325,000 Lubrizol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,334,375
400,000 Pall Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,350,000
75,000 Scott Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,684,375
425,000 Sherwin Williams Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,140,625
--------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . . 116,780,000
--------------
TECHNOLOGY 19.4%
175,000 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,193,750
*250,000 Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 15,406,250
99,300 BMC Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,181,425
300,000 Boeing Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500,000
*225,000 Cisco Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,971,875
*980,000 Compaq Computer Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 37,240,000
200,000 Computer Associates International, Inc. . . . . . . . . . . . . . . . . 12,875,000
*325,000 DSC Communications Corp. . . . . . . . . . . . . . . . . . . . . . . . . 12,025,000
180,000 Hewlett-Packard Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 11,902,500
175,000 Integrated Device Technology, Inc. . . . . . . . . . . . . . . . . . . . 6,671,875
</TABLE>
F-64
<PAGE> 209
--------------------------------------------------------------------------------
GROWTH FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-continued
400,000 Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,950,000
425,000 International Business Machines Corp. . . . . . . . . . . . . . . . . . 40,268,750
135,000 Linear Technology Corp. . . . . . . . . . . . . . . . . . . . . . . . . 8,066,250
300,000 Lockheed Martin Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 17,325,000
250,000 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,750,000
*274,600 Lotus Development Corp. . . . . . . . . . . . . . . . . . . . . . . . . 8,649,900
*120,000 LSI Logic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,995,000
350,000 McDonnell Douglas Corp. . . . . . . . . . . . . . . . . . . . . . . . . 21,700,000
*380,000 Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,065,000
*477,500 National Semiconductor Corp. . . . . . . . . . . . . . . . . . . . . . . 10,922,813
150,000 Northrop Grumman Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 7,443,750
*200,000 Silicon Graphics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 7,500,000
*400,000 Symantec Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,300,000
400,000 Texas Instruments, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 42,400,000
*160,000 3Com Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,960,000
400,000 Varian Associates, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 18,400,000
135,000 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,621,875
--------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . 447,286,013
--------------
TRANSPORTATION 1.6%
200,000 AMR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,475,000
385,000 Burlington Northern, Inc. . . . . . . . . . . . . . . . . . . . . . . . 22,907,500
--------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . . . . 36,382,500
--------------
UTILITIES 2.2%
*250,000 ALC Communications Corp. . . . . . . . . . . . . . . . . . . . . . . . . 9,531,250
250,000 AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,687,500
350,000 Baltimore Gas & Electric Co. . . . . . . . . . . . . . . . . . . . . . . 8,268,750
200,000 FPL Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,350,000
250,000 WorldCom, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000
300,000 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,725,000
--------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,562,500
--------------
TOTAL COMMON STOCK (Cost $1,953,634,082) . . . . . . . . . . . . . . . 2,154,304,083
--------------
PREFERRED STOCK 0.8%
400,000 Cellular Communications, Inc., (Cost $13,201,982) . . . . . . . . . . . 18,650,000
--------------
PRINCIPAL
AMOUNT UNITED STATES GOVERNMENT OBLIGATIONS 4.4%
--------------
United States Treasury Notes
$50,000,000 6.875%, 2/28/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,242,000
50,000,000 7.75%, 2/15/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,961,000
--------------
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS (Cost $101,328,125) . . . . 102,203,000
--------------
</TABLE>
F-65
<PAGE> 210
--------------------------------------------------------------------------------
GROWTH FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS 4.6%
$35,334,000 Federal Home Loan Mortgage Corp., 6.00% to 6.03%, 5/2/95 to 5/9/95 . . . $ 35,317,284
14,000,000 Federal National Mortgage Association, 6.00%, 5/30/95 . . . . . . . . . 13,931,050
55,570,000 Repurchase agreement with Salomon Brothers, Inc., dated 4/28/95, 5.93%,
due 5/1/95 (collateralized by U.S. Government obligations in a
pooled cash account) repurchase proceeds $55,597,461 . . . . . . . . . 55,570,000
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $104,818,737) . . . . . . . . . . 104,818,334
--------------
TOTAL INVESTMENTS (Cost $2,172,982,926) 103.4% . . . . . . . . . . . . . 2,379,975,417
Other assets and liabilities, net (3.4%) . . . . . . . . . . . . . . . . (77,625,580)
--------------
NET ASSETS, equivalent to $15.10 per share 100% . . . . . . . . . . . . $2,302,349,837
==============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited shares authorized;
152,425,634 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,524,256
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,018,050,103
Undistributed net realized gain on securities . . . . . . . . . . . . . . . . . . . . . 65,930,122
Net unrealized appreciation of securities . . . . . . . . . . . . . . . . . . . . . . . 206,992,491
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 9,852,865
--------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,302,349,837
==============
</TABLE>
*Non-income producing security.
See Notes to Financial Statements.
F-66
<PAGE> 211
--------------------------------------------------------------------------------
GROWTH FUND FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(UNAUDITED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, 1995
--------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,369,676
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,672,643
---------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,042,319
---------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,720,918
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . 4,178,536
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,708
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,098
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,784
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,175
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,626
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519,600
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,703
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,807
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,753,955
---------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,288,364
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,316,524
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,142,770
Net unrealized appreciation (depreciation) of securities during the period
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,481,336
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,601,436)
---------------
Net realized and unrealized gain on securities . . . . . . . . . . . . . . . . . 142,339,194
---------------
Increase in net assets resulting from operations . . . . . . . . . . . . . . . . $ 155,627,558
---------------
</TABLE>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED APRIL 30, OCTOBER 31,
1995 1994
--------------- ---------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . $ 2,169,907,302 $ 2,065,704,741
--------------- ---------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . 13,288,364 18,949,920
Net realized gain on securities . . . . . . . . . . . . . . . . . . 71,459,294 150,460,394
Net unrealized appreciation (depreciation) of securities
during the period . . . . . . . . . . . . . . . . . . . . . . . . 70,879,900 (125,267,340)
--------------- ---------------
Increase in net assets resulting from operations . . . . . . . . 155,627,558 44,142,974
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income . . . . . . . . . . . . . . . . . . . . . . . (22,052,763) (14,476,435)
Net realized gain on securities . . . . . . . . . . . . . . . . . . (147,255,728) (151,147,388)
--------------- ---------------
Total distributions . . . . . . . . . . . . . . . . . . . . . . . (169,308,491) (165,623,823)
--------------- ---------------
CAPITAL TRANSACTIONS
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . 156,799,925 394,956,323
Proceeds from shares issued for distributions reinvested . . . . . 168,458,192 164,787,271
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . (179,134,649) (334,060,184)
--------------- ---------------
Increase in net assets resulting from capital transactions . . . 146,123,468 225,683,410
--------------- ---------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . 132,442,535 104,202,561
--------------- ---------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . $ 2,302,349,837 $ 2,169,907,302
=============== ===============
CAPITAL SHARE TRANSACTIONS
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,783,492 25,712,863
Shares issued for distributions reinvested . . . . . . . . . . . . 12,278,300 10,798,656
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (12,376,753) (21,793,543)
--------------- ---------------
Increase in capital shares outstanding . . . . . . . . . . . . . 10,685,039 14,717,976
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-67
<PAGE> 212
--------------------------------------------------------------------------------
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
APRIL 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 81.5%
CONSUMER DISTRIBUTION 2.7%
*13,500 AmeriSource Health Corp. . . . . . . . . . . . . . . . . . . . . . . . . $ 298,687
72,000 Gap, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,295,000
103,000 May Department Stores Co. . . . . . . . . . . . . . . . . . . . . . . . 3,733,750
85,000 McKesson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,368,125
*120,000 Michael's Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 3,420,000
*120,000 Nine West Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 3,900,000
80,000 Nordstrom, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080,000
--------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . 20,095,562
--------------
CONSUMER DURABLES 2.3%
180,000 Black & Decker Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400,000
90,000 Eastman Kodak Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,175,000
95,000 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,467,500
82,000 Stanley Works. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,249,250
--------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . . . . 17,291,750
--------------
CONSUMER NON-DURABLES 7.0%
125,000 Coca-Cola Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,265,625
87,000 CPC International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 5,100,375
60,000 Gillette Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,920,000
121,000 Heinz (H.J.)Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,082,000
78,000 Kellogg Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,953,000
41,000 Nike, Inc., Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 3,141,625
120,000 Procter & Gamble Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,385,000
132,000 Ralston-Ralston Purina Group . . . . . . . . . . . . . . . . . . . . . . 6,270,000
93,900 RJR Nabisco Holdings Corp., Class A . . . . . . . . . . . . . . . . . . 2,617,463
196,000 Sara Lee Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,463,500
--------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . . . . 53,198,588
--------------
CONSUMER SERVICES 4.1%
40,000 Capital Cities ABC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 3,380,000
89,000 Disney (Walt) Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,928,375
160,000 Gaylord Entertainment Co., Class A . . . . . . . . . . . . . . . . . . . 3,780,000
200,000 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000,000
83,571 Omnicom Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,648,637
35,000 Tribune Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,069,375
280,000 Wendy's International, Inc. . . . . . . . . . . . . . . . . . . . . . . 4,760,000
--------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . . 30,566,387
--------------
ENERGY 8.8%
150,000 British Petroleum Co., PLC, ADR . . . . . . . . . . . . . . . . . . . . 12,918,750
165,000 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,488,125
80,000 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,590,000
</TABLE>
F-68
<PAGE> 213
--------------------------------------------------------------------------------
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY-continued
430,000 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,588,750
205,000 Panhandle Eastern Corp. . . . . . . . . . . . . . . . . . . . . . . . . 4,920,000
108,000 Repsol SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,456,000
100,000 Royal Dutch Petroleum Co., ADR . . . . . . . . . . . . . . . . . . . . . 12,400,000
175,000 USX-Marathon Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,281,250
--------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,642,875
--------------
FINANCE 13.2%
240,000 Ahmanson (H.F.) & Co. . . . . . . . . . . . . . . . . . . . . . . . . . 5,040,000
75,000 American International Group, Inc. . . . . . . . . . . . . . . . . . . . 8,006,250
65,000 Avalon Properties, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 1,275,625
220,000 Bank of Boston Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,370,000
71,000 BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,514,500
60,000 BayBanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,750,000
65,000 Beacon Properties Corp. . . . . . . . . . . . . . . . . . . . . . . . . 1,275,625
*140,000 Capital One Financial Corp. . . . . . . . . . . . . . . . . . . . . . . 2,817,500
70,000 Carr Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,242,500
293,000 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 12,232,750
245,000 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . 7,993,125
75,000 Crestar Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . 3,375,000
90,000 Debartolo Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 1,248,750
45,000 Duke Realty Investments, Inc. . . . . . . . . . . . . . . . . . . . . . 1,226,250
50,000 Equity Residential Properties Trust . . . . . . . . . . . . . . . . . . 1,337,500
130,000 Federal National Mortgage Association . . . . . . . . . . . . . . . . . 11,472,500
105,000 First Bank System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 4,252,500
28,000 General Re Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,566,500
50,000 Health Care Property Investors, Inc. . . . . . . . . . . . . . . . . . . 1,512,500
100,000 Liberty Property Trust . . . . . . . . . . . . . . . . . . . . . . . . . 1,862,500
50,000 Manufactured Home Communities, Inc. . . . . . . . . . . . . . . . . . . 787,500
72,500 Morgan (J.P.) & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,757,813
102,000 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 4,908,750
150,000 TIG Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,375,000
40,000 Weingarten Realty Investors . . . . . . . . . . . . . . . . . . . . . . 1,400,000
--------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,600,938
--------------
HEALTH CARE 10.5%
130,000 Abbott Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . . 5,118,750
68,000 American Home Products Corp. . . . . . . . . . . . . . . . . . . . . . . 5,244,500
*100,000 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,268,750
145,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . . . . . 5,038,750
*100,000 Charter Medical Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 1,775,000
*103,000 Foundation Health Corp. . . . . . . . . . . . . . . . . . . . . . . . . 2,858,250
58,600 Lilly (Eli) & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,380,350
*88,500 Lincare Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 2,732,437
175,000 Merck & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,503,125
135,000 Mylan Laboratories Inc. . . . . . . . . . . . . . . . . . . . . . . . . 4,151,250
*300,000 National Medical Enterprises, Inc. . . . . . . . . . . . . . . . . . . . 5,100,000
*120,000 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,980,000
95,000 Pfizer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,229,375
</TABLE>
F-69
<PAGE> 214
--------------------------------------------------------------------------------
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE-continued
*150,000 Physicians Corp. of America . . . . . . . . . . . . . . . . . . . . . . $ 2,681,250
100,000 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 7,537,500
140,000 Upjohn Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,075,000
--------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . . 79,674,287
--------------
PRODUCER MANUFACTURING 7.7%
85,000 Allied-Signal, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,368,125
240,000 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . . . . . . 7,920,000
125,000 Fluor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,437,500
155,000 General Electric Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,680,000
122,000 Honeywell, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,712,250
85,000 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,260,625
225,000 Philip NV, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,662,500
133,000 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . 5,802,125
200,000 Wheelabrator Technologies, Inc. . . . . . . . . . . . . . . . . . . . . 2,900,000
207,000 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 5,640,750
--------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . 58,383,875
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 6.3%
52,000 Air Products & Chemicals Inc. . . . . . . . . . . . . . . . . . . . . . 2,619,500
155,000 Bemis, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,301,250
115,000 Cabot Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,513,750
55,000 Du Pont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . . . . 3,623,125
82,000 Eastman Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,653,500
325,700 Ethyl Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,501,275
94,100 Ferro Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,670,087
*173,000 Fort Howard Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,205,750
175,000 Grace (W.R.) & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,384,375
43,000 International Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . 3,311,000
95,000 Nalco Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,325,000
81,000 Sigma-Aldrich Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,584,250
--------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . . 47,692,862
--------------
TECHNOLOGY 9.9%
100,000 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,825,000
128,000 Computer Associates International, Inc. . . . . . . . . . . . . . . . . 8,240,000
*110,000 DSC Communications Corp. . . . . . . . . . . . . . . . . . . . . . . . . 4,070,000
64,000 Hewlett-Packard Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,232,000
202,500 International Business Machines Corp. . . . . . . . . . . . . . . . . . 19,186,875
110,000 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,170,000
*80,000 Lotus Development Corp. . . . . . . . . . . . . . . . . . . . . . . . . 2,520,000
*60,000 Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,905,000
153,000 Northern Telecom, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 5,565,375
70,000 Northrop Grumman Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 3,473,750
*95,000 Sterling Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 3,230,000
65,000 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,003,125
--------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,421,125
--------------
</TABLE>
F-70
<PAGE> 215
--------------------------------------------------------------------------------
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 9.0%
115,000 Ameritech Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,175,000
93,000 AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,719,750
107,000 BellSouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,553,750
230,000 General Public Utilities Corp. . . . . . . . . . . . . . . . . . . . . . 6,555,000
236,000 GTE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,053,500
211,000 National Power, PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . 2,400,125
280,000 Pacific Telesis Group . . . . . . . . . . . . . . . . . . . . . . . . . 8,645,000
540,000 PacifiCorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,260,000
260,000 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,695,000
50,000 PowerGen, PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . 637,500
208,000 U.S. West, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,606,000
--------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,300,625
--------------
TOTAL COMMON STOCK (Cost $518,249,371) . . . . . . . . . . . . . . . . 615,868,874
--------------
CONVERTIBLE PREFERRED STOCK 4.3%
40,000 Citicorp, $5.375 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,095,000
130,000 Corning Glass Works, MIPS, 6.00% . . . . . . . . . . . . . . . . . . . . 6,695,000
15,000 Enron Corp., Series J, $10.50 . . . . . . . . . . . . . . . . . . . . . 6,675,000
170,000 James River Corp., DECS, $1.55 . . . . . . . . . . . . . . . . . . . . . 4,165,000
66,000 SCI Finance, NV, LLC, 6.25% . . . . . . . . . . . . . . . . . . . . . . 3,663,000
75,000 Transco Energy Co., $3.50 . . . . . . . . . . . . . . . . . . . . . . . 4,293,750
151,400 Westinghouse Electric Corp., PEPS, $1.30 . . . . . . . . . . . . . . . . 2,252,075
--------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $24,909,481) . . . . . . . . . 32,838,825
--------------
Principal
Amount CONVERTIBLE CORPORATE OBLIGATIONS 7.7%
--------------
CONSUMER DISTRIBUTION 1.3%
$ 5,500,000 Price Co., 6.75%, 3/1/01 . . . . . . . . . . . . . . . . . . . . . . . . 5,376,250
8,500,000 Rite Aid Corp., LYON, Zero Coupon, 7/24/06 . . . . . . . . . . . . . . . 3,995,000
--------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . 9,371,250
--------------
CONSUMER SERVICES 2.9%
17,000,000 Comcast Corp., 1.125%, 4/15/07 . . . . . . . . . . . . . . . . . . . . . 7,225,000
9,000,000 News America Holdings, Inc., LYON, Zero Coupon, 3/11/13 . . . . . . . . 3,892,500
Time Warner, Inc.
4,000,000 8.75%, 1/10/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,010,000
11,000,000 LYON, Zero Coupon, 12/17/12 . . . . . . . . . . . . . . . . . . . . . 3,561,250
9,000,000 LYON, Zero Coupon, 6/22/13 . . . . . . . . . . . . . . . . . . . . . . 3,431,250
--------------
Total Consumer Services . . . . . . . . . . . . . . . . . . . . . . . . 22,120,000
--------------
FINANCE 0.5%
97,038 Allstate Corp., 6.76%, 4/15/98 . . . . . . . . . . . . . . . . . . . . . 3,785,163
--------------
HEALTH CARE 1.9%
23,000,000 Roche Holdings, Inc., LYON, Zero Coupon, 4/20/10 . . . . . . . . . . . . 8,596,250
6,000,000 United Technologies Corp., Zero Coupon, 9/8/97 . . . . . . . . . . . . . 5,850,000
--------------
Total Health Care . . . . . . . . . . . . . . . . . . . . . . . . . . 14,446,250
--------------
TECHNOLOGY 0.6%
3,000,000 General Instrument Corp., 5.00%, 6/15/00 . . . . . . . . . . . . . . . . 4,477,500
--------------
</TABLE>
F-71
<PAGE> 216
--------------------------------------------------------------------------------
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 0.5%
$ 87,005 Sprint Corp., DECS, 8.25%, 3/30/00 . . . . . . . . . . . . . . . . . . . $ 3,824,505
--------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS (Cost $55,915,633) . . . . . . 58,024,668
--------------
UNITED STATES GOVERNMENT OBLIGATIONS 1.9%
14,000,000 United States Treasury Notes, 7.75%, 2/15/01 Cost ($14,334,687) . . . . 14,549,080
--------------
SHORT-TERM INVESTMENTS 3.9%
**12,000,000 Federal Home Loan Mortgage Corp., 6.15%, 10/10/95 . . . . . . . . . . . 11,673,840
12,425,000 Repurchase Agreement with SBC, Capital Markets, Inc., dated 4/28/95,
6.00%, 5/1/95 (collateralized by U.S. Government obligations in
a pooled cash account) repurchase proceeds $12,431,212 . . . . . . . . 12,425,000
**5,000,000 United States Treasury Bills, 5.66%, 7/20/95 . . . . . . . . . . . . . . 4,934,750
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $29,037,799) . . . . . . . . . . . 29,033,590
--------------
TOTAL INVESTMENTS (Cost $642,446,971) 99.3% . . . . . . . . . . . . . . 750,315,037
Other assets and liabilities, net 0.7% . . . . . . . . . . . . . . . . . 5,348,499
--------------
NET ASSETS, equivalent to $15.22 per share 100% . . . . . . . . . . . . $ 755,663,536
==============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited shares authorized:
49,662,176 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 496,622
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 633,781,856
Undistributed net realized gain on securities . . . . . . . . . . . . . . . . . . . . . 10,330,393
Net unrealized appreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,868,066
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,200
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 3,008,399
--------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 755,663,536
==============
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $15.5 million were placed as
collateral for futures contracts (Note 1B).
DECS - Dividend enhanced convertible stock
LYON - Liquid yield option note
MIPS - Monthly income participating security
PEPS - Preferred equity participating security
See Notes to Financial Statements.
F-72
<PAGE> 217
--------------------------------------------------------------------------------
GROWTH AND INCOME FUND FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(UNAUDITED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, 1995
--------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,955,841
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,081,785
---------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,037,626
---------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,306,206
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . 976,523
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,968
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,319
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,634
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,801
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,102
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,274
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,888
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,937
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,626,652
---------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,410,974
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,178,893
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (848,465)
Net unrealized appreciation of securities during the period
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,968,607
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,942
---------------
Net realized and unrealized gain on securities . . . . . . . . . . . . . . . . . . 54,524,977
---------------
Increase in net assets resulting from operations . . . . . . . . . . . . . . . . . $ 62,935,951
===============
</TABLE>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED APRIL 30, OCTOBER 31,
1995 1994
--------------- ---------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . $ 712,895,284 $ 712,367,257
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . 8,410,974 12,993,062
Net realized gain on securities . . . . . . . . . . . . . . . . . . 10,330,428 72,326,560
Net unrealized appreciation (depreciation) of securities
during the period . . . . . . . . . . . . . . . . . . . . . . . . 44,194,549 (81,656,758)
--------------- ---------------
Increase in net assets resulting from operations . . . . . . . . . 62,935,951 3,662,864
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income . . . . . . . . . . . . . . . . . . . . . . . (7,735,223) (12,164,102)
Net realized gain on securities . . . . . . . . . . . . . . . . . . (71,730,542) (48,603,788)
--------------- ---------------
Total distributions . . . . . . . . . . . . . . . . . . . . . . . (79,465,765) (60,767,890)
--------------- ---------------
CAPITAL TRANSACTIONS
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . 45,904,093 124,276,586
Proceeds from shares issued for distributions reinvested . . . . . 78,375,866 59,928,843
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . (64,981,893) (126,572,376)
--------------- ---------------
Increase in net assets resulting from capital transactions . . . 59,298,066 57,633,053
--------------- ---------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . 42,768,252 528,027
--------------- ---------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . $ 755,663,536 $ 712,895,284
=============== ===============
CAPITAL SHARE TRANSACTIONS
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,125,152 7,820,632
Shares issued for distributions reinvested . . . . . . . . . . . . 5,763,801 3,781,949
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (4,440,429) (7,984,398)
--------------- ---------------
Increase in capital shares outstanding . . . . . . . . . . . . . 4,448,524 3,618,183
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-73
<PAGE> 218
--------------------------------------------------------------------------------
GOVERNMENT FUND STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
APRIL 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES GOVERNMENT AGENCIES 56.5%
FEDERAL HOME LOAN MORTGAGE CORP.
$ 6,413,364 6.50% Pools, 10/1/97 to 7/1/98 . . . . . . . . . . . . . . . . . . . . $ 6,281,122
661,138 7.00% 5 yr., Pools, 12/1/96 to 8/1/97 . . . . . . . . . . . . . . . . 659,486
5,048,573 7.00% 30 yr., Pools, 7/1/24 to 9/1/24 . . . . . . . . . . . . . . . . 4,805,636
**25,891,572 7.50% Pools, 4/1/24 to 10/1/24 . . . . . . . . . . . . . . . . . . . . 25,284,671
**9,973,827 8.00% Pools, 6/1/24 to 10/1/24 . . . . . . . . . . . . . . . . . . . . 9,951,984
FEDERAL NATIONAL MORTGAGE ASSOCIATION
5,078,387 7.00% Pools, 4/1/24 to 8/1/24 . . . . . . . . . . . . . . . . . . . . 4,829,240
**19,795,206 7.50% Pools, 6/1/23 to 11/1/24 . . . . . . . . . . . . . . . . . . . . 19,325,070
**10,130,297 8.00% Pools, 5/1/22 to 12/1/24 . . . . . . . . . . . . . . . . . . . . 10,104,972
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
**4,726,612 7.00% Pools, 5/15/23 to 5/15/24 . . . . . . . . . . . . . . . . . . . 4,472,557
**38,946,012 7.50% Pools, 3/15/22 to 10/15/24 . . . . . . . . . . . . . . . . . . . 37,972,362
**52,685,465 8.00% Pools, 6/15/16 to 11/15/24 . . . . . . . . . . . . . . . . . . . 52,652,801
9,812,767 8.50% Pools, 12/15/05 to 12/15/22 . . . . . . . . . . . . . . . . . . 10,002,938
14,634 10.00% Pool, 3/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . 15,709
--------------
TOTAL UNITED STATES GOVERNMENT AGENCIES (Cost $184,851,718) . . . . . 186,358,548
--------------
UNITED STATES GOVERNMENT OBLIGATIONS 35.3%
UNITED STATES TREASURY NOTES
**20,000,000 6.50%, 8/15/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,934,400
10,000,000 7.25%, 11/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,106,300
10,000,000 7.50%, 12/31/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,150,000
**15,000,000 7.875%, 7/31/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,253,200
15,000,000 7.875%, 1/15/98 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,424,200
25,000,000 8.50%, 8/15/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,175,750
20,000,000 8.875%, 2/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,390,600
--------------
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS (Cost $115,435,156) . . . . 116,434,450
--------------
FORWARD PURCHASE COMMITMENTS 10.0%
FEDERAL NATIONAL MORTGAGE ASSOCIATION
*5,000,000 7.00%, settling May 95 . . . . . . . . . . . . . . . . . . . . . . . . 4,754,700
*8,500,000 7.50%, settling July 95 . . . . . . . . . . . . . . . . . . . . . . . 8,268,885
*20,000,000 8.00%, settling July 95 . . . . . . . . . . . . . . . . . . . . . . . 19,881,200
--------------
TOTAL FORWARD PURCHASE COMMITMENTS (Cost $32,790,313) . . . . . . . . 32,904,785
--------------
</TABLE>
F-74
<PAGE> 219
--------------------------------------------------------------------------------
GOVERNMENT FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS+ 14.8%
$ 29,505,000 Salomon Brothers, Inc., dated 4/28/95, 5.93%, due 5/1/95, repurchase
proceeds $29,519,580 . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,505,000
19,280,000 SBCCapital Markets, Inc., dated 4/28/95, 6.00%, due 5/1/95, repurchase
proceeds $19,289,640 . . . . . . . . . . . . . . . . . . . . . . . . . 19,280,000
--------------
TOTAL REPURCHASE AGREEMENTS (Cost $48,785,000) . . . . . . . . . . . . 48,785,000
--------------
TOTAL INVESTMENTS (Cost $381,862,187) 116.6% . . . . . . . . . . . . . . 384,482,783
Receivable for investments sold 11.5% . . . . . . . . . . . . . . . . . 38,121,094
Payable for investments purchased (27.8%) . . . . . . . . . . . . . . . (91,862,607)
Other assets and liabilities, net (0.3%) . . . . . . . . . . . . . . . . (921,278)
--------------
NET ASSETS, equivalent to $10.34 per share 100% . . . . . . . . . . . . $ 329,819,992
==============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited shares authorized;
31,892,262 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 318,923
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363,172,535
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . (37,270,798)
Unrealized appreciation (depreciation) of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,620,596
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 835,175
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109,704)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 253,265
--------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 329,819,992
==============
</TABLE>
* Non-income producing securities.
** Securities with a market value of approximately $143.9 million were placed
as collateral for futures contracts and forward commitments.
+ Collateralized by U.S. Government obligations in a pooled cash account.
See Notes to Financial Statements.
F-75
<PAGE> 220
--------------------------------------------------------------------------------
GOVERNMENT FUND FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(UNAUDITED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, 1995
--------------
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,889,894
---------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987,430
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . 263,276
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,265
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,616
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,984
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,003
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,081
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,701
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,393,556
---------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,496,338
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,177,323)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,372,734
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,324,289)
Net unrealized appreciation (depreciation) of securities during the period
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,668,589
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 808,482
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105,723)
---------------
Net realized and unrealized gain on securities . . . . . . . . . . . . . . . . . 11,242,470
---------------
Increase in net assets resulting from operations . . . . . . . . . . . . . . . . $ 22,738,808
===============
</TABLE>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED APRIL 30, OCTOBER 31,
1995 1994
--------------- ---------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . $ 334,961,646 $ 370,213,049
--------------- ---------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . 11,496,338 24,980,745
Net realized loss on securities . . . . . . . . . . . . . . . . . . (4,128,878) (34,030,620)
Net unrealized appreciation (depreciation) of securities
during the period . . . . . . . . . . . . . . . . . . . . . . . . 15,371,348 (11,216,315)
--------------- ---------------
Increase (decrease) in net assets resulting from operations . . . . . 22,738,808 (20,266,190)
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income . . . . . . . . . . . . . . . . . . . . . . . (11,338,002) (22,822,040)
Excess of book-basis net realized gain on securities (see Note 1F) -- (16,458,421)
--------------- ---------------
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . (11,338,002) (39,280,461)
--------------- ---------------
CAPITAL TRANSACTIONS
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . 20,665,965 82,600,565
Proceeds from shares issued for distributions reinvested . . . . . 9,688,944 34,396,895
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . (46,897,369) (92,702,212)
--------------- ---------------
Increase (decrease) in net assets resulting from
capital transactions . . . . . . . . . . . . . . . . . . . . . (16,542,460) 24,295,248
--------------- ---------------
DECREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . (5,141,654) (35,251,403)
--------------- ---------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . $ 329,819,992 $ 334,961,646
=============== ===============
CAPITAL SHARE TRANSACTIONS
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,048,891 7,689,030
Shares issued for distributions reinvested . . . . . . . . . . . . 957,150 3,189,561
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (4,649,029) (8,707,829)
--------------- ---------------
Increase (decrease) in capital shares outstanding . . . . . . . . (1,642,988) 2,170,762
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-76
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MUNICIPAL BOND FUND STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
APRIL 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS 96.6%
EDUCATION 11.1%
$ 500,000 Chicago, Illinois, Public Building Commission, Building Rev., Series
A-1990, MBIA, 7.125%, 1/1/15 . . . . . . . . . . . . . . . . . . . . . $ 536,840
500,000 Connecticut State Health & Educational Facilities Authority Rev.
(University of Hartford), Series D, 6.75%, 7/1/12 . . . . . . . . . . 471,395
500,000 Cook County, Illinois, Community College, District #508, Certificates
of Participation, FGIC, 8.75%, 1/1/07 . . . . . . . . . . . . . . . . 630,630
500,000 District of Columbia Rev. (Howard University), Series A, MBIA,
8.00%, 10/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533,810
500,000 Erie, Pennsylvania, Higher Education Building Authority, College Rev.,
Series A, 8.50%, 6/1/15 . . . . . . . . . . . . . . . . . . . . . . . 572,165
Frenship, Texas, Independent School District, Refunding
500,000 5.50%, 2/15/03 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504,045
500,000 5.50%, 2/15/04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,990
200,000 Huron Valley, Michigan, School District, FGIC, 7.10%, 5/1/08 . . . . . . 222,882
Illinois Educational Facilities Authority Rev.
1,000,000 Illinois State University, Auxiliary Facilities System, MBIA,
5.75%, 4/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . 957,730
320,000 Loyola University, 7.125%, 7/1/11 . . . . . . . . . . . . . . . . . . 331,773
680,000 Loyola University, Series A, 7.125%, 7/1/11 . . . . . . . . . . . . . 759,961
1,000,000 University of Chicago, 5.70%, 12/1/25 . . . . . . . . . . . . . . . . 922,780
500,000 Merriville, Indiana, Multi-School Building Corp., 1st Mtg.,
7.50%, 7/15/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . 561,970
350,000 New York City, New York, Industrial Development Agency, Civil Facility Rev.
(Marymount Manhattan College Project), 7.00%, 7/1/23 . . . . . . . . . 352,989
New York State Dormitory Authority Rev.
100,000 City University System, Series A, 8.00%, 7/1/07 . . . . . . . . . . . 108,763
500,000 City University System, Series C, 6.00%, 7/1/16 . . . . . . . . . . . 480,285
750,000 State University Educational Facilities, Series A, 7.70%, 5/15/12 . . 852,818
750,000 Ohio State Higher Educational Facilities, Community College Rev.
(Case Western Reserve Project), Series A, 7.70%, 10/1/18 . . . . . . . 812,810
Pennsylvania State Higher Educational Facilities Authority Rev.
500,000 Hahnemann University Project, Series 1989, MBIA, 7.20%, 7/1/19 . . . . 534,025
250,000 Medical College of Pennsylvania, Series A, 8.375%, 3/1/11 . . . . . . 270,698
150,000 Thomas Jefferson University, 8.00%, 1/1/18 . . . . . . . . . . . . . . 164,145
500,000 Shenandoah Valley School District, Pennsylvania, Series B, Zero
Coupon, 2/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,970
250,000 State Public School Building Authority, Pennsylvania School Rev.
(Shenandoah Valley School District), AMBAC, 7.375%, 9/15/10 . . . . . 271,595
1,000,000 Wisconsin State Health & Educational Facilities Rev.
(Marquette University Project), 6.45%, 12/1/19 . . . . . . . . . . . . 1,012,130
--------------
TOTAL EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,541,199
--------------
HEALTH CARE 3.9%
1,250,000 Harris County, Texas, Health Facilities (TECO Projects), Series A,
AMBAC, 7.25%, 2/15/15 . . . . . . . . . . . . . . . . . . . . . . . . 1,336,212
250,000 Illinois Development Finance Authority Rev., Refunding
(Columbus-Cuneo-Cabrini Medical Center), 8.50%, 2/1/15 . . . . . . . . 270,202
1,000,000 Indiana Health Facilities Finance Authority, MBIA, 6.85%, 7/1/22 . . . . 1,043,430
New Hampshire Higher Education & Health Facility Authority
520,000 7.50%, 6/1/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548,163
370,000 9.00%, 6/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403,452
</TABLE>
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MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE-continued
$ 500,000 New York State Medical Care Facilities Finance Agency Rev.
(Montefiore Medical Center), 7.25%, 2/15/24 . . . . . . . . . . . . . $ 535,210
225,000 Scottsdale, Arizona, Industrial Development Authority, Series A,
8.25%, 6/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,686
--------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . . 4,374,355
--------------
HOSPITALS 18.4%
500,000 Ames, Iowa, Hospital Rev. (Mary Greeley Medical Center Project),
AMBAC, 5.75%, 8/15/22 . . . . . . . . . . . . . . . . . . . . . . . . 469,265
500,000 Bexar County, Texas, Health Facilities Development Rev. (St. Lukes
Lutheran Hospital Project), 7.90%, 5/1/18 . . . . . . . . . . . . . . 585,720
500,000 Boston, Massachusetts, Rev. (Boston City Hospital) FHA, 7.625%, 2/15/21 565,450
1,000,000 Charleston County, South Carolina, Hospital Facilities Rev. (Bon
Secours Health System Project), FSA, 5.625%, 8/15/25 . . . . . . . . . 901,980
250,000 Clarksville, Tennessee, Hospital Rev., Refunding & Improvement
(Clarksville Memorial Project), 6.25%, 7/1/13 . . . . . . . . . . . . 237,495
250,000 Delaware State, Economic Development Authority Rev. (Osteopathic
Hospital Association), Series A, 6.75%, 1/1/13 . . . . . . . . . . . . 229,032
500,000 District of Columbia Hospital Rev. (National Rehabilitation Hospital),
Series A, MBIA, 7.10%, 11/1/11 . . . . . . . . . . . . . . . . . . . . 529,715
500,000 Ector County, Texas, Hospital District (Medical Center Hospital),
7.125%, 4/15/02 . . . . . . . . . . . . . . . . . . . . . . . . . . . 527,990
250,000 Erie County, Pennsylvania, Hospital Authority Rev.
(Metro Health Center), Series 1992, 7.25%, 7/1/12 . . . . . . . . . . 255,500
250,000 Harris County, Texas, Health Facilities Development Corp.
(Memorial Hospital System Project), 7.125%, 6/1/15 . . . . . . . . . . 264,182
Illinois Health Facilities Authority Rev.
40,000 Community Pooled Program, Refunding, Series A, MBIA, 7.90%, 8/15/03 . 46,670
106,000 Community Pooled Program, Unrefunding, Series A, MBIA, 7.90%, 8/15/03 108,956
500,000 Delnor Community Hospital, 8.00%, 5/15/19 . . . . . . . . . . . . . . 562,515
500,000 Lutheran Health Systems, Series B, MBIA, 6.00%, 4/1/18 . . . . . . . . 481,320
500,000 Masonic Medical Center, Series 1989-B, 7.70%, 10/1/19 . . . . . . . . 561,010
250,000 Memorial Hospital, 7.25%, 5/1/24 . . . . . . . . . . . . . . . . . . . 250,652
300,000 Mercy Center For Health Care Services, 6.625%, 10/1/12 . . . . . . . . 300,813
500,000 Northwestern Memorial Hospital, 6.75%, 8/15/11 . . . . . . . . . . . . 517,240
500,000 Kent Hospital Finance Authority, Michigan (Butterworth Hospital),
Series A, 7.25%, 1/15/12 . . . . . . . . . . . . . . . . . . . . . . . 552,375
250,000 Laramie County, Wyoming, Hospital Rev. (Memorial Hospital Project),
AMBAC, 6.70%, 5/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . 261,617
100,000 Leesburg, Florida, Hospital Rev., 8.40%, 7/1/08 . . . . . . . . . . . . 104,664
500,000 Louisiana Public Facilities Authority, Hospital Rev.
(Southern Baptist Hospital Project), FSA, 6.80%, 5/15/12 . . . . . . . 529,025
500,000 McKeesport, Pennsylvania, Hospital Authority Rev.
(McKeesport Hospital Project), 6.50%, 7/1/08 . . . . . . . . . . . . . 490,420
Michigan State Hospital Finance Authority Rev. (Detroit Medical
Center), Series A,
500,000 7.50%, 10/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502,765
250,000 8.125%, 8/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,907
Mississippi, Hospital Equipment and Facilities, Series A
500,000 Magnolia Hospital Project, 7.375%, 10/1/21 . . . . . . . . . . . . . . 512,545
250,000 Wesley Health System Inc., CONN, 6.05%, 4/1/12 . . . . . . . . . . . . 234,400
Missouri State Health and Educational Facilities Authority Rev.
500,000 Heartland Health Systems Project, 6.875%, 11/15/04 . . . . . . . . . . . 523,845
250,000 Heartland Health Systems Project, 8.125%, 10/1/10 . . . . . . . . . . . 279,598
500,000 Lake of the Ozarks Hospital, 8.00%, 2/15/11 . . . . . . . . . . . . . . 522,205
</TABLE>
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MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS-continued
$ 280,000 Montgomery County, Pennsylvania, IDR (Pennsburg Nursing & Rehabilitation
Center), 7.625%, 7/1/18 . . . . . . . . . . . . . . . . . . . . . . . $ 260,224
250,000 Newton, Kansas, Hospital Rev. (Newton Healthcare Corp.), Series A,
7.375%, 11/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,918
250,000 North Carolina Medical Care Community Health Care Facility, Rev.
(Stanley Memorial Hospital Project), 7.80%, 10/1/19 . . . . . . . . . 263,085
Northeastern Pennsylvania Hospital Authority Rev.
100,000 Nesbitt Memorial Hospital, Series A, 7.50%, 7/1/12 . . . . . . . . . . 112,327
500,000 Wilkes Barre General Hospital, 8.375%, 7/1/06 . . . . . . . . . . . . 545,960
500,000 Royal Oak, Michigan, Hospital Finance Authority Rev.
(William Beaumont Hospital), Series D, 6.75%, 1/1/20 . . . . . . . . . 511,640
250,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital Project), 7.75%, 4/1/13 . . . . . . . . . 257,293
1,000,000 Sayre, Pennsylvania, Health Care Facility Authority Rev.,
Series H-2, AMBAC, 7.625%, 12/1/15 . . . . . . . . . . . . . . . . . . 1,090,460
250,000 Scranton-Lackawanna, Pennsylvania, Health & Welfare Authority Rev.
(Moses Taylor Hospital Project), Series B, 8.50%, 7/1/20 . . . . . . . 270,463
South Dakota State Health & Educational Facility Authority Rev.
500,000 Huron Regional Medical Center, 7.25%, 4/1/20 . . . . . . . . . . . . . 495,190
500,000 Rapid City Regional Hospital, MBIA, 7.00%, 9/1/14 . . . . . . . . . . 520,125
250,000 Sioux Valley Hospital, 7.625%, 11/1/13 . . . . . . . . . . . . . . . . 277,363
500,000 St. Joseph County, Indiana, Hospital Authority Rev.
(Memorial Hospital South Bend Project), MBIA, 6.25%, 8/15/22 . . . . . 501,030
500,000 St. Petersburg, Florida, Health Facilities Authority Rev., Allegany
Health System (St. Mary's Hospital), Series B, 7.75%, 12/1/15 . . . . 563,730
500,000 Tarrant County, Texas, Health Facilities Development Corp.,
Hospital Rev., Refunding & Improvement (Fort Worth Osteopathic
Hospital), 7.00%, 5/15/28 . . . . . . . . . . . . . . . . . . . . . . 509,720
500,000 Tulsa, Oklahoma, Industrial Authority, Hospital Rev.
(Tulsa Regional Medical Center), 7.20%, 6/1/17 . . . . . . . . . . . . 490,750
100,000 Tyler, Texas, Health Facilities Development Corp., Hospital Rev.
(East Texas Hospital Project), Series A, 8.375%, 11/1/11 . . . . . . . 112,748
200,000 University of North Carolina, Chapel Hill, Board of Governors,
6.00%, 2/15/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,376
500,000 Warren County, Pennsylvania, Hospital Authority Rev. (Warren General
Hospital Project), Series A, 6.90%, 4/1/11 . . . . . . . . . . . . . . 495,205
1,000,000 Weslaco, Texas, Health Facilities Development (Knapp Medical
Center Project), Series-A, 5.25%, 6/1/16 . . . . . . . . . . . . . . . 884,700
100,000 Wisconsin State Health & Educational Facilities Authority Rev.
(Wheaton Franciscan Services, Inc.), Series 88, 8.20%, 8/15/18 . . . . 111,629
--------------
TOTAL HOSPITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,905,807
--------------
HOUSING 9.1%
685,000 Austin, Texas, Housing Finance Corp., Multi-Family Housing Rev.,
6.50%, 10/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674,485
1,000,000 Colorado Housing Finance Authority, Single Family Mtg. Rev.,
7.90%, 12/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,082,950
75,000 East Baton Rouge, Louisiana, Mtg. Finance Authority, Single Family
Mtg. Rev., Series C, 8.375%, 2/1/17 . . . . . . . . . . . . . . . . . 78,198
1,000,000 Greater Cincinnati, Ohio (FHA Cambridge Apartments), Series A,
6.60%, 8/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 998,750
215,000 Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.,
Series A, FSA, 5.95%, 12/1/10 . . . . . . . . . . . . . . . . . . . . 211,134
95,000 Illinois Housing Development Authority, Residential Mtg. Rev.,
8.10%, 8/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,795
365,000 Juneau, Alaska, City & Borough Home, Refunding, Mtg. Backed
Securities Program, FNMA, 8.00%, 2/1/09 . . . . . . . . . . . . . . . 388,539
500,000 Lebanon County, Pennsylvania, Health Facilities (United Church of
Christ Homes Project), Series A, 6.75%, 10/1/10 . . . . . . . . . . . 502,045
</TABLE>
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MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING-continued
$ 250,000 Maine State Housing Authority, Mtg. Purchase Rev., Series B,
7.90%, 11/15/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 259,687
400,000 Maricopa County, Arizona, IDR, Multi-Family Rev., Refunding (Laguna
Point Apartments Project), 6.50%, 7/1/09 . . . . . . . . . . . . . . . 405,024
250,000 Massachusetts State, Housing, Single Family, Series 31, 6.45%, 12/1/16 252,187
150,000 Minneapolis, Minnesota, Health Care Facility (Ebenezer Society
Project), Series A, 7.00%, 7/1/12 . . . . . . . . . . . . . . . . . . 143,218
155,000 New York State, Mtg. Agency Rev., Adjustable Rate-Homeowner Mtg.,
Series BB2, 7.95%, 10/1/15 . . . . . . . . . . . . . . . . . . . . . . 163,003
500,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd. Project)
Series A, 7.75%, 12/1/15 . . . . . . . . . . . . . . . . . . . . . . . 491,380
1,000,000 Rhode Island Housing & Mortgage Finance, Series 17B, 6.60%, 10/1/25 . . 1,002,390
500,000 South Carolina State Housing Finance and Development Authority,
Homeownership Mtg., Series A, 7.625%, 7/1/16 . . . . . . . . . . . . . 523,125
1,000,000 Tennessee Housing Development Agency, 6.80%, 7/1/17 . . . . . . . . . . 1,023,830
Texas Housing Agency
485,000 Residential Development Rev., Adjustable Mtg., Series A, 7.60%,
7/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,959
365,000 Single Family Mtg., Refunding, Series A, 7.15%, 9/1/12 . . . . . . . . 379,808
Texas State Veterans Association
210,000 8.30%, 12/1/16, Pre-refunded . . . . . . . . . . . . . . . . . . . . . 238,104
130,000 8.30%, 12/1/16, Un-refunded . . . . . . . . . . . . . . . . . . . . . 135,321
485,000 Texas State Veterans Housing Assistance, MBIA, 6.80%, 12/1/23 . . . . . 507,315
100,000 Utah State Housing Finance Agency, Single Family Mtg., Series G-1,
8.10%, 7/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,750
150,000 Wisconsin Housing & Economical Development Authority
Rev., Series B, 8.00%, 11/1/18 . . . . . . . . . . . . . . . . . . . . 157,415
--------------
TOTAL HOUSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,325,412
--------------
MISCELLANEOUS 12.7%
250,000 Berry Creek Metropolitan District, Eagle, Colorado, G.O.,
Refunding & Improvement, 8.25%, 12/1/11 . . . . . . . . . . . . . . . 266,342
100,000 California Special Districts Finance Authority, Certificates of
Participation Rev., Series A, 8.50%, 7/1/18 . . . . . . . . . . . . . 108,502
2,000,000 Clark County, Nevada (Nevada Power Co. Project), IDR, AMBAC, 7.20%,
10/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,135,120
500,000 Compton, California, Certificates of Participation, Refunding,
Series B, 7.50%, 8/1/15 . . . . . . . . . . . . . . . . . . . . . . . 530,290
500,000 Cook County, Illinois, MBIA, 7.00%, 11/1/10 . . . . . . . . . . . . . . 552,700
500,000 Detroit, Michigan, Tax Increment (Development Area No. 1) Series A,
7.60%, 7/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521,870
500,000 District of Columbia, Series A, AMBAC, 7.50%, 6/1/10 . . . . . . . . . . 560,920
500,000 Du Page County, Illinois, Alternative Rev. (Storm Water Project)
6.55%, 1/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544,710
1,000,000 El Paso County, Texas, Parking Facilities Rev., 6.50%, 8/15/11 . . . . . 1,073,440
250,000 Emmaus, Pennsylvania, General Authority, Local Government Pool
Program Rev., Series A, BIG, 8.15%, 5/15/18 . . . . . . . . . . . . . 268,490
1,000,000 Hawaii State, Series C-D, AMBAC, 5.00%, 2/1/03 . . . . . . . . . . . . . 982,280
500,000 Highlands Ranch, Colorado, Metropolitan District No. 1, Refunding
& Improvement, Series A, 7.30%, 9/1/12 . . . . . . . . . . . . . . . . 549,375
1,500,000 Irving, Texas, Flood Control District, Section #3, AMBAC, Zero
Coupon, 9/1/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697,725
500,000 Milwaukee County, Wisconsin, Refunding, Series A, 5.25%, 9/1/00 . . . . 504,130
400,000 Mountain Village Metropolitan District, San Miguel County, Colorado,
Refunding, Series 1992, 7.95%, 12/1/03 . . . . . . . . . . . . . . . . 413,248
1,000,000 New York, New York, G.O., Series B, 7.00%, 8/15/16 . . . . . . . . . . . 1,018,610
125,000 North Slope Borough, Alaska, Series G, 8.35%, 6/30/98 . . . . . . . . . 136,098
1,500,000 Philadelphia, Pennsylvania, Municipal Authority Rev., Refunding Lease,
Series A, FGIC, 5.625%, 11/15/14 . . . . . . . . . . . . . . . . . . . 1,439,850
50,000 Pocahontas, Iowa, IDR (International Harvester Co.) 10.25%, 10/1/00 . . 51,870
</TABLE>
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MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS-continued
$ 100,000 Tampa, Florida, Capital Improvement Project Rev., Series B,
8.375%, 10/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104,624
Texas General Services, Community Partner Interests, (Office
Building and Land Acquisition Project)
130,000 7.00%, 8/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,444
330,000 7.00%, 8/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338,742
250,000 Utah State Building Ownership Authority, Lease Rev. (Dept. of
Employment Security) 7.80%, 8/15/10 . . . . . . . . . . . . . . . . . 271,800
1,000,000 Valdez, Alaska, Marine Term Rev., Refunding, (Sohio Pipeline),
7.125%, 12/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,069,420
--------------
TOTAL MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 14,273,600
--------------
MUNICIPAL UTILITY DISTRICT (MUD) 1.5%
250,000 Brazoria County, Texas, MUD No. 2, Refunding, 7.00%, 9/1/08 . . . . . . 253,665
Harris County, Texas
250,000 #90, Refunding, 7.50%, 10/1/97 . . . . . . . . . . . . . . . . . . . . 259,012
100,000 #151, 8.65%, 3/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . 107,613
500,000 #322, 6.25%, 5/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . 467,220
Louetta North Public Utility District, Texas
215,000 10.10%, 4/1/98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,574
25,000 10.10%, 4/1/98; Pre-refunded, 4/1/96 . . . . . . . . . . . . . . . . . 26,229
265,000 10.20%, 4/1/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278,271
100,000 Western Oaks, Texas, MUD, Contract Rev., 8.40%, 11/15/01;
Pre-refunded, 11/15/96 . . . . . . . . . . . . . . . . . . . . . . . . 107,007
--------------
TOTAL MUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,724,591
--------------
NURSING HOMES 0.5%
100,000 Carmel, Indiana, Retirement Rent Housing Rev., Refunding
(Beverly Enterprises, Inc. Project), Series 1992, 8.75%, 12/1/08 . . . 108,500
240,000 Louisiana Public Facilities Authority, IDR, Refunding (Beverly
Enterprises, Inc.), 8.25%, 9/1/08 . . . . . . . . . . . . . . . . . . 252,754
250,000 Massachusetts, Industrial Finance Agency, IDR, Refunding (Beverly
Enterprises, Inc., Gloucester and Lexington Projects), Series 1992,
8.00%, 5/1/02 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261,272
--------------
TOTAL NURSING HOMES . . . . . . . . . . . . . . . . . . . . . . . . . 622,526
--------------
POLLUTION CONTROL REVENUE (PCR) 8.8%
Brazos River Authority, Texas, Rev., PCR (Houston Power & Light Co. Project),
500,000 Series B, 8.25%, 5/1/15 . . . . . . . . . . . . . . . . . . . . . . . 547,450
1,000,000 Series C, BIG, 8.10%, 5/1/19 . . . . . . . . . . . . . . . . . . . . . 1,094,300
500,000 Capital Industrial Development Corp., Texas, PCR (International
Business Machines Corp.), 7.40%, 5/1/12 . . . . . . . . . . . . . . . 548,025
250,000 County of Coshocton, Ohio, Solid Waste Disposal Rev., Refunding (Stone
Container Corp. Project), Series 1992, 7.875%, 8/1/13 . . . . . . . . 250,822
1,000,000 Emery County, Utah, PCR, Refunding (Pacificorp Project), Series A,
AMBAC, 5.65%, 11/1/23 . . . . . . . . . . . . . . . . . . . . . . . . 924,340
1,000,000 Farmington, New Mexico, PCR, Refunding, 7.20%, 4/1/21 . . . . . . . . . 1,076,760
995,000 Mercer County, North Dakota, PCR (Basin Electric Power), Series E,
7.00%, 1/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025,148
570,000 Ohio State Air Quality Development Authority Rev., PCR (Cleveland Co.
Project), FGIC, 8.00%, 12/1/13 . . . . . . . . . . . . . . . . . . . . 654,503
500,000 Parish of St. Charles, Louisiana, PCR(Louisiana Power &Light Co.),
8.25%, 6/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533,910
1,000,000 Petersburg, Indiana, PCR, Refunding (Indianapolis Power & Lighting),
Series 1993-A, 6.10%, 1/1/16 . . . . . . . . . . . . . . . . . . . . . 974,700
1,500,000 Skowhegan, Maine, PCR, Refunding (Scott Paper Co. Project),
5.90%, 11/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,416,210
400,000 Stevens County, Washington, Public Corp., PCR (Washington Water &
Power Co., Kettle Project), 6.00%, 12/1/23 . . . . . . . . . . . . . . 361,256
</TABLE>
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MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE (PCR)-continued
$ 500,000 Sweetwater County, Wyoming, PCR (Idaho Power Co.), Series C,
7.625%, 12/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 526,685
--------------
TOTAL PCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,934,109
--------------
POOL FINANCING PROGRAM 1.7%
Indianapolis, Indiana, Local Public Improvement
660,000 Series C, 6.70%, 1/1/17 . . . . . . . . . . . . . . . . . . . . . . . 662,930
1,000,000 Series D, 6.50%, 2/1/22 . . . . . . . . . . . . . . . . . . . . . . . 993,600
250,000 Series D, 6.75%, 2/1/20 . . . . . . . . . . . . . . . . . . . . . . . 253,530
--------------
TOTAL POOL FINANCING PROGRAM . . . . . . . . . . . . . . . . . . . . . 1,910,060
--------------
RESOURCE RECOVERY REVENUE 2.5%
440,000 Broward County, Florida, Resource Recovery Rev. (North Project),
7.95%, 12/1/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479,002
1,000,000 Delaware County, Pennsylvania, Industrial Development Authority Rev.,
Resource Recovery, 8.10%, 12/1/13 . . . . . . . . . . . . . . . . . . 1,057,850
1,000,000 Montgomery County, Pennsylvania, Industrial Development Authority
Rev., Resource Recovery, 7.50%, 1/1/12 . . . . . . . . . . . . . . . . 1,052,150
250,000 Regional Waste Systems, Inc., Maine, Solid Waste Resource Recovery
Rev., 7.95%, 7/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 269,970
--------------
TOTAL RESOURCE RECOVERY REVENUE . . . . . . . . . . . . . . . . . . . 2,858,972
--------------
SALES TAX REVENUE 1.7%
500,000 Arvada, Colorado, Sales & Use Tax Rev., Refunding & Improvement, FGIC,
6.25%, 12/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512,700
250,000 Crestwood, Illinois, Tax Increment Rev., Refunding, 7.25%, 12/1/08 . . . 245,537
400,000 Edgewater, Colorado, Redevelopment Authority Tax Increment Rev.,
Refunding (Edgewater Development Project), 6.75%, 12/1/08 . . . . . . 404,792
100,000 Illinois State Sales Tax Rev., Series F, 8.00%, 6/15/18 . . . . . . . . 110,606
100,000 Jefferson County, Colorado, Southeast Jefferson County Local
Improvement District, 8.20%, 12/1/13 . . . . . . . . . . . . . . . . . 110,741
500,000 Rhode Island Depositors' Economic Corp., Special Obligation,
Series A, FSA, 6.625%, 8/1/19 . . . . . . . . . . . . . . . . . . . . 549,310
--------------
TOTAL SALES TAX REVENUE . . . . . . . . . . . . . . . . . . . . . . . 1,933,686
--------------
TRANSPORTATION 4.7%
500,000 Cleveland, Ohio, Parking Facilities Improvement Rev., 8.00%, 9/15/12 . 522,720
500,000 Delaware Transportation Authority Rev., 5.50%, 7/1/16 . . . . . . . . . 470,205
250,000 Denver, Colorado, City & County Airport Rev., 8.875%, 8/1/15 . . . . . . 253,070
1,000,000 Des Moines, Iowa, Parking Facilities Rev., FGIC, 7.25%, 7/1/15 . . . . . 1,077,610
250,000 Harris County, Texas, Toll Road Rev., Senior Lien, Series 85-D,
8.25%, 8/15/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,580
500,000 Kentucky State Turnpike Authority, Toll Road Rev., Series A,
5.50%, 7/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484,440
1,000,000 New Jersey State Turnpike Authority, Series C, 6.50%, 1/1/16 . . . . . . 1,053,790
Triborough Bridge & Tunnel Authority, New York, Rev.
150,000 Series A, 8.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . . . . 164,081
500,000 Series R, 7.375%, 1/1/16 . . . . . . . . . . . . . . . . . . . . . . . 555,870
500,000 Wayne County, Michigan, Airport Rev., Sub. Lien, Series B, AMBAC,
6.00%, 12/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488,470
--------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . . . . 5,351,836
--------------
UTILITIES-COMBINATION ELECTRIC, GAS AND/OR WATER 6.6%
Austin, Texas, Utility System Rev., Refunding
250,000 FGIC, 7.75%, 11/15/06 . . . . . . . . . . . . . . . . . . . . . . . . 262,720
250,000 Series C, 7.30%, 5/15/17 . . . . . . . . . . . . . . . . . . . . . . . 279,545
500,000 Brownsville, Texas, Utility System Rev., AMBAC, 6.50%, 9/1/17 . . . . . 516,715
2,500,000 Chicago, Illinois, Gas Supply Rev. (Peoples Gas), Series B,
7.50%, 3/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,676,475
500,000 Chicago, Illinois, Metropolitan Water District, G.O., 7.00%, 1/1/11 . . 566,165
250,000 Jefferson, Wisconsin, Sewer System, Waterworks, 7.40%, 7/1/16 . . . . . 279,405
1,000,000 Los Angeles, California, Dept. of Water & Power, Electric Plan
Rev., 5.375%, 9/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 887,340
</TABLE>
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MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES-COMBINATION ELECTRIC, GAS AND/OR WATER-continued
$ 1,000,000 New York State Energy Research and Development Authority, AMBAC,
6.75%, 1/15/27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,036,470
1,000,000 Orlando, Florida, Utilities Commission Water & Electric Rev.,
Refunding, 8.625%, 10/1/05; Pre-refunded 10/1/95 . . . . . . . . . . . 1,036,900
--------------
TOTAL UTILITIES-COMBINATION ELECTRIC, GAS AND/OR WATER . . . . . . . . 7,541,735
--------------
UTILITIES-ELECTRIC 10.3%
1,000,000 Alaska Energy Authority Power Rev., First Series (Bradley Lake
Hydroelectric Project), BIG, 6.25%, 7/1/21 . . . . . . . . . . . . . . 1,005,710
Intermountain Power Agency, Utah
500,000 1st Crossover Series, Special Obligation 7.875%, 7/1/14 . . . . . . . 524,005
1,000,000 Power Supply Rev., Series B, 7.00%, 7/1/21 . . . . . . . . . . . . . . 1,047,180
250,000 Lower Colorado River Authority, Texas, Rev., 8.25%, 1/1/06 . . . . . . . 260,820
100,000 Massachusetts Municipal Wholesale Electric Co., Power Supply System
Rev., Series A, 8.75%, 7/1/18 . . . . . . . . . . . . . . . . . . . . 110,740
250,000 Michigan Public Power Agency Rev., Refunding (Belle River Project)
7.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,345
225,000 Municipal Electric Authority, Georgia, Special Obligation, 2nd
Crossover Series Rev., Series O, 8.125%, 1/1/17 . . . . . . . . . . . 243,754
North Carolina Eastern Municipal Power Agency, Power System Rev.
500,000 Series A, 4.50%, 1/1/24 . . . . . . . . . . . . . . . . . . . . . . . 396,320
50,000 8.00%, 1/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,782
400,000 8.00%, 1/1/21, Pre-refunded, 11/1/98 . . . . . . . . . . . . . . . . . 438,252
North Carolina Municipal Power Agency, Catawba Electric Rev.
1,000,000 MBIA, 5.75%, 1/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 966,680
250,000 7.875%, 1/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273,100
1,000,000 Northern Minnesota Municipal Power Agency, Series A, AMBAC,
7.25%, 1/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,066,210
500,000 Piedmont Municipal Power Agency, South Carolina Electric Rev.,
8.00%, 1/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518,395
775,000 Sam Rayburn, Texas, Municipal Power Agency, Refunding, Series A,
6.75%, 10/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689,967
300,000 South Carolina State Public Service Authority, Electric System
Expansion Rev., 7.875%, 7/1/21 . . . . . . . . . . . . . . . . . . . . 310,400
Washington State Public Power Supply System Rev.
250,000 Nuclear Project #1, Series B, 7.125%, 7/1/16 . . . . . . . . . . . . . 268,260
250,000 Nuclear Project #2, Series 1990-C, 7.625%, 7/1/10 . . . . . . . . . . 283,775
1,500,000 Nuclear Project #3, MBIA 5.60%, 7/1/17 . . . . . . . . . . . . . . . . 1,376,985
1,500,000 Refunding, Series B, 7.00%, 7/1/12 . . . . . . . . . . . . . . . . . . 1,568,475
--------------
TOTAL UTILITIES-ELECTRIC . . . . . . . . . . . . . . . . . . . . . . . 11,660,155
--------------
UTILITIES-WATER AND SEWER 3.1%
500,000 Chicago, Illinois, Waste Water Transmission, Rev., FGIC, 6.30%, 1/1/12 539,490
500,000 Dallas, Texas, Water Works and Sewer System Rev., Series A, 5.50%,
10/1/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498,720
500,000 Houston, Texas, Water System Rev., 7.25%, 12/1/07 . . . . . . . . . . . 538,970
500,000 Massachusetts State Water Resource Authority, Series A, 7.50%, 4/1/16 . 559,460
500,000 New York City Municipal Water Finance Authority, New York, Water &
Sewer System Rev., Series C, 7.75%, 6/15/20 . . . . . . . . . . . . . 577,330
500,000 Texas Water Resource Finance Authority Rev., AMBAC, 7.50%, 8/15/13 . . . 535,190
250,000 Winters, Texas, Water Works & Sewer Rev., 8.50%, 8/1/17 . . . . . . . . 303,850
--------------
TOTAL UTILITIES-WATER AND SEWER . . . . . . . . . . . . . . . . . . . 3,553,010
--------------
TOTAL MUNICIPAL BONDS (Cost $107,078,067) . . . . . . . . . . . . . . 109,511,053
--------------
</TABLE>
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<PAGE> 228
--------------------------------------------------------------------------------
MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL VARIABLE RATE DEMAND NOTES+ 3.4%
$ 600,000 Anchorage Alaska, Higher Education Rev. (Alaska Pacific University)
4.75%, 7/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600,000
700,000 District of Columbia, Series A-6, 5.10%, 10/1/07 . . . . . . . . . . . . 700,000
500,000 Kentucky Development Finance Authority Rev., 4.80%, 12/1/15 . . . . . . 500,000
300,000 New York City, New York, G.O. 1993, Series B, 4.80%, 10/1/20 . . . . . . 300,000
100,000 North Carolina, Educational Facilities Finance (Bowman Grey School
Medical Project) 4.60%, 9/1/20 . . . . . . . . . . . . . . . . . . . . 100,000
1,000,000 Parish of West Feliciana, Louisiana, PCR, 4.80%, 4/1/16 . . . . . . . . 1,000,000
200,000 Pinal County, Arizona, Industrial Development, Series A, 5.00%, 12/1/09 200,000
500,000 Uinta County, Wyoming, PCR, Refunding (Chevron U.S.A., Inc.
Project), 4.65%, 8/15/20 . . . . . . . . . . . . . . . . . . . . . . . 500,000
--------------
Total Municipal Variable Rate Demand Notes (Cost $3,900,000) . . . . . 3,900,000
--------------
TOTAL INVESTMENTS (Cost $110,978,067) 100% . . . . . . . . . . . . . . . 113,411,053
Other assets and liabilities, net 0.0% . . . . . . . . . . . . . . . . . (36,394)
--------------
NET ASSETS, equivalent to $13.34 per share 100% . . . . . . . . . . . . $ 113,374,659
==============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited shares
authorized; 8,498,779 shares outstanding . . . . . . . . . . . . . . . . . . . . . . $ 84,988
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,905,434
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . (211,529)
Net unrealized appreciation of securities . . . . . . . . . . . . . . . . . . . . . . . 2,432,986
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 162,780
--------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113,374,659
==============
</TABLE>
<TABLE>
<S> <C>
Insurers:
+Interest rates are as of April 30, 1995 AMBAC-AMBAC Indemnity Corp.
FHA-Federal Housing Administration BIG-Bond Investors Guaranty Insurance Co.
FNMA-Federal National Mortgage Association CONN-Connie Lee
G.O.-General obligation bond FGIC-Financial Guaranty Insurance Corp.
Rev.-Revenue bond FSA-Financial Security Assurance, Inc.
IDR-Industrial Development Revenue Bond MBIA-Municipal Bond Investor's Assurance Corp.
</TABLE>
See Notes to Financial Statements.
F-84
<PAGE> 229
--------------------------------------------------------------------------------
MUNICIPAL BOND FUND FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(UNAUDITED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, 1995
--------------
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,686,807
---------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332,314
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . 108,885
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,496
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,658
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,483
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,285
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 932
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,018
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,225
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543,061
---------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,143,746
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . . . . (184,756)
Net unrealized appreciation of securities during the period . . . . . . . . . . . . 3,816,347
---------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES . . . . . . . . . . . . . . . . . 3,631,591
---------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . . . . . $ 6,775,337
===============
</TABLE>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED APRIL 30, OCTOBER 31,
1995 1994
--------------- ---------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . $ 112,088,419 $ 95,903,641
--------------- ---------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . 3,143,746 5,614,009
Net realized gain (loss) on securities . . . . . . . . . . . . . . (184,756) 14,380
Net unrealized appreciation (depreciation) of securities
during the period . . . . . . . . . . . . . . . . . . . . . . . . 3,816,347 (9,413,118)
--------------- ---------------
Increase (decrease) in net assets resulting from operations . . . 6,775,337 (3,784,729)
--------------- ---------------
DISTRIBUTION TO SHAREHOLDERS FROM NET INVESTMENT INCOME . . . . . . . (3,012,124) (5,586,734)
--------------- ---------------
NET EQUALIZATION CREDITS . . . . . . . . . . . . . . . . . . . . . . -- 34,076
--------------- ---------------
CAPITAL TRANSACTIONS
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . 12,515,927 46,071,557
Proceeds from shares issued for distributions reinvested . . . . . 2,615,130 4,883,341
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . (17,608,030) (25,432,733)
--------------- ---------------
Increase (decrease) in net assets resulting from
capital transactions . . . . . . . . . . . . . . . . . . . . . (2,476,973) 25,522,165
--------------- ---------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . 1,286,240 16,184,778
--------------- ---------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . $ 113,374,659 $ 112,088,419
=============== ===============
CAPITAL SHARE TRANSACTIONS
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960,355 3,404,943
Shares issued for distributions reinvested . . . . . . . . . . . . 200,423 363,194
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (1,354,762) (1,889,648)
--------------- ---------------
Increase (decrease) in capital shares outstanding . . . . . . . . (193,984) 1,878,489
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-85
<PAGE> 230
--------------------------------------------------------------------------------
MONEY MARKET FUND STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
APRIL 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER 48.7%
$ 2,700,000 Associates Corp. of North America, 6.23%, 7/12/95 . . . . . . . . . . . $ 2,666,602
2,700,000 Chevron Oil Finance Co., 6.00%, 5/10/95 . . . . . . . . . . . . . . . . 2,695,522
2,700,000 Du Pont (E.I.) de Nemours & Co., Inc., 6.06%, 6/27/95 . . . . . . . . . 2,673,987
2,600,000 General Electric Capital Corp., 6.19%, 7/24/95 . . . . . . . . . . . . . 2,562,983
2,700,000 General Electric Co., 6.23%, 9/5/95 . . . . . . . . . . . . . . . . . . 2,641,728
2,600,000 Metlife Funding, Inc., 6.12%, 5/10/95 . . . . . . . . . . . . . . . . . 2,595,645
2,700,000 Pitney Bowes Credit Corp., 6.12%, 6/23/95 . . . . . . . . . . . . . . . 2,675,579
2,700,000 Pitney Bowes, Inc., 5.99%, 5/24/95 . . . . . . . . . . . . . . . . . . . 2,689,272
1,300,000 Prudential Funding Corp., 6.23%, 7/24/95 . . . . . . . . . . . . . . . . 1,281,368
1,400,000 Prudential Funding Corp., 6.23%, 7/27/95 . . . . . . . . . . . . . . . . 1,379,227
2,700,000 Raytheon Co., 5.96%, 5/30/95 . . . . . . . . . . . . . . . . . . . . . . 2,686,658
--------------
TOTAL COMMERCIAL PAPER (Cost $26,548,571) . . . . . . . . . . . . . . 26,548,571
--------------
UNITED STATES GOVERNMENT AGENCIES 38.4%
Federal Home Loan Mortgage Corp.
5,000,000 5.97%, 7/20/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,933,738
3,000,000 6.08%, 5/8/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,996,007
3,000,000 6.16%, 5/2/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,998,988
10,000,000 Federal National Mortgage Association, 6.09%, 5/15/95 . . . . . . . . . 9,975,000
--------------
TOTAL UNITED STATES GOVERNMENT AGENCIES (Cost $20,903,733) . . . . . . 20,903,733
--------------
REPURCHASE AGREEMENTS* 13.3%
3,535,000 Salomon Brothers, Inc., dated 4/28/95, 5.93%, due 5/1/95,
repurchase proceeds $3,536,747 . . . . . . . . . . . . . . . . . . . . 3,535,000
3,700,000 SBC Capital Markets, Inc., dated 4/28/95, 6.00%, due 5/1/95,
repurchase proceeds $3,701,850 . . . . . . . . . . . . . . . . . . . . 3,700,000
--------------
TOTAL REPURCHASE AGREEMENTS (Cost $7,235,000) . . . . . . . . . . . . 7,235,000
--------------
TOTAL INVESTMENTS (Cost $54,687,304) 100.4% . . . . . . . . . . . . . . 54,687,304
Other assets and liabilities, net (0.4%) . . . . . . . . . . . . . . . . (196,533)
--------------
NET ASSETS, equivalent to $1.00 per share 100% . . . . . . . . . . . . . $ 54,490,771
==============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par value $.01 per share; unlimited shares
authorized; 54,491,318 shares outstanding . . . . . . . . . . . . . . . . . . . . . . $ 544,913
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,946,149
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (291)
--------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,490,771
==============
</TABLE>
* Collateralized by U.S. Government obligations in a pooled cash account.
See Notes to Financial Statements.
F-86
<PAGE> 231
--------------------------------------------------------------------------------
MONEY MARKET FUND FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(UNAUDITED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, 1995
--------------
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,600,236
---------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,287
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . 257,044
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,681
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,755
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,433
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,074
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,315
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,150
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,314
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424
Expense reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (209,903)
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,574
---------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,323,662
---------------
Increase in net assets resulting from operations . . . . . . . . . . . . . . . . $ 1,323,662
===============
</TABLE>
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED APRIL 30, OCTOBER 31,
1995 1994
--------------- ---------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . $ 56,401,350 $ 59,198,092
--------------- ---------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . 1,323,662 1,621,523
--------------- ---------------
Increase in net assets resulting from operations . . . . . . . . . 1,323,662 1,621,523
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME . . . . . . (1,325,144) (1,621,596)
--------------- ---------------
CAPITAL TRANSACTIONS
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . 28,606,627 59,396,624
Proceeds from shares issued for distributions reinvested . . . . . 1,286,701 1,600,922
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . (31,802,425) (63,794,215)
--------------- ---------------
Decrease in net assets resulting from capital transactions . . . (1,909,097) (2,796,669)
--------------- ---------------
DECREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . (1,910,579) (2,796,742)
--------------- ---------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . $ 54,490,771 $ 56,401,350
=============== ===============
CAPITAL SHARE TRANSACTIONS
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,606,627 59,396,624
Shares issued for distributions reinvested . . . . . . . . . . . . 1,286,701 1,600,922
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (31,802,425) (63,794,215)
--------------- ---------------
Decrease in capital shares outstanding . . . . . . . . . . . . . . (1,909,097) (2,796,669)
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-87
<PAGE> 232
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(UNAUDITED)
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
Common Sense Trust (the "Trust"), is registered under the Investment Company
Act of 1940, as amended, as a diversified open-end management investment
company which offers shares in eleven separate portfolios, five of which are
described in this report: Growth Fund ("Growth"), Growth and Income Fund
("Growth and Income"), Government Fund ("Government"), Municipal Bond Fund
("Municipal Bond") and Money Market Fund ("Money Market"). Each Fund is
accounted for as a separate entity. The following is a summary of significant
accounting policies consistently followed by the Trust in the preparation of
its financial statements.
A. INVESTMENT VALUATIONS
Securities listed or traded on a national securities exchange are
valued at the last sales price. Unlisted securities and listed
securities for which the last sales price is not available are valued
at the most recent bid price. U.S. Government securities are valued at
the last reported bid price. Municipal bonds are valued at the last
quoted bid prices or at bid prices based on a matrix system (which
considers such factors as security prices, yields, maturities and
ratings) furnished by dealers and an independent pricing service.
Variable rate securities are valued at par; periodic rate changes
reflect current market conditions. Securities for which market
quotations are not readily available are valued at fair value under a
method approved by the Board of Trustees.
Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining
days to maturity become less than 61 days. From such time, until
maturity, such investments are valued at amortized cost. For Money
Market, all investments are valued at amortized cost.
Municipal Bond investments include lower rated debt securities which
may be more susceptible to adverse economic conditions than other
investment grade holdings. These securities are often subordinated to
the prior claims of other senior lenders and uncertainties exist as to
an issuer's ability to meet principal and interest payments. At April
30, 1995, debt securities rated below investment grade and comparable
unrated securities represented approximately 9% of Municipal Bond's
investment portfolio. Issuers of certain securities owned by Municipal
Bond have obtained insurance guaranteeing their timely payment of
principal at maturity and interest. The insurance reduces financial
risk but not market risk of the securities.
B. FUTURES CONTRACTS AND FORWARD COMMITMENTS
General-Transactions in futures contracts and forward commitments are
utilized in strategies to manage the market risk of the Trust's
investments. The purchase of a futures contract or forward commitment
increases the impact on net asset value of changes in the market price
of investments. Forward commitments have a risk of loss due to
nonperformance of counterparties. There is also a risk that the market
movement of such instruments may not be in the direction forecasted.
Note 3-Investment activity contains additional information.
Futures Contracts-Upon entering into futures contracts, the Trust
maintains, in a segregated account with its custodian, securities
with a value equal to its obligation under the futures contracts. A
portion of these funds is held as collateral in an account in the name
of the broker, the Trust's agent in acquiring the futures position.
During the period the futures contract is open, changes in the value
of the contract ("variation margin") are recognized by marking the
contract to market on a daily basis. As unrealized gains or losses are
incurred, variation margin payments are received from or made to the
broker. Upon the closing or cash settlement of a contract, gains and
losses are realized. The cost of securities acquired through delivery
under a contract is adjusted by the unrealized gain or loss on the
contract.
Forward Commitments-The Trust trades certain securities under the
terms of forward commitments, whereby the settlement for payment and
delivery occurs at a specified future date. Forward commitments are
privately negotiated transactions between the Trust and dealers. Upon
executing a forward commitment and during the period of obligation,
the Trust maintains collateral of cash or securities in a segregated
account with its custodian in an amount sufficient to relieve the
obligation. If the intent of the Trust is to accept delivery of a
security traded under a forward purchase commitment, the commitment is
recorded as a long-term purchase. For forward purchase and sale
commitments which security settlement is not intended by the Trust,
changes in the value of the commitment are recognized by marking the
commitment to market on a daily basis. During the commitment, the
Trust may either resell or repurchase the forward commitment and enter
into a new forward commitment, the effect of which is to extend the
settlement date. In addition,
F-88
<PAGE> 233
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, continued
--------------------------------------------------------------------------------
the Trust may occasionally close such forward commitments prior to
delivery. Gains and losses are realized upon the ultimate closing or
cash settlement of forward commitments.
C. REPURCHASE AGREEMENTS
A repurchase agreement is a short-term investment in which the Trust
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The
Trust may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised by Van Kampen American Capital Asset
Management, Inc. (the "Adviser"), the daily aggregate of which is
invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Trust will make
payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not
less than the repurchase proceeds due the Trust.
D. FEDERAL INCOME TAXES
No provision for federal income taxes is required because the Trust
has elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all taxable net investment income and taxable
net realized capital gains to its shareholders. It is anticipated that
no distributions of capital gains will be made until tax basis capital
loss carryforwards, if any, expire or are offset by net realized
capital gains.
The net realized capital loss carryforward at October 31, 1994 for
Municipal Bond was approximately $27,000, which will expire in 1997
and 2001. Government had a capital loss carryforward of approximately
$33.1 million, which will expire in 2002. The net realized capital
loss carryforwards may be utilized to offset current or future capital
gains until expiration.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Dividend income is recorded on the ex-dividend date.
Interest income is accrued daily.
F. DIVIDENDS AND DISTRIBUTIONS
The Trust, excluding Money Market, declares annual distributions from
long-term gains. Government may distribute short-term capital gains
quarterly. Dividends from net investment income are declared daily for
Government, Municipal Bond and Money Market, quarterly for Income and
annually for Growth. Dividends and distributions to shareholders are
recorded on the record date.
The Trust distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which
may differ from generally accepted accounting principles. Such
dividends or distributions may exceed financial statement earnings.
Municipal Bond intends to continue to invest principally in tax-exempt
obligations sufficient in amount to qualify it to pay "exempt-interest
dividends" as defined in the Internal Revenue Code. However, a portion
of such dividends may represent tax preference items subject to
alternative minimum tax.
G. EQUALIZATION
At October 31, 1994, the Municipal Bond discontinued the accounting
practice of equalization, which it had used since its inception.
Equalization is a practice whereby a portion of the proceeds from
sales and the costs of redemptions of Trust shares, equivalent on a
per-share basis to the amount of the undistributed net investment
income, is charged or credited to undistributed net investment income.
H. DEBT DISCOUNT OR PREMIUM
For financial reporting purposes, debt discounts or premiums are
accounted for on the same basis as is followed for federal income tax
reporting. Accordingly, original issue discounts on long-term debt
securities purchased are amortized over the life of the security. For
Money Market and Municipal Bond, all premiums are amortized. Market
discounts and premiums are recognized at the time of sale as realized
gains and realized losses, respectively, for book purposes, and
ordinary income and ordinary loss, respectively, for tax purposes.
F-89
<PAGE> 234
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, continued
--------------------------------------------------------------------------------
NOTE 2-ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Trust. Advisory fees to Adviser
are paid monthly, based on the average daily net assets of each fund at an
annual rate as indicated by the following graduated fee schedules.
<TABLE>
<CAPTION>
GROWTH FUND &
GROWTH AND INCOME GOVERNMENT MUNICIPAL BOND MONEY MARKET
------------------------- ----------------------- ------------------------ -------------------------
AVERAGE DAILY ANNUAL AVERAGE DAILY ANNUAL AVERAGE DAILY ANNUAL AVERAGE DAILY ANNUAL
NET ASSETS RATE NET ASSETS RATE NET ASSETS RATE NET ASSETS RATE
---------------- ------ --------------- ------ ---------------- ------ ----------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
First $1 billion .65% First $1 billion .60% First $1 billion .60% First $2 billion .50%
Next $1 billion .60% Next $1 billion .55% Next $1 billion .55% Next $2 billion .475%
Next $1 billion .55% Next $1 billion .50% Next $1 billion .50% Over $4 billion .45%
Next $1 billion .50% Next $1 billion .45% Over $3 billion .45%
Over $4 billion .45% Next $1 billion .40%
Over $5 billion .35%
</TABLE>
The Adviser has voluntarily elected to reimburse Money Market for any ordinary
business expenses in excess of 1.00% of its average daily net assets. The
Adviser may modify or terminate this election at any time without prior notice.
At the end of the period, the Adviser reimbursed $209,903 of Money Market's
expenses.
Accounting services include the salaries and overhead expenses of the Trust's
Treasurer and the personnel operating under his direction. Charges are
allocated among investment companies advised by the Adviser. These charges
include the employee costs attributable to the Trust's accounting officers. A
portion of the accounting services expense was paid to the Adviser in
reimbursement of personnel, facilities and equipment costs attributable to the
provision of accounting services. The services provided by the Adviser are at
cost.
Common Sense Shareholder Services ("CSSS") serves as the Trust's shareholder
service agent. CSSS is a subsidiary of PFS Services, Inc. Common Sense
Distributors, a subsidiary of PFS Distributors, Inc., serves as Distributor of
the Trust's shares through an exclusive selling agreement with PFS Investments
Inc. (the "Retail Dealer"). The Retail Dealer is an indirect wholly-owned
subsidiary of Primerica Financial Services. During the period, the Trust paid
brokerage commissions of $216,758 to companies which are deemed affiliates of
the Adviser's parent because it owns more than 5% of the company's outstanding
voting securities. As of December 20, 1994, the companies were no longer
considered affiliates. Certain officers and trustees of the Trust are officers
and directors of the Adviser or its affiliates.
Amounts paid by the Trust to affiliates during the period were as follows:
<TABLE>
<CAPTION>
GROWTH MUNICIPAL MONEY
GROWTH AND INCOME GOVERNMENT BOND MARKET
----------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Accounting services . . . . . . . $ 17,768 $ 7,740 $ 5,163 $ 3,664 $ 3,277
Shareholder service agent fees . 3,643,077 848,960 239,173 84,756 222,964
Sales of Trust shares:
Distributor commissions . . . . 1,997,027 472,181 245,180 53,494 --
Retail Dealer commissions . . . 9,297,215 2,230,412 722,709 421,162 --
</TABLE>
F-90
<PAGE> 235
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, continued
--------------------------------------------------------------------------------
At the end of the period, Growth owned approximately 49% of the American
Capital Small Capitalization Fund, Inc. ("Small Cap"), an investment company
managed by the Adviser. Small Cap comprised approximately 3% of Growth's total
net assets. Small Cap's portfolio consisted of the following securities:
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK
CONSUMER DISTRIBUTION
6,000 Arbor Drugs, Inc. $ 154,500
29,000 Barnes & Noble, Inc. 833,750
13,000 Big B, Inc. 189,313
5,000 Books-A-Million, Inc. 68,125
3,000 Carson Pirie Scott & Co. 48,000
4,000 CDW Computer Centers, Inc. 142,000
39,000 Circuit City Stores, Inc. 984,750
60,000 Claire's Stores, Inc. 832,500
12,000 CompUSA, Inc. 295,500
26,000 Fingerhut Companies, Inc. 295,750
7,000 Food Lion, Inc. 38,938
33,000 General Nutrition Companies, Inc. 810,563
16,000 Gymboree Corp. 378,000
4,000 Haggar Corp. 82,000
11,000 Health Management, Inc. 198,000
2,000 Hills Stores Co. 40,250
14,000 MacFrugals Bargains Closeouts 197,750
4,000 Medicine Shoppe International, Inc. 129,000
6,000 Men's Wearhouse, Inc. 151,500
7,900 Meyer (Fred), Inc. 245,888
1,000 Michael's Stores, Inc. 28,750
20,000 Micro Warehouse, Inc. 705,000
7,000 New England Business Service, Inc. 127,750
4,000 Nine West Group, Inc. 129,500
39,900 Pier 1 Imports, Inc. 359,100
5,000 Proffitts, Inc. 123,438
5,000 Rex Stores Corp. 67,500
3,000 Richfood Holdings, Inc. 60,000
7,000 Ross Stores, Inc. 67,813
12,500 Rykoff-Sexton, Inc. 217,188
5,000 Shoe Carnival, Inc. 30,000
31,800 Stop & Shop Companies, Inc. 846,675
31,000 Sunglass Hut International, Inc. 875,749
3,000 Urban Outfitters, Inc. 63,000
13,000 Viking Office Products, Inc. 354,250
39,000 Waban, Inc. 648,375
3,000 Younkers, Inc. 55,875
12,000 Zale Corp. 140,250
-------------
TOTAL CONSUMER DISTRIBUTION 11,016,290
-------------
CONSUMER DURABLES
11,000 Aldila, Inc. 68,750
2,000 Armstrong World Industries, Inc. 90,750
11,000 Automotive Industries Holdings, Inc., Class A 290,125
3,000 Borg Warner Automotive, Inc. 75,750
10,000 Breed Technologies, Inc. 202,500
4,000 Champion Enterprises, Inc. 118,500
35,000 Clayton Homes, Inc. 581,875
28,000 Echlin, Inc. 1,022,000
5,000 Fleetwood Enterprises, Inc. 111,875
8,000 Harman International Industries, Inc. 290,000
11,000 Leggett & Platt, Inc. 424,875
32,000 Lennar Corp. 524,000
7,000 Libbey, Inc. 136,500
32,000 Masland Corp. 428,000
46,000 Maytag Co. 793,500
30,000 Oakwood Homes Corp. 742,500
12,000 Outboard Marine Corp. 256,500
10,000 Pulte Corp. 215,000
7,000 Smith (A.O.) Corp. 166,250
3,000 Strattec Security Corp. 34,500
12,000 Toro Co. 346,500
15,000 Winnebago Industries, Inc. 151,875
14,000 Zenith Electronics Corp. 105,000
-------------
TOTAL CONSUMER DURABLES 7,177,125
-------------
CONSUMER NON-DURABLES
22,000 American Greetings Corp., Class A 603,625
7,000 Armour All Products Corp. 140,000
6,000 Barefoot, Inc. 66,000
5,000 Cyrk, Inc. 71,250
4,000 Dean Foods Co. 113,000
4,000 Dial Corp. 96,000
7,000 Fieldcrest Cannon, Inc. 155,750
15,000 Griffon Corp. 118,125
5,000 Hormel (Geo. A.) & Co. 136,250
13,000 IBP, Inc. 477,750
1,800 Jones Apparel Group, Inc. 47,025
2,000 Kellwood Co. 35,250
19,000 Lancaster Colony Corp. 665,000
5,000 Nautica Enterprises, Inc. 140,000
5,000 Nu-kote Holdings, Inc., Class A 139,063
22,000 Paragon Trade Brands, Inc. 338,250
11,000 Phillips-Van Heusen Corp. 167,750
3,000 Scotts Co., Class A 59,250
9,000 Smithfield Foods, Inc. 204,750
18,000 Springs Industries, Inc. 693,000
4,000 Starbucks Corp. 93,750
3,000 St. John Knits, Inc. 102,750
31,000 Topps, Inc. 186,000
17,000 Unifi, Inc. 431,375
9,000 Universal Foods Corp. 292,500
10,000 Westpoint Stevens, Inc. 183,750
53,000 Whitman Corp. 960,625
6,000 WLR Foods, Inc. 138,000
12,000 Wolverine World Wide, Inc. 393,000
-------------
TOTAL CONSUMER NON-DURABLES 7,248,838
-------------
CONSUMER SERVICES
4,000 Advo, Inc. 80,000
4,000 American Media, Inc., Class A 24,500
10,200 American Medical Response 261,375
5,000 Banta Corp. 166,250
6,000 Belo (A.H.) Corp. 361,500
25,000 Bowne & Co., Inc. 403,125
6,000 Brinker International, Inc. 102,750
1,000 Central Newspapers, Inc., Class A 26,000
3,500 Club Med, Inc. 99,313
33,000 Equifax, Inc. 1,056,000
1,000 Heritage Media Corp., Class A 25,500
16,000 Hospitality Franchise Systems, Inc. 488,000
3,000 Jones Intercable, Inc., Class A 43,125
</TABLE>
F-91
<PAGE> 236
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------------------------------------------------------------------------------
<S> <C> <C>
11,000 Kelly Services, Inc. $ 375,375
1,000 Lee Enterprises, Inc. 35,750
28,000 Lone Star Steakhouse & Saloon, Inc. 861,000
27,000 Mirage Resorts, Inc. 803,250
35,760 Ogden Corp. 733,080
11,000 Olsten Corp. 374,000
5,200 PHH Corp. 207,350
17,000 Players International, Inc. 503,625
3,000 Regal Cinemas, Inc. 82,500
33,000 Robert Half International, Inc. 870,375
26,000 Sbarro, Inc. 672,750
3,000 Scripps (E.W.) Co., Class A 86,625
10,000 Service Corp. International 278,750
13,500 Spelling Entertainment, Group I 138,374
18,000 SPS Transaction Services 558,000
58,000 Wendy's International, Inc. 993,250
32,000 Westcott Communications, Inc. 452,000
-------------
TOTAL CONSUMER SERVICES 11,163,492
-------------
ENERGY
5,000 Addington Resources, Inc. 58,125
21,000 Ashland, Inc. 769,125
17,000 BJServices Co. 391,000
5,000 Chesapeake Energy Corp. 117,500
4,000 Columbia Gas System, Inc. 118,000
14,000 Diamond Shamrock R & M, Inc. 383,250
27,000 Eastern Enterprises 806,625
19,000 El Paso Natural Gas Co. 553,375
19,000 KCS Energy, Inc. 339,625
2,000 MAPCO, Inc. 113,250
7,000 McDermott (J. Ray) & Co., Inc. 193,375
102,000 Nabors Industries, Inc. 956,250
9,000 NACCO Industries, Inc., Class A 499,500
15,500 National Fuel Gas Co. 443,687
8,000 New Jersey Resources Corp. 183,000
35,000 NICOR, Inc. 866,250
20,000 Offshore Logistics, Inc. 271,250
14,400 ONEOK, Inc. 273,600
3,000 Oryx Energy Co. 41,625
39,000 Pacific Enterprises 960,375
3,000 Phoenix Resource Co. 85,500
7,000 Quaker State Corp. 99,750
6,000 Smith International, Inc. 103,500
7,000 Southwestern Energy Co. 106,750
4,000 Tosco Corp. 136,500
301 Transco Energy Co. 6,095
30,000 Varco International, Inc. 247,500
5,400 WICOR, Inc. 147,150
-------------
TOTAL ENERGY 9,271,532
-------------
FINANCE
8,000 Advanta Corp., Class A 274,000
15,000 Alex Brown, Inc. 605,625
2,080 Alleghany Corp. 323,960
17,000 AMBAC, Inc. 688,500
29,000 Bankers Life Holdings Corp. 605,375
8,000 BanPonce Corp. 257,000
4,500 Capitol American Financial Corp. 97,875
6,000 Capital Re Corp. 138,750
6,000 Charter One Financial, Inc. 137,250
10,000 CMACInvestment Corp. 365,000
5,000 Comdisco, Inc. 140,625
11,000 Commercial Federal Corp. 288,750
16,500 Compass Bancshares, Inc. 432,094
81,960 Dime Bancorp, Inc. 778,620
2,000 Eaton Vance Corp. 63,250
13,000 Finova Group, Inc. 438,750
7,000 First American Corp. 241,500
1,000 First Commercial Corp. 27,500
2,000 First Financial Corp. 31,625
26,000 First USA, Inc. 1,111,500
15,000 Firstar Corp. 433,125
24,000 FirstFed Michigan Corp. 579,000
14,000 Foothill Group, Inc., Class A 306,250
13,000 Fremont General Corp. 287,625
4,000 GATX Corp. 180,000
79,000 Hibernia Corp., Class A 651,750
15,000 Integra Financial Corp. 654,375
5,000 Inter-Regional Financial Group, Inc. 126,875
7,000 Marshall & Ilsley Corp. 140,875
2,000 Mercantile Bancorporation, Inc. 72,750
20,000 Mercury Finance Co. 302,500
29,300 MGIC Investment Corp. 1,230,600
3,000 Ohio Casualty Corp. 87,375
4,000 Old Kent Financial Corp. 124,000
17,250 Orion Capital Corp. 605,906
15,000 Protective Life Corp. 680,625
29,000 Regions Financial Corp. 1,000,500
20,000 Reliastar Financial Corp. 715,000
3,000 Roosevelt Financial Group, Inc. 48,094
7,000 Southern National Corp. 142,625
54,000 SouthTrust Corp. 1,161,000
2,000 Standard Federal Bancorp 56,000
20,300 Star Banc Corp. 847,525
10,000 TCF Financial Corp. 427,500
5,500 White River Corp. 180,125
-------------
TOTAL FINANCE 18,089,549
-------------
HEALTH CARE
8,000 Abbey Healthcare Group, Inc. 311,000
24,000 AMSCO International, Inc. 303,000
23,000 Calgene, Inc. 158,125
14,000 Circa Pharmaceuticals, Inc. 341,250
6,000 Cognex Corp. 178,500
3,000 Cordis Corp. 219,750
4,000 Dentsply International, Inc. 141,000
38,000 FoxMeyer Health Corp. 726,750
14,000 Genetic Therapy, Inc. 133,000
51,000 Gilead Sciences, Inc. 752,250
8,000 Healthsouth Rehabilitation 157,000
26,000 ICOS Corp. 117,000
9,000 Integrated Health Services, Inc. 312,750
21,000 Lincare Holdings, Inc. 630,000
1,000 Manor Care, Inc. 29,750
6,000 Mariner Health Group, Inc. 87,750
11,000 Mentor Corp. 248,875
27,000 Mylan Laboratories, Inc. 833,625
23,000 Nellcor, Inc. 943,000
16,000 Oxford Health Plans, Inc. 672,000
6,000 Pacific Physician Services, Inc. 110,250
12,000 Pacificare Health Systems, Inc., Class A 750,000
3,000 Quintiles Transnational 114,000
7,000 Scios Nova, Inc. 46,375
1,000 Sierra Health Services, Inc. 26,500
18,000 Steris Corp. 711,000
3,000 Target Therapeutics, Inc. 108,750
</TABLE>
F-92
<PAGE> 237
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------------------------------------------------------------------------------
<S> <C> <C>
26,000 Thermo Cardiosystems, Inc. $ 867,750
2,000 United American Healthcare Corp. 34,000
4,000 United Wisconsin Services, Inc. 81,000
3,000 Universal Health Services, Inc. 78,750
24,000 Vivra, Inc. 777,000
15,000 Watsons Pharmaceuticals, Inc. 465,000
-------------
TOTAL HEALTH CARE 11,466,750
-------------
PRODUCER MANUFACTURING
18,000 AGCO Corp. 639,000
36,000 Allwaste, Inc. 220,500
5,000 Ametek, Inc. 81,250
9,600 Aptar Group, Inc. 283,200
3,000 Belden, Inc. 67,500
2,000 Blount, Inc., Class A 90,000
20,000 Briggs & Stratton Corp. 702,500
21,000 Cummins Engine Co., Inc. 929,250
30,000 Danaher Corp. 862,500
10,000 Detroit Diesel Corp. 232,500
2,000 Duracraft Corp. 64,500
4,000 Granite Construction, Inc. 80,250
24,500 IDEX Corp. 808,500
7,000 Indresco, Inc. 95,375
20,000 Juno Lighting, Inc. 405,000
5,000 Kaydon Corp. 138,125
2,000 Kent Electrics Corp. 58,750
8,000 Kulicke & Soffa Industries, Inc. 343,000
40,000 Manville Corp. 465,000
12,000 Mueller Industries, Inc. 498,000
4,000 National Service Industries, Inc. 112,000
1,000 Newpark Resources, Inc. 21,625
5,500 PEC Israel Economic Corp. 151,938
8,000 Ruddick Corp. 166,000
9,000 Southdown, Inc. 171,000
11,000 SPS Technologies, Inc. 343,750
16,000 Sterling Chemicals, Inc. 198,000
42,000 Thermo Instrument Systems, Inc. 976,500
5,000 United Waste Systems, Inc. 145,000
14,000 Varity Corp. 586,250
6,000 Watts Industries, Inc., Class A 138,000
9,000 Wellman, Inc. 247,500
7,000 York International Corp. 288,750
-------------
TOTAL PRODUCER MANUFACTURING 10,611,013
-------------
RAW MATERIALS/PROCESSING INDUSTRIES
9,900 Amcast Industrial Corp. 195,525
35,000 Ecolab, Inc. 796,250
6,000 First Mississippi Corp. 150,000
22,000 Georgia Gulf Corp. 723,250
24,000 Handy & Harman 357,000
8,000 Inland Steel Industries, Inc. 208,000
6,000 International Specialty Products, Inc. 47,250
14,000 Jefferson Smurfit Corp. 190,750
2,000 Justin Industries, Inc. 22,000
6,000 Kaiser Aluminum Corp. 67,500
22,000 Longview Fibre Co. 360,250
18,000 Lubrizol Corp. 627,750
29,000 Lyondell Petrochemical Co. 725,000
20,000 Magma Copper Co., Class B 330,000
3,000 Medusa Corp. 67,875
22,000 Minerals Technologies, Inc. 731,500
2,000 NCH Corp. 127,000
12,000 Olin Corp. 670,500
73,000 Owens-Illinois, Inc. 866,875
2,000 Pentair, Inc. 91,000
10,000 Potlatch Corp. 422,500
16,000 Rayonier, Inc. 530,000
9,000 Riverwood International Corp. 196,875
25,000 RPM,Inc. 490,625
10,000 Sealed Air Corp. 427,500
15,000 Terra Industries, Inc. 165,000
7,000 USG Corp. 163,625
21,000 Vigoro Corp. 840,000
4,000 Vulcan Materials Co. 232,500
37,500 Worthington Industries, Inc. 703,124
-------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES 11,527,024
-------------
TECHNOLOGY
7,500 Altera Corp. 600,469
13,950 Analog Devices, Inc. 371,419
10,000 Aspect Telecommunications Corp. 416,250
4,000 Atmel Corp. 171,000
3,000 Augat, Inc. 61,125
22,400 Avnet, Inc. 994,000
16,000 BMCSoftware, Inc. 988,000
13,000 Chipcom Corp. 419,250
3,000 Cirrus Logic, Inc. 146,625
5,000 Conner Peripherals, Inc. 53,750
21,000 Credence Systems Corp. 771,750
2,000 Cyrix Corp. 48,375
21,000 Electroglas, Inc. 913,500
20,000 Electronics For Imaging 920,000
16,000 Exabyte Corp. 200,000
21,000 Filenet Corp. 708,750
22,000 Frame Technology Corp. 462,000
4,000 FTP Software, Inc. 104,500
48,000 Gateway 2000, Inc. 912,000
17,000 Harris Corp. 799,000
4,200 Input/Output, Inc. 143,325
10,000 Integrated Device Technology, Inc. 390,000
14,000 International Rectifier Corp. 353,500
51,000 Intervoice, Inc. 777,750
3,000 Komag, Inc. 116,625
21,000 Lam Research Corp. 1,050,000
25,000 LEGENT Corp. 675,000
1,000 Littelfuse, Inc. 33,750
12,000 National Semiconductor Corp. 271,500
15,500 Novellus Systems, Inc. 926,125
3,000 Pioneer Standard Electronics, Inc. 58,500
5,000 Quantum Corp. 91,250
4,000 Recoton Corp. 63,000
19,000 S3, Inc. 444,125
14,000 Seagate Technology 441,000
33,000 Sequent Computer Systems, Inc. 548,624
34,000 Solectron Corp. 994,500
16,000 Sterling Software, Inc. 536,000
1,000 Symbol Technologies, Inc. 32,875
9,000 Synopsys, Inc. 488,250
15,000 Tandem Computers, Inc. 193,125
18,000 Teradyne, Inc. 893,250
6,000 3Com Corp. 336,750
5,737 U.S. Robotics Corp. 446,768
5,000 VLSI Technology, Inc. 102,500
6,000 Wall Data, Inc. 111,000
49,000 Western Digital Corp. 784,000
11,000 Xilinx, Inc. 838,750
-------------
TOTAL TECHNOLOGY 22,203,605
-------------
</TABLE>
F-93
<PAGE> 238
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
--------------------------------------------------------------------------------
<S> <C>
TRANSPORTATION
45,000 Arkansas Best Corp. $ 450,000
8,000 Arnold Industries, Inc. 142,000
6,800 Consolidated Freightways, Inc. 173,400
28,000 Illinois Central Corp. 983,500
2,000 M.S. Carriers, Inc. 47,750
29,000 Northwest Airlines, Inc., Class A 866,375
19,000 Pittston Company Services Group 451,250
9,000 Skywest, Inc. 142,875
-------------
TOTAL TRANSPORTATION 3,257,150
-------------
UTILITIES
8,000 Atlantic Energy, Inc. 145,000
37,100 Boston Edison Co. 890,400
3,000 C-TEC Corp. 63,750
4,300 Central Hudson Gas & Electric Corp. 111,263
2,000 Cilcorp, Inc. 72,750
44,000 Delmarva Power & Lighting Co. 863,500
28,000 DQE, Inc. 941,500
8,000 Eastern Utilities Association 191,000
42,000 Illinova Corp. 976,500
35,000 Lincoln Telecommunications Co. 542,500
33,500 Oklahoma Gas & Electric Co. 1,151,562
3,000 Orange & Rockland Utilities, Inc. 95,250
40,000 Pinnacle West Capital Corp. 855,000
47,000 Portland General Corp. 963,500
16,000 Public Services Co. of New Mexico 202,000
14,200 Southern New England Telecommunications 466,825
-------------
TOTAL UTILITIES 8,532,300
-------------
TOTAL COMMON STOCK 131,564,668
-------------
CONVERTIBLE PREFERRED STOCK
1,600 FHP International, $1.25, Series A 37,800
-------------
Principal
Amount
(000) REPURCHASE AGREEMENT
---------
$ 2,045 SBC Capital Markets, Inc., 5.92%, 5/1/95 2,045,000
-------------
TOTAL INVESTMENTS 133,647,468
Other assets and liabilities, net 3,104,847
-------------
NET ASSETS at April 30, 1995 $ 136,752,315
=============
</TABLE>
NOTE 3-INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales and maturities
of investments, excluding short-term investments, forward commitments and
variable rate demand notes were:
<TABLE>
<CAPTION>
GROWTH MUNICIPAL
GROWTH AND INCOME GOVERNMENT BOND
------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Purchases . . . . . . . . . . . . . . . . $2,562,054,723 $425,306,482 $378,078,823 $6,715,140
Sales . . . . . . . . . . . . . . . . . . 2,383,919,510 410,429,313 450,898,093 5,443,790
</TABLE>
The following table presents the identified cost of investments at the end of
the period for federal income tax purposes with the associated net unrealized
appreciation.
<TABLE>
<CAPTION>
GROWTH MUNICIPAL
GROWTH AND INCOME GOVERNMENT BOND
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Identified cost . . . . . . . . . . . . . $2,173,892,480 $642,446,971 $381,862,187 $110,978,067
============== ============ ============ ============
Gross unrealized appreciation . . . . . . $ 218,750,927 $114,051,917 $ 4,746,892 $ 4,389,261
Gross unrealized depreciation . . . . . . (12,667,990) (6,183,851) (2,126,296) (1,956,275)
-------------- ------------ ------------ ------------
Net unrealized appreciation . . . . . . . $ 206,082,937 $107,868,066 $ 2,620,596 $ 2,432,986
============== ============ ============ ============
</TABLE>
Money Market held only short-term investments.
At the end of the period, the Trust held the following futures contracts
expiring in June 1995:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF MARKET APPRECIATION
FUND DESCRIPTION CONTRACTS VALUE (DEPRECIATION)
------------------- --------------------------------- --------- ------------ --------------
<S> <C> <C> <C> <C>
Growth and Income Standard & Poor's 500 Index (long) 60 $15,502,500 $ 178,200
=========== ============
Government U.S. Treasury Bond (short) 30 $(3,160,313) $ (121,315)
U.S. Treasury Note (short) 70 (17,903,125) 11,611
----------- ------------
(21,063,438) $ (109,704)
=========== ============
</TABLE>
F-94
<PAGE> 239
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, continued
--------------------------------------------------------------------------------
At the end of the period, Government held the following forward commitments:
<TABLE>
<CAPTION>
PRINCIPAL MARKET UNREALIZED
AMOUNT SECURITY VALUE APPRECIATION
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government National Mortgage Association
$ 5,000,000 7.00%, settling 5/95 (sale) $(4,731,250) $ 17,187
10,000,000 7.50%, settling 6/95 (purchase) 9,735,300 10,300
20,000,000 7.50%, settling 7/95 (purchase) 19,435,200 35,200
5,000,000 8.00%, settling 6/95 (purchase) 4,987,900 37,900
20,000,000 8.50%, settling 5/95 (purchase) 20,387,600 578,225
5,000,000 8.50%, settling 6/95 (purchase) 5,086,050 7,925
30,000,000 9.00%, settling 5/95 (purchase) 31,125,000 148,438
----------- -----------
(Net obligation $85,190,625) $86,025,800 $ 835,175
=========== ===========
</TABLE>
NOTE 4-TRUSTEE COMPENSATION
Trustees who are not affiliated with the Adviser are compensated by the Trust
at the annual rate of $19,240 plus a fee of $1,285 per day for the Board
meetings attended.
<TABLE>
<CAPTION>
GROWTH
AND MUNICIPAL MONEY
GROWTH INCOME GOVERNMENT BOND MARKET
--------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Trustees' fees for the period . . . . . $ 70,750 $28,393 $20,355 $11,924 $10,156
========= ======= ======= ======= =======
</TABLE>
F-95
<PAGE> 240
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated (Unaudited).
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31
APRIL 30, ----------------------------------------------------
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
GROWTH FUND
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . . . . . $15.31 $16.26 $16.02 $15.47 $11.26 $13.15
-------- -------- -------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . . .17 .29 .281 .30 .36 .38
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . (.08) (.16) (.165) (.17) (.17) (.175)
-------- -------- -------- -------- -------- ------
Net investment income . . . . . . . . . . . . . . . . . . . .09 .13 .116 .13 .19 .205
Net realized and unrealized gain or losses on securities . .89 .2075 2.0065 1.3925 4.2425 (1.25)
-------- -------- -------- -------- -------- ------
Total from investment operations . . . . . . . . . . . . . .98 .3375 2.1225 1.5225 4.4325 (1.045)
-------- -------- -------- -------- -------- ------
LESS DISTRIBUTIONS FROM
Net investment income . . . . . . . . . . . . . . . . . . . (.155) (.1125) (.115) (.17) (.2225) (.2025)
Net realized gain on securities . . . . . . . . . . . . . . (1.035) (1.175) (1.3996) (.8025) -- (.6425)
Excess of book-basis net realized gain on securities . . . -- -- (.3679) -- -- --
-------- -------- -------- -------- -------- ------
Total distributions . . . . . . . . . . . . . . . . . . . . (1.19) (1.2875) (1.8825) (.9725) (.2225) (.845)
-------- -------- -------- -------- -------- ------
Net asset value, end of period . . . . . . . . . . . . . . $15.10 $15.31 $16.26 $16.02 $15.47 $11.26
======== ======== ======== ======== ======== ======
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . . . . . 7.18% 2.04% 14.27% 9.83% 39.90% (8.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . . $2,302.3 $2,169.9 $2,065.7 $1,648.0 $1,311.5 $866.1
Average net assets (millions) . . . . . . . . . . . . . . . $2,171.2 $2,123.1 $1,894.0 $1,479.7 $1,127.8 $878.0
Ratios to average net assets (annualized)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1.09% 1 .09% 1.14% 1.18% 1.26% 1.53%
Net investment income . . . . . . . . . . . . . . . . . . 1.23% .89% .80% .91% 1.44% 1.79%
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 118% 164% 166% 134% 100% 99%
----------------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . . . . . $15.77 $17.13 $15.54 $14.70 $11.49 $12.51
-------- -------- -------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . . .25 .45 .46 .435 .46 .47
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . (.08) (.16) (.17) (.16) (.155) (.165)
-------- -------- -------- -------- -------- ------
Net investment income . . . . . . . . . . . . . . . . . . . .17 .29 .29 .275 .305 .305
Net realized and unrealized gain or losses on securities . 1.04 (.2125) 1.8775 1.2875 3.2225 (.9975)
-------- -------- -------- -------- -------- ------
Total from investment operations . . . . . . . . . . . . . 1.21 .0775 2.1675 1.5625 3.5275 (.6925)
-------- -------- -------- -------- -------- ------
LESS DISTRIBUTIONS FROM
Net investment income . . . . . . . . . . . . . . . . . . . (.165) (.275) (.2775) (.295) (.3175) (.325)
Net realized gain on securities . . . . . . . . . . . . . . (1.595) (1.1625) (.30) (.4275) -- (.0025)
-------- -------- -------- -------- -------- ------
Total distributions . . . . . . . . . . . . . . . . . . . . (1.76) (1.4375) (.5775) (.7225) (.3175) (.3275)
-------- -------- -------- -------- -------- ------
Net asset value, end of period . . . . . . . . . . . . . . $15.22 $15.77 $17.13 $15.54 $14.70 $11.49
======== ======== ======== ======== ======== ======
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . . . . . 9.06% .51% 14.13% 10.85% 31.68% (5.84%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . . $755.7 $712.9 $712.4 $591.0 $499.6 $366.6
Average net assets (millions) . . . . . . . . . . . . . . . $709.6 $707.5 $659.5 $545.0 $449.4 $351.5
Ratios to average net assets (annualized)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1.03% 1 .02% 1.05% 1.09% 1.14% 1.37%
Net investment income . . . . . . . . . . . . . . . . . . 2.39% 1 .84% 1.76% 1.84% 2.29% 2.55%
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 61% 88% 51% 32% 42% 48%
</TABLE>
(1) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-96
<PAGE> 241
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS, continued
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated (Unaudited).
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31
APRIL 30, ----------------------------------------------------
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
GOVERNMENT FUND
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . . . . . $ 9.99 $11 .80 $11.56 $11.47 $10.79 $11.46
-------- -------- -------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . . .39 .78 .8536 .97 1.012 1.073
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . (.04) (.09) (.0920) (.11) (.107) (.118)
-------- -------- -------- -------- -------- ------
Net investment income . . . . . . . . . . . . . . . . . . . .35 .69 .7616 .86 .905 .955
Net realized and unrealized gain or loss on securities . . .3443 (1.358) .4249 .1639 .6788 (.4421)
-------- -------- -------- -------- -------- ------
Total from investment operations . . . . . . . . . . . . . .6943 (.668) 1.1865 1.0239 1.5838 .5129
-------- -------- -------- -------- -------- ------
LESS DISTRIBUTIONS FROM
Net investment income . . . . . . . . . . . . . . . . . . . (.3443) (.6878) (.7615) (.8639) (.9038) (.9579)
Net realized gain on securities . . . . . . . . . . . . . . -- -- (.185) (.07) -- (.225)
Excess of book-basis net realized gains on securities . . . -- (.4542) -- -- -- --
-------- -------- -------- -------- -------- ------
Total distributions . . . . . . . . . . . . . . . . . . . . (.3443) (1.142) (.9465) (.9339) (.9038) (1.1829)
Net asset value, end of period . . . . . . . . . . . . . . $10.34 $9.99 $11.80 $11.56 $11.47 $10.79
======== ======== ======== ======== ======== ======
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . . . . . 7.11% (5.45%) 10.55% 9.32% 15.16% 4.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period(millions) . . . . . . . . . . . . $329.8 $335.0 $370.2 $282.0 $189.0 $140.9
Average net assets (millions) . . . . . . . . . . . . . . . $329.1 $353.8 $330.1 $229.5 $161.2 $120.0
Ratios to average net assets (annualized)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . .85% .89% .89% .95% .96% 1.09%
Net investment income . . . . . . . . . . . . . . . . . . 7.04% 7 .06% 7.35% 7.46% 8.15% 8.78%
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 114% 256%. 218% 112% 39% 28%
</TABLE>
(1) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-97
<PAGE> 242
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS, continued
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated (Unaudited).
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31
APRIL 30, ----------------------------------------------------
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
MUNICIPAL BOND FUND
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . . . . . $12.89 $14 .07 $13.03 $12.84 $12.18 $12.37
-------- -------- -------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . . .43 .84 .859 .875 .905 .91
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . (.06) (.13) (.141) (.15) (.145) (.16)
Expense reimbursement(2) . . . . . . . . . . . . . . . . . -- -- .01 -- -- .01
-------- -------- -------- -------- -------- ------
Net investment income . . . . . . . . . . . . . . . . . . . .37 .71 .728 .725 .76 .76
Net realized and unrealized gain or loss on securities . . .434 (1.182) 1.038 .2175 .648 (.185)
-------- -------- -------- -------- -------- ------
Total from investment operations . . . . . . . . . . . . . .804 (.472) 1.766 .9425 1.408 .575
-------- -------- -------- -------- -------- ------
Distributions from net investment income . . . . . . . . . (.354) (.708) (.726) (.7525) (.748) (.765)
-------- -------- -------- -------- -------- ------
Net asset value, end of period . . . . . . . . . . . . . . $13.34 $12.89 $14.07 $13.03 $12.84 $12.18
======== ======== ======== ======== ======== ======
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . . . . . 5.77% (3.38%) 13.84% 7.57% 11.79% 4.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . . $113.4 $112.1 $95.9 $60.3 $42.5 $37.1
Average net assets (millions) . . . . . . . . . . . . . . . $110.8 $106.6 $77.1 $50.0 $39.2 $31.7
Ratios to average net assets (annualized)(2)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . .99% .99% .96% 1.14% 1.15% 1.25%
Expenses, without expense reimbursement . . . . . . . . . -- -- 1.04% -- -- 1.28%
Net investment income . . . . . . . . . . . . . . . . . . 5.72% 5.27% 5.29% 5.56% 6.08% 6.21%
Net investment income, without expense reimbursement . . -- -- 5.21% -- -- 6.18%
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 5% 4% 4% 6% 1% 4%
-------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . . . . . $1.00 $1 .00 $1.00 $1.00 $1.00 $1.00
-------- -------- -------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . . .0294 .0388 .033 .0424 .0647 .0839
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . (.0089) (.0184) (.0174) (.016) (.014) (.014)
Expense reimbursement(2) . . . . . . . . . . . . . . . . . .0038 .0084 .0074 .006 .0041 .004
-------- -------- -------- -------- -------- ------
Net investment income . . . . . . . . . . . . . . . . . . . .0243 .0288 .023 .0324 .0548 .0739
Distributions from net investment income . . . . . . . . . (.0243) (.0288) (.023) (.0324) (.0548) (.0739)
-------- -------- -------- -------- -------- ------
Net asset value, end of period . . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======== ======== ======
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . . . . . 2.43% 2.91% 2.31% 3.29% 5.65% 7.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . . $54.5 $56.4 $59.2 $72.5 $84.8 $95.7
Average net assets (millions) . . . . . . . . . . . . . . . $55.3 $56.6 $65.8 $77.9 $92.6 $81.6
Ratios to average net assets (annualized)(2)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, without expense reimbursement . . . . . . . . . 1.77% 1.84% 1.74% 1.60% 1.41% 1.36%
Net investment income . . . . . . . . . . . . . . . . . . 4.83% 2.87% 2.30% 3.27% 5.53% 7.37%
Net investment income, without expense reimbursement . . 4.06% 2.03% 1.56% 2.67% 5.12% 7.01%
</TABLE>
(1) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(2) See Note 2.
See Notes to Financial Statements.
F-98
<PAGE> 243
Growth II Fund Statement of Net Assets
--------------------------------------------------------------------------------
April 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 88.7%
CONSUMER DISTRIBUTION 3.4%
1,500 Albertsons, Inc. . . . . . . . . . . . . . . . . . . . . . $ 47,437
1,700 Federated Department Stores, Inc. . . . . . . . . . . . . . 35,912
*7,500 Kroger Co. . . . . . . . . . . . . . . . . . . . . . . . . 191,250
2,500 May Department Stores Co. . . . . . . . . . . . . . . . . . 90,625
2,200 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . 119,350
4,500 Sysco Corp. . . . . . . . . . . . . . . . . . . . . . . . . 126,000
3,300 Walgreen Co. . . . . . . . . . . . . . . . . . . . . . . . 155,100
8,500 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . 201,875
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . 967,549
------------
CONSUMER DURABLES 0.8%
2,600 Black & Decker Corp. . . . . . . . . . . . . . . . . . . . 78,000
4,300 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . 156,950
------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . 234,950
------------
CONSUMER NON-DURABLES 7.7%
2,800 Campbell Soup Co. . . . . . . . . . . . . . . . . . . . . . 143,500
2,000 Coca-Cola Co. . . . . . . . . . . . . . . . . . . . . . . . 116,250
3,500 Colgate-Palmolive Co. . . . . . . . . . . . . . . . . . . . 245,875
5,500 ConAgra, Inc. . . . . . . . . . . . . . . . . . . . . . . . 182,875
3,000 CPC International, Inc. . . . . . . . . . . . . . . . . . . 175,875
2,500 General Mills, Inc. . . . . . . . . . . . . . . . . . . . . 152,500
3,500 Heinz (H.J.) Co. . . . . . . . . . . . . . . . . . . . . . 147,000
5,200 PepsiCo, Inc. . . . . . . . . . . . . . . . . . . . . . . . 216,450
4,100 Procter & Gamble Co. . . . . . . . . . . . . . . . . . . . . 286,488
2,800 Ralston-Ralston Purina Group . . . . . . . . . . . . . . . . 133,000
*6,500 RJR Nabisco Holdings Corp., Class A . . . . . . . . . . . . 181,188
5,500 Sara Lee Corp. . . . . . . . . . . . . . . . . . . . . . . . 153,313
2,500 Whitman Corp. . . . . . . . . . . . . . . . . . . . . . . . 45,625
------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . 2,179,939
------------
CONSUMER SERVICES 7.0%
1,400 Capital Cities ABC, Inc. . . . . . . . . . . . . . . . . . 118,300
2,500 CBS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 160,312
*4,000 Circus Circus Enterprises, Inc. . . . . . . . . . . . . . . 132,500
*5,000 Cox Communications Inc. . . . . . . . . . . . . . . . . . . 76,250
3,500 Disney (Walt) Co. . . . . . . . . . . . . . . . . . . . . . 193,812
5,500 Marriott International, Inc. . . . . . . . . . . . . . . . 198,000
6,000 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . 210,000
6,500 News Corp. Limited, ADR . . . . . . . . . . . . . . . . . . 126,750
500 Omnicom Group, Inc. . . . . . . . . . . . . . . . . . . . . 27,813
5,500 Service Corp. International . . . . . . . . . . . . . . . . 155,375
*8,000 Tele-Communications, Inc., Class A . . . . . . . . . . . . . 153,000
5,000 Time Warner, Inc. . . . . . . . . . . . . . . . . . . . . . 183,125
2,200 Tribune Co. . . . . . . . . . . . . . . . . . . . . . . . . 130,075
*2,500 Viacom, Inc., Class B . . . . . . . . . . . . . . . . . . . 114,688
------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . 1,980,000
------------
</TABLE>
F-99
<PAGE> 244
Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 8.5%
5,000 Amoco Corp. . . . . . . . . . . . . . . . . . . . . . . . . $ 328,125
2,300 Ashland, Inc. . . . . . . . . . . . . . . . . . . . . . . . 85,100
2,500 British Petroleum Co., PLC, ADR . . . . . . . . . . . . . . 215,312
9,000 Coastal Corp. . . . . . . . . . . . . . . . . . . . . . . . 267,750
4,000 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . 278,500
1,500 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . 142,313
10,200 Panhandle Eastern Corp. . . . . . . . . . . . . . . . . . . 244,800
2,500 Repsol SA, ADR . . . . . . . . . . . . . . . . . . . . . . . 80,000
1,200 Royal Dutch Petroleum Co., ADR . . . . . . . . . . . . . . . 148,800
4,500 Texaco, Inc. . . . . . . . . . . . . . . . . . . . . . . . 307,688
9,000 Williams Companies . . . . . . . . . . . . . . . . . . . . . 295,875
------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . 2,394,263
------------
FINANCE 15.3%
5,000 Ahmanson (H.F.) & Co. . . . . . . . . . . . . . . . . . . . 105,000
60,661 American Capital Small Capitalization Fund, Inc.
(See Note 2) . . . . . . . . . . . . . . . . . . . . . . 622,988
5,500 American Express Co. . . . . . . . . . . . . . . . . . . . . 191,125
2,200 American International Group, Inc. . . . . . . . . . . . . . 234,850
6,000 Bank of Boston Corp. . . . . . . . . . . . . . . . . . . . . 201,000
2,000 BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . 99,000
3,000 BayBanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . 187,500
7,000 Chase Manhattan Corp. . . . . . . . . . . . . . . . . . . . 306,250
6,500 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . 271,375
3,000 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . 97,875
7,000 Federal National Mortgage Association . . . . . . . . . . . 617,750
2,700 First Bank System, Inc. . . . . . . . . . . . . . . . . . . 109,350
3,500 First Chicago Corp. . . . . . . . . . . . . . . . . . . . . 193,375
7,500 Great Western Financial Corp. . . . . . . . . . . . . . . . 158,437
6,500 Green Point Financial Corp. . . . . . . . . . . . . . . . . 155,594
3,300 Green Tree Financial Corp. . . . . . . . . . . . . . . . . . 134,887
3,000 MBNA Corp. . . . . . . . . . . . . . . . . . . . . . . . . 90,750
5,700 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . 208,050
1,800 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . 86,625
8,500 West One Bancorp. . . . . . . . . . . . . . . . . . . . . . 234,813
------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . 4,306,594
------------
HEALTH CARE 10.6%
5,500 Abbott Laboratories, Inc. . . . . . . . . . . . . . . . . . 216,562
3,000 American Home Products Corp. . . . . . . . . . . . . . . . 231,375
*1,500 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 109,031
*3,000 Astra AB, Series A, ADR . . . . . . . . . . . . . . . . . . 86,250
5,500 Baxter International, Inc. . . . . . . . . . . . . . . . . 191,125
2,000 Becton Dickinson & Co. . . . . . . . . . . . . . . . . . . 111,500
6,000 Caremark International, Inc. . . . . . . . . . . . . . . . 105,000
3,500 Columbia/HCA Healthcare Corp. . . . . . . . . . . . . . . . 147,000
*1,000 Forest Laboratories, Inc. . . . . . . . . . . . . . . . . . 45,000
*1,600 Genentech, Inc. . . . . . . . . . . . . . . . . . . . . . . 80,600
*4,500 Healthcare & Retirement Corp. . . . . . . . . . . . . . . . 127,125
2,000 Healthsouth Rehabilitation . . . . . . . . . . . . . . . . . 39,500
1,200 Integrated Health Services, Inc. . . . . . . . . . . . . . 41,550
2,000 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . 130,000
</TABLE>
F-100
<PAGE> 245
Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE-continued
2,400 Lilly (Eli) & Co. . . . . . . . . . . . . . . . . . . . . . $ 179,400
2,500 Mallinckrodt Group, Inc. . . . . . . . . . . . . . . . . . . 90,000
2,500 Merck & Co., Inc. . . . . . . . . . . . . . . . . . . . . . 107,188
3,000 Mylan Laboratories, Inc. . . . . . . . . . . . . . . . . . 92,250
1,500 Pfizer, Inc. . . . . . . . . . . . . . . . . . . . . . . . 129,938
*2,700 Scherer (R.P.) Corp. . . . . . . . . . . . . . . . . . . . 128,925
3,000 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . 226,125
4,500 Upjohn Co. . . . . . . . . . . . . . . . . . . . . . . . . 163,125
2,400 Warner Lambert Co. . . . . . . . . . . . . . . . . . . . . 191,400
------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . 2,969,969
------------
PRODUCER MANUFACTURING 7.3%
4,500 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . 148,500
5,500 Corning, Inc. . . . . . . . . . . . . . . . . . . . . . . . 183,562
2,800 Deere & Co. . . . . . . . . . . . . . . . . . . . . . . . . 229,600
4,000 General Electric Co. . . . . . . . . . . . . . . . . . . . 224,000
7,500 Honeywell, Inc. . . . . . . . . . . . . . . . . . . . . . . 289,687
2,000 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . 100,250
2,500 ITT Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 261,250
2,500 Philip NV, ADR . . . . . . . . . . . . . . . . . . . . . . 96,250
4,800 Rockwell International Corp. . . . . . . . . . . . . . . . 209,400
*5,000 Thermo Fibertek, Inc. . . . . . . . . . . . . . . . . . . . 91,875
3,000 Wheelabrator Technologies, Inc. . . . . . . . . . . . . . . 43,500
6,100 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . 166,225
------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . 2,044,099
------------
RAW MATERIALS/PROCESSING INDUSTRIES 4.7%
2,200 Air Products & Chemicals, Inc. . . . . . . . . . . . . . . 110,825
4,000 Du Pont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . 263,500
2,300 Eastman Chemical Co. . . . . . . . . . . . . . . . . . . . 130,525
2,000 Engelhard Corp. . . . . . . . . . . . . . . . . . . . . . . 76,750
3,500 Grace (W.R.) & Co. . . . . . . . . . . . . . . . . . . . . . 187,687
3,000 James River Corp. . . . . . . . . . . . . . . . . . . . . . 81,375
3,500 Lubrizol Corp. . . . . . . . . . . . . . . . . . . . . . . 122,062
4,500 Pall Corp. . . . . . . . . . . . . . . . . . . . . . . . . 105,188
800 Scott Paper Co. . . . . . . . . . . . . . . . . . . . . . . 71,300
5,000 Sherwin Williams Co. . . . . . . . . . . . . . . . . . . . 178,125
------------
TOTAL MATERIALS/PROCESSING INDUSTRIES . . . . . . . . 1,327,337
------------
TECHNOLOGY 19.4%
2,200 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . 128,150
*3,300 Applied Materials, Inc. . . . . . . . . . . . . . . . . . . 203,362
1,400 BMC Software, Inc. . . . . . . . . . . . . . . . . . . . . 87,150
2,500 Boeing Co. . . . . . . . . . . . . . . . . . . . . . . . . 137,500
*2,700 Cisco Systems, Inc. . . . . . . . . . . . . . . . . . . . . 107,662
*12,500 Compaq Computer Corp. . . . . . . . . . . . . . . . . . . . 475,000
2,300 Computer Associates International, Inc. . . . . . . . . . . 148,062
*3,500 DSC Communications Corp. . . . . . . . . . . . . . . . . . 129,500
1,600 Hewlett-Packard Co. . . . . . . . . . . . . . . . . . . . . 105,800
</TABLE>
F-101
<PAGE> 246
Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-continued
*2,500 Integrated Device Technology, Inc. . . . . . . . . . . . . . $ 95,312
4,800 Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . 491,400
5,100 International Business Machines Corp. . . . . . . . . . . . 483,225
1,300 Linear Technology Corp. . . . . . . . . . . . . . . . . . . 77,675
3,500 Lockheed Martin Corp. . . . . . . . . . . . . . . . . . . . 202,125
2,900 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . 136,300
*2,800 Lotus Development Corp. . . . . . . . . . . . . . . . . . . 88,200
*1,600 LSI Logic Corp. . . . . . . . . . . . . . . . . . . . . . . 106,600
4,500 McDonnell Douglas Corp. . . . . . . . . . . . . . . . . . . 279,000
*4,800 Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . 392,400
*9,100 National Semiconductor Corp. . . . . . . . . . . . . . . . 208,164
1,500 Northrop Grumman Corp. . . . . . . . . . . . . . . . . . . 74,438
*2,650 Oracle System Corp. . . . . . . . . . . . . . . . . . . . . 80,825
*2,000 Silicon Graphics, Inc. . . . . . . . . . . . . . . . . . . 75,000
*4,000 Symantec Corp. . . . . . . . . . . . . . . . . . . . . . . 93,000
4,800 Texas Instruments, Inc. . . . . . . . . . . . . . . . . . . 508,800
*1,900 3Com Corp. . . . . . . . . . . . . . . . . . . . . . . . . 106,400
5,000 Varian Associates, Inc. . . . . . . . . . . . . . . . . . . 230,000
1,700 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . 209,312
------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . 5,460,362
------------
TRANSPORTATION 1.5%
2,200 AMR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 148,225
4,500 Burlington Northern, Inc. . . . . . . . . . . . . . . . . . 267,750
------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . 415,975
------------
UTILITIES 2.5%
*3,000 ALC Communications Corp. . . . . . . . . . . . . . . . . . 114,375
2,000 AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . 101,500
3,000 Baltimore Gas & Electric Co. . . . . . . . . . . . . . . . 70,875
1,000 BellSouth Corp. . . . . . . . . . . . . . . . . . . . . . . 61,250
*3,100 Celluar Communications, Inc., Class A . . . . . . . . . . . 144,538
2,000 FPL Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 73,500
3,000 WorldCom, Inc. . . . . . . . . . . . . . . . . . . . . . . 72,000
2,600 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . 66,950
------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . 704,988
------------
TOTAL COMMON STOCK (Cost $23,107,670) . . . . . . . . 24,986,025
------------
</TABLE>
F-102
<PAGE> 247
Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value
----------------------------------------------------------------------------------------------
<S> <C> <C>
United States Government Obligations 1.8%
$ 500,000 United States Treasury Notes, 7.75%, 2/15/01 (Cost $512,375) $ 519,610
------------
Short-Term Investments 15.3%
**1,100,000 Federal Home Loan Mortgage Corp., 5.97% to 6.03%,
5/2/95 to 7/20/95 . . . . . . . . . . . . . . . . . . . . . 1,094,097
**800,000 Federal National Mortgage Association, 5.99% to 6.16%, 5/31/95
to 10/10/95 . . . . . . . . . . . . . . . . . . . . . . . . 787,085
2,020,000 Repurchase agreement with SBC Capital Markets, Inc., dated
4/28/95, 5.92%, due 5/1/95 (collateralized by U.S.
Government obligations in a pooled cash account)
repurchase proceeds $2,020,997 . . . . . . . . . . . . . . 2,020,000
**400,000 United States Treasury Bills, 5.66%, 7/20/95 . . . . . . . . 394,780
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $4,296,354) . . . . 4,295,962
------------
TOTAL INVESTMENTS (Cost $27,916,399) 105.8% . . . . . . . . 29,801,597
Other assets and liabilities, net (5.8%) . . . . . . . . . . (1,639,363)
------------
NET ASSETS Equivalent to $12.69 per share for Class A shares
and $12.60 per share for Class B shares 100% . . . . . . . $ 28,162,234
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 883,874 Class A and 1,344,411
Class B shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,283
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,379,545
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . (159,907)
Net unrealized appreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,885,198
Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,643
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (73,528)
------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . $ 28,162,234
============
</TABLE>
* Non-income producing security.
** Securities with a market value of approximately $2.1 million were placed as
collateral for futures contracts (Note 1D).
See Notes to Financial Statements.
F-103
<PAGE> 248
GROWTH II Fund Financial Statements
--------------------------------------------------------------------------------
(Unaudited)
Statement of Operations
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, 1995
----------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 126,789
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,943
------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,732
------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,062
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . 144,930
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,353
Service fees-Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,074
Distribution and service fees-Class B . . . . . . . . . . . . . . . . . . . . 53,031
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 12,230
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,396
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,250
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . 57,533
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
Expense reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73,625)
------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,420
------------
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,688)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,183)
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,154
Net unrealized appreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,613,745
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,155
------------
Net realized and unrealized gain on securities . . . . . . . . . . . . . . 1,741,871
------------
Increase in net assets resulting from operations . . . . . . . . . . . . . $ 1,677,183
============
</TABLE>
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS MAY 3, 1994*
ENDED THROUGH
APRIL 30, 1995 OCTOBER 31, 1994
-------------- ----------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . $ 10,163,636 $ 200
------------- ------------
OPERATIONS
Net investment loss . . . . . . . . . . . . . . . . . . . . (64,688) (8,840)
Net realized gain (loss) on securities . . . . . . . . . . . 35,971 (195,878)
Net unrealized appreciation of securities during the period 1,705,900 287,941
------------- ------------
Increase in net assets resulting from operations . . . . . . 1,677,183 83,223
------------- ------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . 6,786,103 4,406,808
Class B . . . . . . . . . . . . . . . . . . . . . . . . 10,743,754 5,848,735
------------- ------------
17,529,857 10,255,543
------------- ------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . (629,144) (63,815)
Class B . . . . . . . . . . . . . . . . . . . . . . . . (579,298) (111,515)
------------- ------------
(1,208,442) (175,330)
------------- ------------
Increase in net assets resulting from capital transactions . 16,321,415 10,080,213
------------- ------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . 17,998,598 10,163,436
------------- ------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . $ 28,162,234 $ 10,163,636
============= ============
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-104
<PAGE> 249
Growth and Income II Fund Statement of Net Assets
--------------------------------------------------------------------------------
April 30, 1995 (Unaudited)
<TABLE>
<Catpion>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 76.1%
CONSUMER DISTRIBUTION 2.5%
*500 AmeriSource Health Corp. . . . . . . . . . . . . . . . . . . . $ 11,062
1,400 Gap, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,625
1,700 May Department Stores Co. . . . . . . . . . . . . . . . . . . . 61,625
1,800 McKesson Corp. . . . . . . . . . . . . . . . . . . . . . . . . 71,325
*2,100 Michael's Stores, Inc. . . . . . . . . . . . . . . . . . . . . 59,850
*3,100 Nine West Group, Inc. . . . . . . . . . . . . . . . . . . . . . 100,750
1,600 Nordstrom, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 61,600
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . 410,837
------------
CONSUMER DURABLES 2.2%
3,500 Black & Decker Corp. . . . . . . . . . . . . . . . . . . . . . 105,000
2,100 Eastman Kodak Co. . . . . . . . . . . . . . . . . . . . . . . . 120,750
1,800 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 65,700
1,400 Stanley Works . . . . . . . . . . . . . . . . . . . . . . . . . 55,475
------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . 346,925
------------
CONSUMER NON-DURABLES 6.7%
2,200 Coca-Cola Co. . . . . . . . . . . . . . . . . . . . . . . . . . 127,875
1,700 CPC International, Inc. . . . . . . . . . . . . . . . . . . . . 99,662
1,200 Gillette Co. . . . . . . . . . . . . . . . . . . . . . . . . . 98,400
1,800 Heinz (H.J.) Co. . . . . . . . . . . . . . . . . . . . . . . . 75,600
1,600 Kellogg Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 101,600
1,000 Nike, Inc., Class B . . . . . . . . . . . . . . . . . . . . . . 76,625
2,300 Procter & Gamble Co. . . . . . . . . . . . . . . . . . . . . . 160,713
2,800 Ralston-Ralston Purina Group . . . . . . . . . . . . . . . . . 133,000
2,800 RJR Nabisco Holdings Corp., Class A . . . . . . . . . . . . . . 78,050
4,100 Sara Lee Corp. . . . . . . . . . . . . . . . . . . . . . . . . 114,288
------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . 1,065,813
------------
CONSUMER SERVICES 3.9%
1,500 Capital Cities ABC, Inc. . . . . . . . . . . . . . . . . . . . 126,750
2,000 Disney (Walt) Co. . . . . . . . . . . . . . . . . . . . . . . . 110,750
2,400 Gaylord Entertainment Co., Class A . . . . . . . . . . . . . . 56,700
3,800 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . . . 133,000
1,300 Omnicom Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 72,312
900 Tribune Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 53,213
4,500 Wendy's International, Inc. . . . . . . . . . . . . . . . . . . 76,500
------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . 629,225
------------
</TABLE>
F-105
<PAGE> 250
Growth and Income II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<Catpion>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 8.8%
2,700 British Petroleum Co., PLC, ADR . . . . . . . . . . . . . . . . $ 232,537
3,900 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 271,537
1,500 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 142,312
8,000 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . 197,000
6,500 Panhandle Eastern Corp. . . . . . . . . . . . . . . . . . . . . 156,000
2,500 Repsol SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
2,000 Royal Dutch Petroleum Co., ADR . . . . . . . . . . . . . . . . 248,000
4,000 USX-Marathon Group . . . . . . . . . . . . . . . . . . . . . . 75,000
------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . 1,402,386
------------
FINANCE 12.0%
4,400 Ahmanson (H.F.) & Co. . . . . . . . . . . . . . . . . . . . . . 92,400
1,200 American International Group, Inc. . . . . . . . . . . . . . . 128,100
1,300 Avalon Properties, Inc. . . . . . . . . . . . . . . . . . . . . 25,512
4,500 Bank of Boston Corp. . . . . . . . . . . . . . . . . . . . . . 150,750
1,200 BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . . . 59,400
1,400 BayBanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 87,500
1,600 Beacon Properties Corp. . . . . . . . . . . . . . . . . . . . . 31,400
*2,600 Capital One Financial Corp. . . . . . . . . . . . . . . . . . . 52,325
1,800 Carr Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . 31,950
4,700 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . 196,225
4,700 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . . 153,337
1,300 Crestar Financial Corp. . . . . . . . . . . . . . . . . . . . . 58,500
1,600 Debartolo Realty Corp. . . . . . . . . . . . . . . . . . . . . 22,200
1,100 Duke Realty Investments, Inc. . . . . . . . . . . . . . . . . . 29,975
1,000 Equity Residential Properties Trust . . . . . . . . . . . . . . 26,750
2,700 Federal National Mortgage Association . . . . . . . . . . . . . 238,275
1,900 First Bank System, Inc. . . . . . . . . . . . . . . . . . . . . 76,950
700 General RECorp. . . . . . . . . . . . . . . . . . . . . . . . . 89,162
1,000 Health Care Property Investors, Inc. . . . . . . . . . . . . . 30,250
1,400 Liberty Property Trust . . . . . . . . . . . . . . . . . . . . . 26,075
1,000 Manufactured Home Communities, Inc. . . . . . . . . . . . . . . 15,750
1,900 Morgan (J.P.) & Co., Inc. . . . . . . . . . . . . . . . . . . . 124,687
1,700 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . . . 81,813
3,100 TIG Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . 69,750
900 Weingarten Realty Investors . . . . . . . . . . . . . . . . . . 31,500
------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . 1,930,536
------------
HEALTH CARE 9.2%
2,700 Abbott Laboratories, Inc. . . . . . . . . . . . . . . . . . . . 106,312
1,700 American Home Products Corp. . . . . . . . . . . . . . . . . . . 131,112
*2,000 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 145,375
2,700 Baxter International, Inc. . . . . . . . . . . . . . . . . . . 93,825
*2,200 Charter Medical Corp. . . . . . . . . . . . . . . . . . . . . . 39,050
*2,000 Foundation Health Corp. . . . . . . . . . . . . . . . . . . . . 55,500
1,100 Lilly (Eli) & Co. . . . . . . . . . . . . . . . . . . . . . . . 82,225
*1,800 Lincare Holdings, Inc. . . . . . . . . . . . . . . . . . . . . 55,575
2,400 Merck & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . 102,900
2,400 Mylan Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . 73,800
*5,700 National Medical Enterprises, Inc. . . . . . . . . . . . . . . . 96,900
*2,500 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 103,750
</TABLE>
F-106
<PAGE> 251
Growth and Income II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<Catpion>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE-continued
1,300 Pfizer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,612
*2,400 Physicians Corp. of America . . . . . . . . . . . . . . . . . . 42,900
1,700 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . 128,138
2,900 Upjohn Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 105,125
------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . 1,475,099
------------
PRODUCER MANUFACTURING 6.6%
1,400 Allied-Signal, Inc. . . . . . . . . . . . . . . . . . . . . . . 55,475
3,700 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . 122,100
1,200 Fluor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 61,800
2,800 General Electric Co. . . . . . . . . . . . . . . . . . . . . . 156,800
3,800 Honeywell, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 146,775
2,300 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . . . 115,288
3,700 Philip NV, ADR . . . . . . . . . . . . . . . . . . . . . . . . . 142,450
2,700 Rockwell International Corp. . . . . . . . . . . . . . . . . . . 117,788
3,000 Wheelabrator Technologies, Inc. . . . . . . . . . . . . . . . . 43,500
3,500 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . . . 95,375
------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . 1,057,351
------------
RAW MATERIALS/PROCESSING INDUSTRIES 6.6%
1,400 Air Products & Chemicals, Inc. . . . . . . . . . . . . . . . . . 70,525
4,100 Bemis, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 113,775
1,600 Cabot Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 62,800
1,800 Du Pont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . 118,575
1,800 Eastman Chemical Co. . . . . . . . . . . . . . . . . . . . . . 102,150
5,700 Ethyl Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 61,275
2,300 Ferro Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 65,263
*4,000 Fort Howard Corp. . . . . . . . . . . . . . . . . . . . . . . . 51,000
3,600 Grace (W.R.) & Co. . . . . . . . . . . . . . . . . . . . . . . 193,050
900 International Paper Co. . . . . . . . . . . . . . . . . . . . . 69,300
1,800 Nalco Chemical Co. . . . . . . . . . . . . . . . . . . . . . . 63,000
2,000 Sigma-Aldrich Corp. . . . . . . . . . . . . . . . . . . . . . . 88,500
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . 1,059,213
------------
TECHNOLOGY 9.6%
2,000 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . 116,500
2,600 Computer Associates International, Inc. . . . . . . . . . . . . 167,375
*2,900 DSC Communications Corp. . . . . . . . . . . . . . . . . . . . 107,300
*2,200 General Instruments Corp. . . . . . . . . . . . . . . . . . . . 75,075
1,200 Hewlett-Packard Co. . . . . . . . . . . . . . . . . . . . . . . 79,350
3,500 International Business Machines Corp. . . . . . . . . . . . . . 331,625
1,500 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 70,500
*1,700 Lotus Development Corp. . . . . . . . . . . . . . . . . . . . . 53,550
*1,100 Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . 89,925
3,400 Northern Telecom, Ltd. . . . . . . . . . . . . . . . . . . . . 123,675
</TABLE>
F-107
<PAGE> 252
Growth and Income II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<Catpion>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-continued
1,700 Northrop Grumman Corp. . . . . . . . . . . . . . . . . . . . . . $ 84,363
*1,900 Sterling Software, Inc. . . . . . . . . . . . . . . . . . . . . 64,600
1,400 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 172,375
------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . 1,536,213
------------
UTILITIES 8.0%
2,900 Ameritech Corp. . . . . . . . . . . . . . . . . . . . . . . . . 130,500
1,900 AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 96,425
1,100 BellSouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . 67,375
4,500 Duke Power Co. . . . . . . . . . . . . . . . . . . . . . . . . 177,750
3,300 General Public Utilities Corp. . . . . . . . . . . . . . . . . . 94,050
3,500 GTE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,438
6,000 National Power, PLC, ADR . . . . . . . . . . . . . . . . . . . . 68,250
4,800 Pacific Telesis Group . . . . . . . . . . . . . . . . . . . . . 148,200
7,600 PacifiCorp . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,400
3,000 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . 77,250
1,500 PowerGen, PLC, ADR . . . . . . . . . . . . . . . . . . . . . . 19,125
3,300 U.S. West, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 136,538
------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . 1,279,301
------------
TOTAL COMMON STOCK (Cost $11,131,058) . . . . . . . . . . . 12,192,899
------------
Convertible Preferred Stock 2.1%
2,000 Corning Glass Works, MIPS, 6.00% . . . . . . . . . . . . . . . . 103,000
3,500 James River Corp., DECS, $1.55 . . . . . . . . . . . . . . . . . 85,750
1,000 SCI Finance, NV, LLC, 6.25% . . . . . . . . . . . . . . . . . . 55,500
1,000 Transco Energy Co., $3.50 . . . . . . . . . . . . . . . . . . . 57,250
1,700 Westinghouse Electric Corp., PEPS, $1.30 . . . . . . . . . . . . 25,288
------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $292,852) . . . . . . . 326,788
------------
Principal
Amount Convertible Corporate Obligations 7.7%
---------
CONSUMER DISTRIBUTION 1.4%
$ 150,000 Price Co., 6.75%, 3/1/01 . . . . . . . . . . . . . . . . . . . . 146,625
160,000 Rite Aid Corp., LYON, Zero Coupon, 7/24/06 . . . . . . . . . . . 75,200
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . 221,825
------------
CONSUMER SERVICES 2.9%
280,000 Comcast Corp., 1.125%, 4/15/07 . . . . . . . . . . . . . . . . . 119,000
300,000 News America Holdings, Inc., LYON, Zero Coupon, 3/11/13 . . . . 129,750
Time Warner, Inc.
100,000 8.75%, 1/10/15 . . . . . . . . . . . . . . . . . . . . . . . 100,250
200,000 LYON, Zero Coupon, 12/17/12 . . . . . . . . . . . . . . . . 64,750
150,000 LYON, Zero Coupon, 6/22/13 . . . . . . . . . . . . . . . . . 57,188
------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . 470,938
------------
FINANCE 0.5%
1,941 Allstate Corp., 6.76%, 4/15/98 . . . . . . . . . . . . . . . . . 75,704
------------
</TABLE>
F-108
<PAGE> 253
Growth and Income II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value
-----------------------------------------------------------------------------------------------
<S> <C>
HEALTH CARE 2.1%
$ 500,000 Roche Holdings, Inc., LYON, Zero Coupon, 4/20/10 . . . . . . . . $ 186,875
150,000 United Technologies Corp., Zero Coupon, 9/8/97 . . . . . . . . . 146,250
------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . 333,125
------------
UTILITIES 0.8%
3,026 Sprint Corp., DECS, 8.25%, 3/30/00 . . . . . . . . . . . . . . . 133,026
------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS (Cost $1,195,286) . 1,234,618
------------
United States Government Obligations 1.3%
200,000 United States Treasury Notes, 7.75%, 2/15/01 (Cost $204,781) . . 207,844
------------
Short-Term Investments 16.3%
**500,000 Federal National Mortgage Association, 6.04% to 6.16%,
5/24/95 to 10/10/95 . . . . . . . . . . . . . . . . . . . . . . 493,374
1,225,000 Repurchase Agreement with SBC Capital Markets, Inc., dated
4/28/95, 5.92%, due 5/1/95 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase
proceeds $1,225,604 . . . . . . . . . . . . . . . . . . . . 1,225,000
**900,000 United States Treasury Bills, 5.66% to 5.77%, 5/18/95 to 7/20/95 891,315
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $2,610,009) . . . . . . . 2,609,689
------------
TOTAL INVESTMENTS (Cost $15,433,986) 103.5% . . . . . . . . . . 16,571,838
Other assets and liabilities, net (3.5%) . . . . . . . . . . . . (554,175)
------------
NET ASSETS, equivalent to $12.53 per share for
Class A shares and $12.51 per share for Class B shares 100% $ 16,017,663
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 556,335 Class A and 723,354
Class B shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,797
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,973,792
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . (145,085)
Net unrealized appreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,137,852
Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,782
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,475)
------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . $ 16,017,663
============
</TABLE>
* Non-income producing security.
** Securities with a market value of approximately $1.1 million were placed
as collateral for futures contracts (Note 1D).
DECS - Dividend enhanced convertible stock
LYON - Liquid yield option note
MIPS - Monthly income participating security
PEPS - Preferred equity participating security
See Notes to Financial Statements.
F-109
<PAGE> 254
Growth and Income II Fund Financial Statements
--------------------------------------------------------------------------------
(Unaudited)
Statement of Operations
<TABLE>
<CAPTION>
SIX MONTHS ENDED
INVESTMENT INCOME APRIL 30, 1995
--------------
<S> <C>
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 137,720
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,113
------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,833
------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,001
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . 32,684
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,074
Service fees - Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,472
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . . . 29,495
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 11,997
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,233
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . 58,257
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Expense reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,352)
------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,432
------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 26,401
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,624)
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,932
Net unrealized appreciation of securities during the period
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,056,715
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,907
------------
Net realized and unrealized gain on securities . . . . . . . . . . . . . . . 1,081,930
------------
Increase in net assets resulting from operations . . . . . . . . . . . . . . $ 1,108,331
============
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 3, 1994* THROUGH
Statement of Changes in Net Assets APRIL 30, 1995 OCTOBER 31, 1994
-------------- ----------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . . . $ 7,111,500 $ 200
------------ -------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 26,401 54,709
Net realized loss on securities . . . . . . . . . . . . . . . . . . . (23,692) (121,393)
Net unrealized appreciation of securities during the period . . . . . 1,105,622 77,012
------------ -------------
Increase in net assets resulting from operations . . . . . . . . . . 1,108,331 10,328
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (SEE NOTE 1H)
Class A (Includes $19,597 in excess of net investment as of 4/30/95) (42,548) (11,970)
Class B (Includes $22,777 in excess of net investment as of 4/30/95) (26,227) (6,840)
------------ -------------
(68,775) (18,810)
------------ -------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,563,085 3,526,516
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200,215 3,654,518
------------ -------------
8,763,300 7,181,034
------------ -------------
Proceeds from shares issued for distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,342 11,544
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,081 6,749
------------ -------------
67,423 18,293
------------ -------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (584,222) (56,689)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (379,894) (22,856)
------------ -------------
(964,116) (79,545)
------------ -------------
Increase in net assets resulting from capital transactions . . . . . 7,866,607 7,119,782
------------ -------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 8,906,163 7,111,300
------------ -------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 16,017,663 $ 7,111,500
============ =============
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-110
<PAGE> 255
Government II Fund Statement of Net Assets
--------------------------------------------------------------------------------
April 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount Value
-----------------------------------------------------------------------------------------------
<S> <C>
United States Agency Obligations 68.2%
Federal Home Loan Mortgage Corp.
$ 185,781 7.00%, 10/1/24 . . . . . . . . . . . . . . . . . . . . . . . $ 176,841
628,958 7.50%, 7/1/24 to 11/1/24 . . . . . . . . . . . . . . . . . . 614,215
243,785 8.00%, 4/1/23 to 11/1/24 . . . . . . . . . . . . . . . . . . 243,251
241,517 8.50%, 12/1/24 . . . . . . . . . . . . . . . . . . . . . . . 245,442
Federal National Mortgage Association
395,258 7.00%, 5/1/24 . . . . . . . . . . . . . . . . . . . . . . . 375,867
396,791 7.50%, 8/1/24 . . . . . . . . . . . . . . . . . . . . . . . 387,367
722,826 8.00%, 8/1/24 to 1/1/25 . . . . . . . . . . . . . . . . . . 721,019
200,828 8.50%, 7/1/24 . . . . . . . . . . . . . . . . . . . . . . . 203,902
Government National Mortgage Association
182,923 7.00%, 6/15/22 . . . . . . . . . . . . . . . . . . . . . . . 173,091
1,978,320 7.50%, 4/15/22 to 6/15/24 . . . . . . . . . . . . . . . . . 1,928,862
1,380,660 8.00%, 2/15/23 to 9/15/24 . . . . . . . . . . . . . . . . . 1,379,804
803,487 8.50%, 8/15/24 to 12/15/24 . . . . . . . . . . . . . . . . . 819,058
706,417 9.00%, 9/15/24 to 11/15/24 . . . . . . . . . . . . . . . . . 732,908
------------
TOTAL UNITED STATES AGENCY OBLIGATIONS (Cost $7,804,672) . . 8,001,627
------------
United States Government Obligations 25.2%
50,000 United States Treasury Bond, 8.125%, 8/15/19 . . . . . . . . . . 53,508
United States Treasury Notes
2,250,000 8.875%, 2/15/96 . . . . . . . . . . . . . . . . . . . . . . 2,293,942
600,000 11.25%, 5/15/95 . . . . . . . . . . . . . . . . . . . . . . 601,032
------------
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS (Cost $2,977,899) 2,948,482
------------
Repurchase Agreement 3.6%
425,000 SBC Capital Markets, Inc., dated 4/28/95, 5.92%, due 5/1/95
(collateralized by U.S. Government obligations in a pooled
cash account) repurchase proceeds $425,210 (Cost $425,000) 425,000
------------
TOTAL INVESTMENTS (Cost $11,207,571)97.0% . . . . . . . . . . . 11,375,109
Other assets and liabilities, net 3.0% . . . . . . . . . . . . 354,975
------------
NET ASSETS, equivalent to $11.87 per share for Class A
and Class B shares 100% . . . . . . . . . . . . . . . . . . $ 11,730,084
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 538,892 Class A and 449,594 Class B
shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,885
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,608,656
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . (52,979)
Net unrealized appreciation of securities . . . . . . . . . . . . . . . . . . 167,538
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,016)
------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . $ 11,730,084
============
</TABLE>
See Notes to Financial Statements.
F-111
<PAGE> 256
Government II Fund Financial Statements
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Statement of Operations SIX MONTHS
ENDED
APRIL 30, 1995
--------------
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 378,290
------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,369
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . 16,460
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,546
Service fees - Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,495
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . . . 19,636
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 11,995
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,233
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Report to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,961
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . 54,054
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Expense reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,823)
------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,168
------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 238,122
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . (17,418)
Net unrealized appreciation of securities during the period . . . . . . . . . 314,316
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES . . . . . . . . . . . . . 296,898
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . $ 535,020
============
</TABLE>
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS MAY 3, 1994*
ENDED THROUGH
APRIL 30, 1995 OCTOBER 31, 1994
-------------- ----------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . . . $ 7,342,156 $ 200
------------ -------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 238,122 89,214
Net realized loss on securities . . . . . . . . . . . . . . . . . . . (17,418) (35,179)
Net unrealized appreciation (depreciation) of securities during
the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314,316 (146,778)
------------ -------------
Increase (decrease) in net assets resulting from operations . . . . . 535,020 (92,743)
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (SEE NOTE 1H)
Class A (Includes $4,984 in excess of net investment income
as of 4/30/95) . . . . . . . . . . . . . . . . . . . . . . . . . . (148,926) (66,280)
Class B (Includes $3,399 in excess of net investment income
as of 4/30/95) . . . . . . . . . . . . . . . . . . . . . . . . . . (97,579) (17,949)
------------ -------------
(246,505) (84,229)
------------ -------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,531,654 5,138,916
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,662,069 2,976,454
------------ -------------
5,193,723 8,115,370
------------ -------------
Proceeds from shares issued for distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,023 60,050
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,887 17,072
------------ -------------
236,910 77,122
------------ -------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (993,818) (516,794)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (337,402) (156,770)
------------ -------------
(1,331,220) (673,564)
------------ -------------
Increase in net assets resulting from capital transactions . . . . . 4,099,413 7,518,928
------------ -------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 4,387,928 7,341,956
------------ -------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 11,730,084 $ 7,342,156
============ =============
</TABLE>
* Commencement of operations
See Notes to Financial Statements.
F-112
<PAGE> 257
Emerging Growth II Fund Statement of Net Assets
--------------------------------------------------------------------------------
April 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 83.6%
CONSUMER DISTRIBUTION 5.4%
500 Alco Standard Corp. . . . . . . . . . . . . . . . . . . . . . . $ 35,437
*100 Baby Superstore, Inc. . . . . . . . . . . . . . . . . . . . . . 3,650
*200 Barnes & Noble, Inc. . . . . . . . . . . . . . . . . . . . . . 5,725
600 Bergen Brunswig Corp. . . . . . . . . . . . . . . . . . . . . . 14,250
900 Casey's General Stores, Inc. . . . . . . . . . . . . . . . . . 15,525
*800 CompUSA, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 19,900
*1,000 Corporate Express, Inc. . . . . . . . . . . . . . . . . . . . . 28,250
225 Dollar General Corp. . . . . . . . . . . . . . . . . . . . . . 5,231
500 Emulex Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 9,750
700 Fastenal Co. . . . . . . . . . . . . . . . . . . . . . . . . . 18,550
210 Pier 1 Imports, Inc. . . . . . . . . . . . . . . . . . . . . . 1,890
900 Richfood Holdings, Inc. . . . . . . . . . . . . . . . . . . . . 18,000
*300 Safeway, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 11,250
*400 Waban, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,650
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . 194,058
------------
CONSUMER DURABLES 2.2%
200 Clayton Homes, Inc. . . . . . . . . . . . . . . . . . . . . . . 3,375
900 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 32,850
100 Harman International Industries, Inc. . . . . . . . . . . . . . 3,650
1,000 Modine Manufacturing Co. . . . . . . . . . . . . . . . . . . . 33,875
*300 Ultralife Batteries, Inc. . . . . . . . . . . . . . . . . . . . 5,025
------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . 78,775
------------
CONSUMER NON-DURABLES 3.8%
*500 Bush Boake Allen, Inc. . . . . . . . . . . . . . . . . . . . . 14,875
700 Coca-Cola Enterprises, Inc. . . . . . . . . . . . . . . . . . . 15,662
700 First Brands Corp. . . . . . . . . . . . . . . . . . . . . . . 26,950
*400 Nautica Enterprises, Inc. . . . . . . . . . . . . . . . . . . . 11,000
600 St. John Knits, Inc. . . . . . . . . . . . . . . . . . . . . . 20,775
*700 Tommy Hilfiger Corp. . . . . . . . . . . . . . . . . . . . . . 16,100
100 Unifi, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,513
*900 Wolverine World Wide, Inc. . . . . . . . . . . . . . . . . . . 30,150
------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . 138,025
------------
CONSUMER SERVICES 8.4%
*400 Alternative Resources Corp. . . . . . . . . . . . . . . . . . . 16,900
100 Belo (A.H.) Corp. . . . . . . . . . . . . . . . . . . . . . . . 6,012
*400 Clear Channel Communications, Inc. . . . . . . . . . . . . . . 22,500
*900 Corrections Corp. of America . . . . . . . . . . . . . . . . . . 29,362
900 Equifax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 29,137
*300 Gartner Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 12,412
*900 Hospitality Franchise Systems, Inc. . . . . . . . . . . . . . . 27,337
*500 Infinity Broadcasting Corp. . . . . . . . . . . . . . . . . . . 21,312
800 La Quinta Inns, Inc. . . . . . . . . . . . . . . . . . . . . . 23,900
*400 Landry's Seafood Restaurants . . . . . . . . . . . . . . . . . . 13,850
700 Manpower, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 23,363
600 Meredith Corp. . . . . . . . . . . . . . . . . . . . . . . . . 15,000
</TABLE>
F-113
<PAGE> 258
Emerging Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES-continued
*900 Mirage Resorts, Inc. . . . . . . . . . . . . . . . . . . . . . $ 27,000
500 Reynolds & Reynolds Co. . . . . . . . . . . . . . . . . . . . . 13,250
*600 Robert Half International, Inc. . . . . . . . . . . . . . . . . 15,825
500 Wendy's International, Inc. . . . . . . . . . . . . . . . . . . 8,500
------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . 305,660
------------
ENERGY 5.4%
500 Apache Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 13,500
*700 Barrett Resources Corp. . . . . . . . . . . . . . . . . . . . . 16,450
*1,200 Benton Oil & Gas Co. . . . . . . . . . . . . . . . . . . . . . 14,775
*850 BJ Services Co. . . . . . . . . . . . . . . . . . . . . . . . . 19,462
*300 Chesapeake Energy Corp. . . . . . . . . . . . . . . . . . . . . 7,050
500 Enron Oil & Gas Co. . . . . . . . . . . . . . . . . . . . . . . 11,437
*500 McDermott (J. Ray) & Co., Inc., SA . . . . . . . . . . . . . . 13,750
500 Kerr McGee Corp. . . . . . . . . . . . . . . . . . . . . . . . 25,938
*800 Petroleum Geo-Services, ADR . . . . . . . . . . . . . . . . . . 21,850
400 Phoenix Resource Co. . . . . . . . . . . . . . . . . . . . . . 11,400
600 Pogo Producing Co. . . . . . . . . . . . . . . . . . . . . . . 13,500
*300 Smith International, Inc. . . . . . . . . . . . . . . . . . . . 5,175
400 Sonat Offshore Drilling, Inc. . . . . . . . . . . . . . . . . . 10,800
500 Union Texas Petroleum Holdings, Inc. . . . . . . . . . . . . . 10,688
------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . 195,775
------------
FINANCE 11.0%
400 AFLAC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500
400 Bank of Boston Corp. . . . . . . . . . . . . . . . . . . . . . 13,400
200 BayBanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 12,500
700 CMAC Investment Corp. . . . . . . . . . . . . . . . . . . . . . 25,900
500 Comdisco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 14,062
700 Cullen Frost Bankers, Inc. . . . . . . . . . . . . . . . . . . 25,725
700 First American Corp. . . . . . . . . . . . . . . . . . . . . . . 24,150
400 First Bank Systems, Inc. . . . . . . . . . . . . . . . . . . . 16,200
300 Foothill Group, Inc., Class A . . . . . . . . . . . . . . . . . 6,525
200 GATX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
500 Green Tree Financial Corp. . . . . . . . . . . . . . . . . . . 20,437
300 Household International, Inc. . . . . . . . . . . . . . . . . . 14,062
700 MBNA Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 21,175
200 Mercantile Bancorporation, Inc. . . . . . . . . . . . . . . . . 7,300
500 MGIC Investment Corp. . . . . . . . . . . . . . . . . . . . . . 21,188
900 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . . 32,850
400 Money Store, Inc. . . . . . . . . . . . . . . . . . . . . . . . 9,350
*700 Olympic Financial . . . . . . . . . . . . . . . . . . . . . . . 8,488
100 Progressive Corp. . . . . . . . . . . . . . . . . . . . . . . . 3,775
100 Republic Corp. . . . . . . . . . . . . . . . . . . . . . . . . 4,788
200 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . . . 9,625
500 Star Banc Corp. . . . . . . . . . . . . . . . . . . . . . . . . 20,875
600 TCF Financial Corp. . . . . . . . . . . . . . . . . . . . . . . 25,725
600 United Companies Financial Corp. . . . . . . . . . . . . . . . 22,875
200 Vesta Insurance Group, Inc. . . . . . . . . . . . . . . . . . . 6,675
</TABLE>
F-114
<PAGE> 259
Emerging Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE-continued
300 Webb (Del) Corp. . . . . . . . . . . . . . . . . . . . . . . . $ 5,738
------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . 398,888
------------
HEALTH CARE 13.2%
*600 AMSCO International, Inc. . . . . . . . . . . . . . . . . . . . 7,575
200 Becton Dickinson & Co. . . . . . . . . . . . . . . . . . . . . 11,150
*300 Boston Scientific Corp. . . . . . . . . . . . . . . . . . . . . 8,100
*500 Community Health Services, Inc. . . . . . . . . . . . . . . . . 17,375
*200 Cordis Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 14,350
*500 Coventry Corp. . . . . . . . . . . . . . . . . . . . . . . . . 11,750
*1,000 Cycare Systems, Inc. . . . . . . . . . . . . . . . . . . . . . 25,000
*200 Gulf South Medical Supply, Inc. . . . . . . . . . . . . . . . . 8,400
700 HBO & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,025
*800 Health Management Associates, Inc., Class A . . . . . . . . . . 23,200
*100 Healthcare Compare Corp. . . . . . . . . . . . . . . . . . . . 3,006
*100 Healthcare & Retirement Corp. . . . . . . . . . . . . . . . . . 2,825
*200 Healthsouth Rehabilitation . . . . . . . . . . . . . . . . . . . 3,950
*200 Hillhaven Corp. . . . . . . . . . . . . . . . . . . . . . . . . 5,500
*500 Homedco Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 28,625
500 Invacare Corp. . . . . . . . . . . . . . . . . . . . . . . . . 19,750
*500 Lincare Holdings, Inc. . . . . . . . . . . . . . . . . . . . . 15,438
*300 Medaphis Corp. . . . . . . . . . . . . . . . . . . . . . . . . 17,100
400 Medic Computer Systems, Inc. . . . . . . . . . . . . . . . . . 17,600
500 Medtronic, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 37,188
200 Mentor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 4,725
400 Mylan Laboratories, Inc. . . . . . . . . . . . . . . . . . . . 12,300
300 Omnicare, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 14,588
*200 Oxford Health Plans, Inc. . . . . . . . . . . . . . . . . . . . 8,325
*500 Phycor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 15,875
300 Physician Sales & Services, Inc. . . . . . . . . . . . . . . . 10,613
*300 REN Corp. - USA . . . . . . . . . . . . . . . . . . . . . . . . 4,800
*400 Steris Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 15,800
400 Stryker Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 18,050
*200 Sun Healthcare Group . . . . . . . . . . . . . . . . . . . . . . 4,825
*100 Target Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . 3,650
*500 Tenet Healthcare Corp. . . . . . . . . . . . . . . . . . . . . 8,500
*500 Thermedics, Inc. . . . . . . . . . . . . . . . . . . . . . . . 9,438
*600 Vencor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 18,600
*200 Vivra, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,425
*400 Watsons Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . 12,450
------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . 478,871
------------
PRODUCER MANUFACTURING 4.3%
400 Danaher Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 11,900
*200 FMC Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,275
*600 Glenayre Technologies . . . . . . . . . . . . . . . . . . . . . 36,900
900 Greenfield Industries, Inc. . . . . . . . . . . . . . . . . . . 26,550
200 Harnischfeger Industries, Inc. . . . . . . . . . . . . . . . . 5,900
500 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . . . 25,062
100 Image Industries, Inc. . . . . . . . . . . . . . . . . . . . . 1,375
</TABLE>
F-115
<PAGE> 260
Emerging Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING-continued
100 Kennametal, Inc. . . . . . . . . . . . . . . . . . . . . . . . $ 3,350
200 Parker Hannifin Corp. . . . . . . . . . . . . . . . . . . . . . 10,400
850 Thermo Remediation, Inc. . . . . . . . . . . . . . . . . . . . 13,706
300 United Waste Systems, Inc. . . . . . . . . . . . . . . . . . . 8,475
------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . 155,893
------------
RAW MATERIALS/PROCESSING INDUSTRIES 5.4%
200 Avery Dennison Corp. . . . . . . . . . . . . . . . . . . . . . 8,125
300 Bemis, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,325
400 Boise Cascade Corp. . . . . . . . . . . . . . . . . . . . . . . 13,100
800 Cabot Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 31,400
350 Eastman Chemical Co. . . . . . . . . . . . . . . . . . . . . . 19,862
300 First Mississippi Corp. . . . . . . . . . . . . . . . . . . . . 7,500
500 Hercules, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 24,937
200 IMC Global, Inc. . . . . . . . . . . . . . . . . . . . . . . . 9,825
900 Mineral Technologies, Inc. . . . . . . . . . . . . . . . . . . 29,925
500 Potash Corp. Sask, Inc. . . . . . . . . . . . . . . . . . . . . 26,563
*100 Sealed Air Corp. . . . . . . . . . . . . . . . . . . . . . . . 4,275
*500 USG Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,813
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . 195,650
------------
TECHNOLOGY 21.9%
*300 Adaptec, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 9,600
*900 ADC Telecommunications, Inc. . . . . . . . . . . . . . . . . . 29,700
300 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . 17,475
*300 Altera Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 24,262
*600 Amphenol Corp., Class A . . . . . . . . . . . . . . . . . . . . 16,800
*900 Analog Devices, Inc. . . . . . . . . . . . . . . . . . . . . . 24,187
*500 Andrew Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 24,750
*100 Ascend Communications, Inc. . . . . . . . . . . . . . . . . . . 7,700
*800 Atmel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 35,200
200 Autodesk, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 6,813
*100 BMC Software, Inc. . . . . . . . . . . . . . . . . . . . . . . 6,225
*300 Cadence Design Systems, Inc. . . . . . . . . . . . . . . . . . 9,675
*800 Ceridian Corp. . . . . . . . . . . . . . . . . . . . . . . . . 27,600
*200 Credence Systems Corp. . . . . . . . . . . . . . . . . . . . . 7,250
*300 Cypress Semiconductor Corp. . . . . . . . . . . . . . . . . . . 9,075
*200 Frame Technology Corp. . . . . . . . . . . . . . . . . . . . . 4,200
*300 FSI International, Inc. . . . . . . . . . . . . . . . . . . . . 13,950
*100 Hyperion Software Corp. . . . . . . . . . . . . . . . . . . . . 4,300
*300 Informix Corp. . . . . . . . . . . . . . . . . . . . . . . . . 11,812
*800 Input/Output, Inc. . . . . . . . . . . . . . . . . . . . . . . 27,100
*300 Integrated Device Technology, Inc. . . . . . . . . . . . . . . 11,438
*400 Kemet Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,800
*400 KLA Instruments Corp. . . . . . . . . . . . . . . . . . . . . . 24,800
*100 Kronos Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,050
200 Linear Technology Corp. . . . . . . . . . . . . . . . . . . . . 11,950
*800 LSI Logic Corp. . . . . . . . . . . . . . . . . . . . . . . . . 53,300
*100 Macromedia, Inc. . . . . . . . . . . . . . . . . . . . . . . . 3,350
500 Micron Technology, Inc. . . . . . . . . . . . . . . . . . . . . 41,125
</TABLE>
F-116
<PAGE> 261
Emerging Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-continued
800 National Data Corp. . . . . . . . . . . . . . . . . . . . . . . $ 14,900
*300 Network General Corp. . . . . . . . . . . . . . . . . . . . . . 7,838
*200 Optical Data Systems, Inc. . . . . . . . . . . . . . . . . . . 8,100
*100 PRI Automation . . . . . . . . . . . . . . . . . . . . . . . . . 2,625
*400 Sierra On-Line, Inc. . . . . . . . . . . . . . . . . . . . . . 7,550
600 Sierra Semiconductor Corp. . . . . . . . . . . . . . . . . . . 15,300
*300 Silicon Graphics, Inc. . . . . . . . . . . . . . . . . . . . . 11,250
100 Softkey International, Inc. . . . . . . . . . . . . . . . . . . 2,450
*500 Sunguard Data Systems, Inc. . . . . . . . . . . . . . . . . . . 23,188
*600 Tellabs, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 41,400
500 Tencor Instruments . . . . . . . . . . . . . . . . . . . . . . . 33,875
*600 Teradyne, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 30,375
*300 3Com Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,800
*100 U.S. Robotics Corp. . . . . . . . . . . . . . . . . . . . . . . 7,925
*400 Ultratech Stepper, Inc. . . . . . . . . . . . . . . . . . . . . 22,400
*300 Vicor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 11,550
705 Vishay Intertechnology, Inc. . . . . . . . . . . . . . . . . . 41,683
300 Watkins-Johnson Co. . . . . . . . . . . . . . . . . . . . . . . 11,888
------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . 793,584
------------
TRANSPORTATION 1.8%
700 Air Express International Corp. . . . . . . . . . . . . . . . . 16,450
*100 Landstar Systems, Inc. . . . . . . . . . . . . . . . . . . . . 2,900
*700 Northwest Airlines, Inc., Class A . . . . . . . . . . . . . . . 20,825
*100 TNT Freightways Corp. . . . . . . . . . . . . . . . . . . . . . 2,350
*400 Wisconsin Central Transportation Corp. . . . . . . . . . . . . 22,825
------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . 65,350
------------
UTILITIES 0.8%
*400 ALC Communications Corp. . . . . . . . . . . . . . . . . . . . 15,250
100 Century Telephone Enterprises, Inc. . . . . . . . . . . . . . . 2,975
200 Cincinnati Bell, Inc. . . . . . . . . . . . . . . . . . . . . . 4,800
100 Telecom New Zealand, ADR . . . . . . . . . . . . . . . . . . . . 6,675
------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . 29,700
------------
TOTAL COMMON STOCK (Cost $2,940,469) . . . . . . . . . . . . 3,030,229
------------
WARRANT 0.0%
*60 BJ Services Co., expiring 4/13/00 (Cost $300) . . . . . . . . . 285
------------
</TABLE>
F-117
<PAGE> 262
Emerging Growth II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value
-----------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS 39.9%
*$1,000,000 Federal Home Loan Mortgage Association, 5.97%, 7/20/95 . . . . . $ 986,400
460,000 Repurchase Agreement with SBC Capital Markets, Inc., dated
4/28/95, 5.92%, due 5/1/95 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase proceeds
$460,227 . . . . . . . . . . . . . . . . . . . . . . . . . . 460,000
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,446,747) . . . . . . . 1,446,400
------------
TOTAL INVESTMENTS (Cost $4,387,516) 123.5% . . . . . . . . . . . 4,476,914
Other assets and liabilities, net (23.5%). . . . . . . . . . . . (851,939)
------------
NET ASSETS Equivalent to $12.40 per share for Class A and
$12.39 per share for Class B shares 100% . . . . . . . . . . $ 3,624,975
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 201,914 Class A and 90,434 Class B
shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,923
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,548,821
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . (15,420)
Net unrealized appreciation of securities . . . . . . . . . . . . . . . . . . 89,398
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (747)
------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . $ 3,624,975
============
</TABLE>
*Non-income producing security.
See Notes to Financial Statements.
F-118
<PAGE> 263
Emerging Growth II Fund Financial Statements
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS FEBRUARY 21, 1995
THROUGH
APRIL 30, 1995
--------------
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,365
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 898
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,263
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,789
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . 2,400
Service fees - Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . 541
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . . . 589
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . 9,757
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Expense reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,804)
------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,010
------------
NET INVESTMENT LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . (747)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . (15,420)
Net unrealized appreciation of securities during the period . . . . . . . . . 89,398
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES . . . . . . . . . . . . . . 73,978
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . . $ 73,231
============
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Changes in Net Assets FEBRUARY 21, 1995*
THROUGH
APRIL 30, 1995
--------------
<S> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . . . . $ 200
------------
OPERATIONS
Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (747)
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . (15,420)
Net unrealized appreciation of securities during the period . . . . . . . . 89,398
------------
Increase in net assets resulting from operations . . . . . . . . . . . . 73,231
------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,449,285
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,112,794
------------
3,562,079
------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,000)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,535)
------------
(10,535)
------------
Increase in net assets resulting from capital transactions . . . . . . . . 3,551,544
------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,624,775
------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,624,975
============
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-119
<PAGE> 264
International Equity II Fund Statement of Net Assets
--------------------------------------------------------------------------------
April 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 86.2%
AUSTRALIA 1.8%
10,000 Coca-Cola Amatil . . . . . . . . . . . . . . . . . . . . . . . $ 61,095
------------
AUSTRIA 4.8%
500 AMS Austria Mikros . . . . . . . . . . . . . . . . . . . . . . 49,672
1,200 Baumax, AG . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,049
1,500 Burgenland Holding . . . . . . . . . . . . . . . . . . . . . . . 55,880
------------
160,601
------------
CANADA 2.1%
2,500 Loewen Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 70,333
------------
DENMARK 1.9%
1,000 Kobenhaven Lufthave . . . . . . . . . . . . . . . . . . . . . . 64,305
------------
FINLAND 2.0%
1,600 Nokia Oy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,337
------------
FRANCE 3.3%
300 Castorama Dubois . . . . . . . . . . . . . . . . . . . . . . . . 49,695
200 Sidel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,486
------------
108,181
------------
GERMANY 3.5%
100 Bayer Motoren Werk . . . . . . . . . . . . . . . . . . . . . . . 51,215
200 Grohe (Friedrich) AG . . . . . . . . . . . . . . . . . . . . . . 65,931
------------
117,146
------------
HONG KONG 5.5%
10,000 Hong Kong Electric . . . . . . . . . . . . . . . . . . . . . . . 30,681
20,000 Hutchison Whampoa . . . . . . . . . . . . . . . . . . . . . . . 86,810
10,000 Swire Pacific . . . . . . . . . . . . . . . . . . . . . . . . . 66,852
------------
184,343
------------
IRELAND 4.9%
12,000 CRH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,290
20,000 Independent News . . . . . . . . . . . . . . . . . . . . . . . . 90,119
------------
164,409
------------
ITALY 5.5%
5,000 Alleanza Assicuraz . . . . . . . . . . . . . . . . . . . . . . . 45,145
25,000 Stet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,266
25,000 Telecom Italia . . . . . . . . . . . . . . . . . . . . . . . . . 66,718
------------
183,129
------------
JAPAN 6.8%
1,000 Bunkyodd Co. . . . . . . . . . . . . . . . . . . . . . . . . . 34,509
1,000 Mabuchi Motor Co. . . . . . . . . . . . . . . . . . . . . . . . 66,044
2,220 Sato Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 45,967
400 Shohkoh Fund & Co. . . . . . . . . . . . . . . . . . . . . . . 81,395
------------
227,915
------------
</TABLE>
F-120
<PAGE> 265
International Equity II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA 5.9%
20,000 Leader Univ Holdings . . . . . . . . . . . . . . . . . . . . . . $ 65,130
10,000 Resorts World, BHD . . . . . . . . . . . . . . . . . . . . . . . 52,589
20,000 Sungei Way Holdings . . . . . . . . . . . . . . . . . . . . . . 79,288
------------
197,007
------------
MEXICO 3.6%
20,400 Gruma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,395
*10,000 Grupo Carso . . . . . . . . . . . . . . . . . . . . . . . . . . 53,112
------------
121,507
------------
NETHERLANDS 3.2%
375 Heineken, NV . . . . . . . . . . . . . . . . . . . . . . . . . . 53,516
2,000 IHC Caland, NV . . . . . . . . . . . . . . . . . . . . . . . . . 54,636
------------
108,152
------------
NORWAY 1.6%
2,000 Petroleum Geo Service . . . . . . . . . . . . . . . . . . . . . 54,575
------------
SINGAPORE 5.7%
10,000 Cerebos Pacific . . . . . . . . . . . . . . . . . . . . . . . . 61,715
6,000 Fraser & Neave . . . . . . . . . . . . . . . . . . . . . . . . . 65,877
15,000 Sembawang Maritime . . . . . . . . . . . . . . . . . . . . . . . 62,971
------------
190,563
------------
SWEDEN 9.8%
2,500 Astra, AB . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,949
1,500 Autoliv, AB . . . . . . . . . . . . . . . . . . . . . . . . . . 67,926
1,000 Ericsson (LM) Tel . . . . . . . . . . . . . . . . . . . . . . . 66,205
1,000 Hennes & Mauritz . . . . . . . . . . . . . . . . . . . . . . . . 67,582
1,500 Kinmevik Investment . . . . . . . . . . . . . . . . . . . . . . 52,028
------------
326,690
------------
SWITZERLAND 2.1%
100 Schw Ruckversicher . . . . . . . . . . . . . . . . . . . . . . . 69,696
------------
UNITED KINGDOM 3.1%
4,000 Carlton Communications . . . . . . . . . . . . . . . . . . . . . 60,766
10,000 Rentokil Group . . . . . . . . . . . . . . . . . . . . . . . . . 42,085
------------
102,851
------------
UNITED STATES 9.1%
1,500 Embotelladora Andina, ADR . . . . . . . . . . . . . . . . . . . 43,125
3,000 Madeco, SA, ADR . . . . . . . . . . . . . . . . . . . . . . . . 87,375
1,000 Roche Holdings, Ltd., ADR . . . . . . . . . . . . . . . . . . . 60,000
1,000 Telecom Corp. of New Zealand, ADR . . . . . . . . . . . . . . . 66,750
1,500 Telefonos de Mexico, SA, ADR . . . . . . . . . . . . . . . . . . 45,375
------------
302,625
------------
TOTAL COMMON STOCK (Cost $2,690,697) . . . . . . . . . . . . 2,880,460
------------
</TABLE>
F-121
<PAGE> 266
International Equity II Fund Statement of Net Assets, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value
-----------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement 17.8%
$ 593,000 State Street Bank & Trust Co., dated 4/28/95, 4.00%, due 5/1/95
(collateralized by U.S. Government obligations) repurchase
proceeds $593,198 (Cost $593,000) . . . . . . . . . . . . . . $ 593,000
------------
TOTAL INVESTMENTS (Cost $3,283,697) 104.0% . . . . . . . . . . . 3,473,460
Other assets and liabilities, net (4.0%) . . . . . . . . . . . . (132,700)
------------
NET ASSETS Equivalent to $12.69 per share for Class A and $12.68
per share for Class B shares 100% . . . . . . . . . . . . . . $ 3,340,760
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 228,871 Class A and 34,353 Class B
shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,632
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,142,890
Undistributed net realized gain on securities . . . . . . . . . . . . . . . . 1,142
Net unrealized appreciation (depreciation) of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,763
Other foreign denominated assets and liabilities . . . . . . . . . . . . . 1,789
Forward currency exchange contracts . . . . . . . . . . . . . . . . . . . . (940)
Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (353)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . 3,837
------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . $ 3,340,760
============
</TABLE>
*Non-income producing security.
See Notes to Financial Statements.
F-122
<PAGE> 267
International Equity II Fund Financial Statements
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Statement of Operations FEBRUARY 21, 1995*
THROUGH
APRIL 30, 1995
--------------
<S> <C>
INVESTMENT INCOME
Dividends (Net of $1,785 foreign taxes withheld at source) . . . . . . . . . $ 6,615
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,547
------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,162
------------
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,425
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . 5,644
Service fees - Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,055
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . . . 207
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,896
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,404
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 476
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . 4,607
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Expense reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,733)
------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,325
------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 3,837
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on foreign currency . . . . . . . . . . . . . . . . . . . . 1,142
Net unrealized appreciation (depreciation) of securities during the period
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,763
Other foreign denominated assets and liabilities . . . . . . . . . . . . . 1,789
Forward currency exchange contracts . . . . . . . . . . . . . . . . . . . . (940)
Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (353)
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES . . . . . . . . . . . . . . . 191,401
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . . . $ 195,238
============
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Changes in Net Assets FEBRUARY 21, 1995*
THROUGH
APRIL 30, 1995
--------------
<S> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . . . . $ 200
------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,837
Net realized gain on securities . . . . . . . . . . . . . . . . . . . . . 1,142
Net unrealized appreciation of securities during the period . . . . . . . . 190,259
------------
Increase in net assets resulting from operations . . . . . . . . . . . . 195,238
------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,726,104
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422,430*
------------
3,148,534
------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,000)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,212)
-------------
(3,212)
-------------
Increase in net assets resulting from capital transactions . . . . . . . . 3,145,322
------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,340,560
------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,340,760
============
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-123
<PAGE> 268
Notes to Financial Statements
--------------------------------------------------------------------------------
(Unaudited)
Note 1-Significant Accounting Policies
Common Sense Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as a diversified open-end management investment company
which offers shares in eleven separate portfolios, five of which are described
in this report: Common Sense II Growth Fund ("Growth II"), Common Sense II
Growth and Income Fund ("Growth and Income II"), Common Sense II Government
Fund ("Government II"), Common Sense II Emerging Growth Fund ("Emerging Growth
II") and Common Sense II International Equity Fund ("International Equity II").
Each Fund is accounted for as a separate entity. Investments in foreign
securities involve certain risks not ordinarily associated with investments in
securities of domestic issuers, including fluctuations in foreign exchange
rates, future political and economical developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. The following is a summary of significant accounting policies
consistently followed by the Trust in the preparation of its financial
statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which
the last sale price is not available are valued at the most recent bid
price. U.S. Government securities are valued at the last reported bid
price. Securities for which market quotations are not readily available are
valued at fair value under a method approved by the Board of Trustees.
Short-term investments with a maturity of more than 60 days when purchased
are valued based on market quotations until the remaining days to maturity
become less than 61 days. From such time, until maturity, the investments
are valued at amortized cost.
B. Foreign Currency Translation
The market values of foreign securities, forward currency exchange
contracts and other assets and liabilities stated in foreign currency are
translated into U.S. dollars based on quoted exchange rates as of Noon
Eastern Time. The cost of securities is determined using historical
exchange rates. Income and expenses are translated at prevailing exchange
rates when accrued or incurred. Gains and losses on the sale of securities
are not segregated for financial reporting purposes between amounts arising
from changes in exchange rates and amounts arising from changes in the
market prices of securities. Realized gain and loss on foreign currency
includes the net realized amount from the sale of currency and the amount
realized between trade date and settlement date on security transactions.
C. Forward Currency Exchange Contracts
International Equity II enters into forward currency exchange contracts in
order to hedge its exposure to changes in foreign currency exchange rates
on its foreign portfolio holdings or settle transactions. A forward
currency exchange contract is a commitment to buy or sell a foreign
security at a set price on a future date. Changes in the value of the
contract are recognized by marking the contract to market on a daily basis
to reflect current currency translation rates. The Fund realizes gains or
losses at the time the forward currency exchange contract is closed. Risks
may arise as a result of the potential inability of the counterparties to
meet the terms of their contracts, and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar.
D. Futures Contracts and Forward Commitments
General-Transactions in futures contracts and forward commitments are
utilized in strategies to manage the market risk of the Trust's
investments. The purchase of a futures contract or forward commitment
increases the impact of changes in the market price of investments on net
asset value. Forward commitments have a risk of loss due to nonperformance
of counterparties. There is also a risk that the market movement of such
instruments may not be in the direction forecasted. Note 3-Investment
activity contains additional information.
Futures Contracts-Upon entering into futures contracts, the Trust maintains
securities with a value equal to its obligation under the futures contracts
in a segregated account with its custodian. A portion of these funds is
held as collateral in an account in the name of the broker, the Trust's
agent in acquiring the futures position. During the period the futures
contract is open, changes in the value of the contract ("variation margin")
are recognized by marking the contract to market on a daily basis. As
unrealized gains or losses are incurred, variation margin payments are
received from or made to the broker. Upon the closing or cash settlement of
a contract, gains and losses are realized. The cost of securities acquired
through delivery under a contract is adjusted by the unrealized gain or
loss on the contract.
Forward Commitments-The Trust trades certain securities under the terms of
forward commitments, whereby the settlement for payment and delivery occurs
at a specified future date. Forward commitments are privately negotiated
F-124
<PAGE> 269
Notes to Financial Statements, continued
transactions between the Trust and dealers. Upon executing a forward
commitment and during the period of obligation, the Trust maintains
collateral of cash or securities in a segregated account with its custodian
in an amount sufficient to relieve the obligation. If the intent of the
Trust is to accept delivery of a security traded under a forward purchase
commitment, the commitment is recorded as a long-term purchase. For forward
purchase and sale commitments which security settlement is not intended by
the Trust, changes in the value of the commitment are recognized by marking
the commitment to market on a daily basis. During the commitment, the Trust
may either resell or repurchase the forward commitment and enter into a new
forward commitment, the effect of which is to extend the settlement date.
In addition, the Trust may occasionally close such forward commitments
prior to delivery. Gains and losses are realized upon the ultimate closing
or cash settlement of forward commitments.
E. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Trust
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Trust may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised by Van Kampen American Capital Asset Management, Inc. (the
"Adviser"), the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are collateralized by the underlying debt
security. The Trust will make payment for such securities only upon
physical delivery or evidence of book entry transfer to the account of the
custodian bank. The seller is required to maintain the value of the
underlying security at not less than the repurchase proceeds due the Trust.
F. Federal Income Taxes
No provision for federal income taxes is required because each Fund intends
to elect to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all taxable net investment income and taxable net realized
capital gains to shareholders. It is anticipated that no distributions of
capital gains will be made until tax basis capital loss carryforwards, if
any, expire or are offset by net realized capital gains.
G. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily.
Under the applicable foreign tax laws, a tax may be imposed on interest,
dividends and realized gains generated from foreign investments. Such taxes
are generally reflected on the Statement of Operations as a reduction of
the related income or gains.
H. Dividends and Distributions
The Trust declares annual distributions from net capital gains. Dividends
from net investment income are declared daily for Government II, quarterly
for Growth and Income II and annually for Growth II, Emerging Growth II and
International Equity II. Government II may distribute short-term capital
gains quarterly. Dividends and distributions to shareholders are recorded
on the record date.
The Trust distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ
from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
I. Debt Discount or Premium
The Trust accounts for debt discounts or premiums on the same basis as is
followed for federal income tax reporting. Accordingly, original issue
discounts on long-term debt securities purchased are amortized over the
life of the security. Premiums on debt securities are not amortized. Market
discounts are recognized at the time of sale as realized gains for book
purposes, and ordinary income for tax purposes.
Note 2-Advisory Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Trust. Advisory fees to Adviser
are paid monthly, based on the average daily
F-125
<PAGE> 270
Notes to Financial Statements, continued
net assets of each Fund at an annual rate as indicated by the following
graduated fee schedules:
<TABLE>
<CAPTION>
Emerging Growth II, Growth II
& Growth and Income II Government II
------------------------------------- ------------------------------------
Average Daily Annual Average Daily Annual
Net Assets Rate Net Assets Rate
----------------- ---------- ----------------- ----------
<S> <C> <C> <C>
First $1 billion .65% First $1 billion .60%
Next $1 billion .60% Next $1 billion .55%
Next $1 billion .55% Next $1 billion .50%
Next $1 billion .50% Next $1 billion .45%
Over $4 billion .45% Next $1 billion .40%
Over $5 billion .35%
</TABLE>
The Adviser has entered into a subadvisory agreement with Smith Barney Mutual
Funds Management, Inc. (the "Subadviser"), who provides advisory services to
the International Equity II Fund and the Adviser with respect to it's
investments in foreign securities. Advisory fees for the International Equity
II Fund are calculated monthly, based on the average daily net assets of the
Fund at the annual rate of 1.00%. The Adviser pays 50% of its advisory fee to
the Subadviser.
The Adviser has agreed that it will reimburse the Trust for any expenses
(including the advisory fee, but excluding interest, brokerage commissions,
distribution and service fees, and other extraordinary expenses) in excess of
the most restrictive limitation imposed by state securities commissions. The
most restrictive expense limitation is presently believed to be 2.5% of the
Fund's average daily net assets up to $30 million, 2.0% of the next $70 million
of such net assets and 1.5% of the Fund's net assets in excess of $100 million.
For the period ended April 30, 1995, the Adviser had no reimbursement to the
Trust due to such expense limitation. The Adviser and, in the case of the
International Equity II Fund, the Subadviser may, from time to time, agree to
waive their respective investment advisory fees or any portion thereof or elect
to reimburse a Fund for ordinary business expenses in excess of an agreed upon
amount. The Adviser prepaid the Trust's initial registration and filing
expenses. The Trust is amortizing such expenses over a ten month period ending
April 1995.
At the end of the period, the Adviser owned approximately 10% of Emerging
Growth II's and 37% of International Equity II's Class A outstanding shares,
respectively.
Accounting services include the salaries and overhead expenses of the Trust's
Treasurer and the personnel operating under his direction. Charges are
allocated among investment companies advised by the Adviser. These charges
include the employee costs attributable to the Trust's accounting officers. A
portion of the accounting services expense was paid to the Adviser in
reimbursement of personnel, facilities and equipment costs attributable to the
provision of accounting services. The services provided by the Adviser are at
cost.
Common Sense Shareholder Services ("CSSS") serves as the Trust's shareholder
service agent. CSSS is a subsidiary of PFS Services, Inc. Common Sense
Distributors (the "Distributor"), a subsidiary of PFS Distributors, Inc.,
serves as Distributor of the Trust's shares through an exclusive selling
agreement with PFS Investments Inc. (the "Retail Dealer"). The Retail Dealer is
an indirect wholly-owned subsidiary of Primerica Financial Services. Certain
officers and trustees of the Trust are officers and directors of the Adviser or
its affiliates.
Under the Distribution Plans, each class of shares pays .25% per annum of its
average daily net assets to the Distributor as a service fee. The service fee
is intended to cover personal services provided to the shareholders by
representatives of the Retail Dealer. Class B shares pay an additional fee of
.75% per annum of their average daily net assets to reimburse the Distributor
for its distribution costs. Actual distribution expenses incurred by the
Distributor for Class B shares may exceed the amounts reimbursed to the
Distributor by the Fund. At the end of the period, the Trust was advised that
the unreimbursed expenses incurred by the Distributor under the Class B plan
were as shown in the table below and may be carried forward and reimbursed
through either the collection of the contingent deferred sales charges from
share repurchases or, subject to the annual renewal of the plans, future Trust
reimbursements of distribution fees.
Amounts paid by the affiliates during the period were as follows:
<TABLE>
<CAPTION>
Growth and Emerging International
Growth II Income II Government II Growth II Equity II
--------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Accounting services . . . . . . . . . . . . . $ 2,228 $ 2,186 $ 2,173 $ - $ -
Shareholder service agent fees . . . . . . . . 117,607 26,318 5,589 2,000 5,440
Sales of Fund shares:
Distributor commissions . . . . . . . . . . 47,931 19,281 13,620 7,984 3,587
Retail Dealer commissions . . . . . . . . . 300,937 126,641 77,844 50,255 3,416
Distributor Class B unreimbursed expenses . 638,187 350,124 223,633 10,232 3,416
</TABLE>
F-126
<PAGE> 271
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
At the end of the period, Growth II owned approximately .46% of the American
Capital Small Capitalization Fund, Inc. ("Small Cap"), an investment company
managed by the Adviser. Small Cap comprised approximately 2% of Growth II's
total net assets. Small Cap's portfolio consisted of the following securities:
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------------------------------
<S> <C>
Common Stock
CONSUMER DISTRIBUTION
6,000 Arbor Drugs, Inc. . . . . . . . . . . . . . . . . . . . . . . . $ 154,500
29,000 Barnes & Noble, Inc. . . . . . . . . . . . . . . . . . . . . . . 833,750
13,000 Big B, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 189,313
5,000 Books-A-Million, Inc. . . . . . . . . . . . . . . . . . . . . . 68,125
3,000 Carson Pirie Scott & Co. . . . . . . . . . . . . . . . . . . . . 48,000
4,000 CDW Computer Centers, Inc. . . . . . . . . . . . . . . . . . . . 142,000
39,000 Circuit City Stores, Inc. . . . . . . . . . . . . . . . . . . . 984,750
60,000 Claire's Stores, Inc. . . . . . . . . . . . . . . . . . . . . . 832,500
12,000 CompUSA, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 295,500
26,000 Fingerhut Companies, Inc. . . . . . . . . . . . . . . . . . . . 295,750
7,000 Food Lion, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 38,938
33,000 General Nutrition Companies, Inc. . . . . . . . . . . . . . . . 810,563
16,000 Gymboree Corp. . . . . . . . . . . . . . . . . . . . . . . . . 378,000
4,000 Haggar Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 82,000
11,000 Health Management, Inc. . . . . . . . . . . . . . . . . . . . . 198,000
2,000 Hills Stores Co. . . . . . . . . . . . . . . . . . . . . . . . . 40,250
14,000 MacFrugals Bargains Closeouts . . . . . . . . . . . . . . . . . 197,750
4,000 Medicine Shoppe International, Inc. . . . . . . . . . . . . . . 129,000
6,000 Men's Wearhouse, Inc. . . . . . . . . . . . . . . . . . . . . . 151,500
7,900 Meyer (Fred), Inc. . . . . . . . . . . . . . . . . . . . . . . 245,888
1,000 Michael's Stores, Inc. . . . . . . . . . . . . . . . . . . . . 28,750
20,000 Micro Wholesale, Inc. . . . . . . . . . . . . . . . . . . . . . 705,000
7,000 New England Business Service, Inc. . . . . . . . . . . . . . . . 127,750
4,000 Nine West Group, Inc. . . . . . . . . . . . . . . . . . . . . . 129,500
39,900 Pier 1 Imports, Inc. . . . . . . . . . . . . . . . . . . . . . . 359,100
5,000 Proffitts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 123,438
5,000 Rex Stores Corp. . . . . . . . . . . . . . . . . . . . . . . . . 67,500
3,000 Richfood Holdings, Inc. . . . . . . . . . . . . . . . . . . . . 60,000
7,000 Ross Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . 67,813
12,500 Rykoff-Sexton, Inc. . . . . . . . . . . . . . . . . . . . . . . 217,188
5,000 Shoe Carnival, Inc. . . . . . . . . . . . . . . . . . . . . . . 30,000
31,800 Stop & Shop Companies, Inc. . . . . . . . . . . . . . . . . . . 846,675
31,000 Sunglass Hut International, Inc. . . . . . . . . . . . . . . . . 875,749
3,000 Urban Outfitters, Inc. . . . . . . . . . . . . . . . . . . . . . 63,000
13,000 Viking Office Products, Inc. . . . . . . . . . . . . . . . . . 354,250
39,000 Waban, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 648,375
3,000 Younkers, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 55,875
12,000 Zale Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,250
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . 11,016,290
------------
CONSUMER DURABLES
11,000 Aldila, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 68,750
2,000 Armstrong World Industries, Inc. . . . . . . . . . . . . . . . . 90,750
11,000 Automotive Industries Holdings, Inc., Class A . . . . . . . . . 290,125
3,000 Borg Warner Automotive, Inc. . . . . . . . . . . . . . . . . . . 75,750
10,000 Breed Technologies, Inc. . . . . . . . . . . . . . . . . . . . . 202,500
4,000 Champion Enterprises, Inc. . . . . . . . . . . . . . . . . . . . 118,500
35,000 Clayton Homes, Inc. . . . . . . . . . . . . . . . . . . . . . . 581,875
28,000 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,022,000
5,000 Fleetwood Enterprises, Inc. . . . . . . . . . . . . . . . . . . 111,875
8,000 Harman International Industries, Inc. . . . . . . . . . . . . . 290,000
11,000 Leggett & Platt, Inc. . . . . . . . . . . . . . . . . . . . . . 424,875
32,000 Lennar Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 524,000
7,000 Libbey, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 136,500
32,000 Masland Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 428,000
46,000 Maytag Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 793,500
30,000 Oakwood Homes Corp. . . . . . . . . . . . . . . . . . . . . . . 742,500
12,000 Outboard Marine Corp. . . . . . . . . . . . . . . . . . . . . . 256,500
10,000 Pulte Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 215,000
7,000 Smith (A.O.) Corp. . . . . . . . . . . . . . . . . . . . . . . . 166,250
3,000 Strattec Security Corp. . . . . . . . . . . . . . . . . . . . . 34,500
12,000 Toro Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,500
15,000 Winnebago Industries, Inc. . . . . . . . . . . . . . . . . . . . 151,875
14,000 Zenith Electronics Corp. . . . . . . . . . . . . . . . . . . . . 105,000
------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . 7,177,125
------------
CONSUMER NON-DURABLES
22,000 American Greetings Corp., Class A . . . . . . . . . . . . . . . 603,625
7,000 Armour All Products Corp. . . . . . . . . . . . . . . . . . . . 140,000
6,000 Barefoot, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 66,000
5,000 Cyrk, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,250
4,000 Dean Foods Co. . . . . . . . . . . . . . . . . . . . . . . . . . 113,000
4,000 Dial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000
7,000 Fieldcrest Cannon, Inc. . . . . . . . . . . . . . . . . . . . . 155,750
15,000 Griffon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 118,125
5,000 Hormel (Geo. A.) & Co. . . . . . . . . . . . . . . . . . . . . . 136,250
13,000 IBP, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 477,750
1,800 Jones Apparel Group, Inc. . . . . . . . . . . . . . . . . . . . 47,025
2,000 Kellwood Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 35,250
19,000 Lancaster Colony Corp. . . . . . . . . . . . . . . . . . . . . . 665,000
5,000 Nautica Enterprises, Inc. . . . . . . . . . . . . . . . . . . . 140,000
5,000 Nu-kote Holdings, Inc., Class A . . . . . . . . . . . . . . . . 139,063
22,000 Paragon Trade Brands, Inc. . . . . . . . . . . . . . . . . . . . 338,250
11,000 Phillips-Van Heusen Corp. . . . . . . . . . . . . . . . . . . . 167,750
3,000 Scotts Co., Class A . . . . . . . . . . . . . . . . . . . . . . 59,250
9,000 Smithfield Foods, Inc. . . . . . . . . . . . . . . . . . . . . . 204,750
18,000 Springs Industries, Inc. . . . . . . . . . . . . . . . . . . . . 693,000
4,000 Starbucks Corp. . . . . . . . . . . . . . . . . . . . . . . . . 93,750
3,000 St. John Knits, Inc. . . . . . . . . . . . . . . . . . . . . . . 102,750
31,000 Topps, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 186,000
17,000 Unifi, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 431,375
9,000 Universal Foods Corp. . . . . . . . . . . . . . . . . . . . . . 292,500
10,000 Westpoint Stevens, Inc. . . . . . . . . . . . . . . . . . . . . 183,750
53,000 Whitman Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 960,625
6,000 WLR Foods, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 138,000
12,000 Wolverine World Wide, Inc. . . . . . . . . . . . . . . . . . . . 393,000
------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . 7,248,838
------------
CONSUMER SERVICES
4,000 ADVO, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
4,000 American Media, Inc., Class A . . . . . . . . . . . . . . . . . 24,500
10,200 American Medical Response . . . . . . . . . . . . . . . . . . . 261,375
5,000 Banta Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 166,250
6,000 Belo (A.H.) Corp. . . . . . . . . . . . . . . . . . . . . . . . 361,500
25,000 Bowne & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . 403,125
6,000 Brinker International, Inc. . . . . . . . . . . . . . . . . . . 102,750
1,000 Central Newspapers, Inc., Class A . . . . . . . . . . . . . . . 26,000
3,500 Club Med, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 99,313
33,000 Equifas, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 1,056,000
1,000 Heritage Media Corp., Class A . . . . . . . . . . . . . . . . . 25,500
16,000 Hospitality Franchise System, Inc. . . . . . . . . . . . . . . . 488,000
3,000 Jones Intercable, Inc., Class A . . . . . . . . . . . . . . . . 43,125
11,000 Kelly Services, Inc. . . . . . . . . . . . . . . . . . . . . . . 375,375
1,000 Lee Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . . 35,750
28,000 Lone Star Steakhouse & Saloon, Inc. . . . . . . . . . . . . . . 861,000
27,000 Mirage Resorts, Inc. . . . . . . . . . . . . . . . . . . . . . . 803,250
</TABLE>
F-127
<PAGE> 272
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------------------------------
<S> <C> <C>
35,760 Ogden Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 733,080
11,000 Olsten Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 374,000
5,200 PHH Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,350
17,000 Players International, Inc. . . . . . . . . . . . . . . . . . . 503,625
3,000 Regal Cinemas, Inc. . . . . . . . . . . . . . . . . . . . . . . 82,500
33,000 Robert Half International, Inc. . . . . . . . . . . . . . . . . 870,375
26,000 Sbarro, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 672,750
3,000 Scripps (E.W.) Co., Class A . . . . . . . . . . . . . . . . . . 86,625
10,000 Service Corp. International . . . . . . . . . . . . . . . . . . 278,750
13,500 Spelling Entertainment, Group I . . . . . . . . . . . . . . . . 138,374
18,000 SPS Transaction Services . . . . . . . . . . . . . . . . . . . . 558,000
58,000 Wendy's International, Inc. . . . . . . . . . . . . . . . . . . 993,250
32,000 Westcott Communications, Inc. . . . . . . . . . . . . . . . . . 452,000
------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . 11,163,492
------------
ENERGY
5,000 Addington Resources, Inc. . . . . . . . . . . . . . . . . . . . 58,125
21,000 Ashland, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 769,125
17,000 BJ Services Co. . . . . . . . . . . . . . . . . . . . . . . . . 391,000
5,000 Chesapeake Energy Corp. . . . . . . . . . . . . . . . . . . . . 117,500
4,000 Columbia Gas System, Inc. . . . . . . . . . . . . . . . . . . . 118,000
14,000 Diamond Shamrock R & M, Inc. . . . . . . . . . . . . . . . . . . 383,250
27,000 Eastern Enterprises . . . . . . . . . . . . . . . . . . . . . . 806,625
19,000 El Paso Natural Gas Co. . . . . . . . . . . . . . . . . . . . . 553,375
19,000 KCS Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 339,625
2,000 MAPCO, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 113,250
7,000 McDermott (J. Ray) & Co., Inc. . . . . . . . . . . . . . . . . . 193,375
102,000 Nabors Industries, Inc. . . . . . . . . . . . . . . . . . . . . 956,250
9,000 NACCO Industries, Inc., Class A. . . . . . . . . . . . . . . . . 499,500
15,500 National Fuel Gas . . . . . . . . . . . . . . . . . . . . . . . 443,688
8,000 New Jersey Resources . . . . . . . . . . . . . . . . . . . . . . 183,000
35,000 NICOR, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 866,250
20,000 Offshore Logistics, Inc. . . . . . . . . . . . . . . . . . . . . 271,250
14,400 ONEOK, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 273,600
3,000 Oryx Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . 41,625
39,000 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . 960,375
3,000 Phoenix Resource Co. . . . . . . . . . . . . . . . . . . . . . . 85,500
7,000 Quaker State Corp. . . . . . . . . . . . . . . . . . . . . . . . 99,750
6,000 Smith International, Inc. . . . . . . . . . . . . . . . . . . . 103,500
7,000 Southwestern Energy Co. . . . . . . . . . . . . . . . . . . . . 106,750
4,000 Tosco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 136,500
301 Transco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . 6,094
30,000 Varco International, Inc. . . . . . . . . . . . . . . . . . . . 247,500
5,400 WICOR, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 147,150
------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . 9,271,532
------------
FINANCE
8,000 Advanta Corp., Class A . . . . . . . . . . . . . . . . . . . . . 274,000
15,000 Alex Brown, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 605,625
2,080 Alleghany Corp. . . . . . . . . . . . . . . . . . . . . . . . . 323,960
17,000 AMBAC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 688,500
29,000 Bankers Life Holding Corp. . . . . . . . . . . . . . . . . . . . 605,375
8,000 BanPonce Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 257,000
4,500 Capitol American Financial Corp. . . . . . . . . . . . . . . . . 97,875
6,000 Capital Re Corp. . . . . . . . . . . . . . . . . . . . . . . . . 138,750
6,000 Charter One Financial, Inc. . . . . . . . . . . . . . . . . . . 137,250
10,000 CMAC Investment Corp. . . . . . . . . . . . . . . . . . . . . . 365,000
5,000 Comdisco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 140,625
11,000 Commercial Federal Corp. . . . . . . . . . . . . . . . . . . . . 288,750
16,500 Compass Bancshares, Inc. . . . . . . . . . . . . . . . . . . . . 432,094
81,960 Dime Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . 778,620
2,000 Eaton Vance Corp. . . . . . . . . . . . . . . . . . . . . . . . 63,250
13,000 Finova Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . 438,750
7,000 First American Corp. . . . . . . . . . . . . . . . . . . . . . . 241,500
1,000 First Commercial Corp. . . . . . . . . . . . . . . . . . . . . . 27,500
2,000 First Financial Corp. . . . . . . . . . . . . . . . . . . . . . 31,625
26,000 First USA, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 1,111,500
15,000 Firstar Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 433,125
24,000 FirstFed Michigan Corp. . . . . . . . . . . . . . . . . . . . . 579,000
14,000 Foothill Group, Inc., Class A . . . . . . . . . . . . . . . . . 306,250
13,000 Fremont General Corp. . . . . . . . . . . . . . . . . . . . . . 287,625
4,000 GATX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
79,000 Hibernia Corp., Class A . . . . . . . . . . . . . . . . . . . . 651,750
15,000 Integra Financial Corp. . . . . . . . . . . . . . . . . . . . . 654,375
5,000 Inter-Regional Financial Group, Inc. . . . . . . . . . . . . . . 126,875
7,000 Marshall & Ilsley Corp. . . . . . . . . . . . . . . . . . . . . 140,875
2,000 Mercantile Bancorporation, Inc. . . . . . . . . . . . . . . . . 72,750
20,000 Mercury General Corp. . . . . . . . . . . . . . . . . . . . . . 302,500
29,300 MGIC Investment Corp. . . . . . . . . . . . . . . . . . . . . . 1,230,600
3,000 Ohio Casualty Corp. . . . . . . . . . . . . . . . . . . . . . . 87,375
4,000 Old Kent Financial Corp. . . . . . . . . . . . . . . . . . . . 124,000
17,250 Orion Capital Corp. . . . . . . . . . . . . . . . . . . . . . . 605,906
15,000 Protective Life Corp. . . . . . . . . . . . . . . . . . . . . . 680,625
29,000 Regions Financial Corp. . . . . . . . . . . . . . . . . . . . . 1,000,500
20,000 Reliastar Financial Corp. . . . . . . . . . . . . . . . . . . . 715,000
3,000 Roosevelt Financial Group, Inc. . . . . . . . . . . . . . . . . 48,094
7,000 Southern National Corp. . . . . . . . . . . . . . . . . . . . . 142,625
54,000 SouthTrust Corp. . . . . . . . . . . . . . . . . . . . . . . . 1,161,000
2,000 Standard Federal Bank . . . . . . . . . . . . . . . . . . . . . 56,000
20,300 Star Banc Corp. . . . . . . . . . . . . . . . . . . . . . . . . 847,525
10,000 TCF Financial Corp. . . . . . . . . . . . . . . . . . . . . . . 427,500
5,500 White River Corp. . . . . . . . . . . . . . . . . . . . . . . . 180,125
------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . 18,089,549
------------
HEALTH CARE
8,000 Abbey Healthcare Group, Inc. . . . . . . . . . . . . . . . . . . 311,000
24,000 AMSCO International, Inc. . . . . . . . . . . . . . . . . . . . 303,000
23,000 Calgene, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 158,125
14,000 Circa Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . 341,250
6,000 Cognex Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 178,500
3,000 Cordis Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 219,750
4,000 Dentsply International, Inc. . . . . . . . . . . . . . . . . . . 141,000
38,000 FoxMeyer Health Corp. . . . . . . . . . . . . . . . . . . . . . 726,750
14,000 Genetic Therapy, Inc. . . . . . . . . . . . . . . . . . . . . . 133,000
51,000 Gilead Sciences, Inc. . . . . . . . . . . . . . . . . . . . . . 752,250
8,000 Healthsouth Rehabilitation . . . . . . . . . . . . . . . . . . . 157,000
26,000 ICOS Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,000
9,000 Integrated Health Services, Inc. . . . . . . . . . . . . . . . . 312,750
21,000 Lincare Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . 630,000
1,000 Manor Care, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 29,750
6,000 Mariner Health Group, Inc. . . . . . . . . . . . . . . . . . . . 87,750
11,000 Mentor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 248,875
27,000 Mylan Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . 833,625
23,000 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 943,000
16,000 Oxford Health Plans, Inc. . . . . . . . . . . . . . . . . . . . 672,000
6,000 Pacific Physician Services, Inc. . . . . . . . . . . . . . . . . 110,250
12,000 Pacificare Health Systems, Inc. . . . . . . . . . . . . . . . . 750,000
3,000 Quintiles Transnational . . . . . . . . . . . . . . . . . . . . 114,000
7,000 Scios Nova, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 46,375
1,000 Sierra Health Services, Inc. . . . . . . . . . . . . . . . . . . 26,500
18,000 Steris Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 711,000
3,000 Target Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . 108,750
26,000 Thermo Cardiosystems, Inc. . . . . . . . . . . . . . . . . . . . 867,750
2,000 United American Healthcare Corp. . . . . . . . . . . . . . . . . 34,000
4,000 United Wisconsin Services, Inc. . . . . . . . . . . . . . . . . 81,000
3,000 Universal Health Services, Inc. . . . . . . . . . . . . . . . . 78,750
</TABLE>
F-128
<PAGE> 273
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------------------------------
<S> <C> <C>
24,000 Vivra, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 777,000
15,000 Watsons Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . 465,000
------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . 11,466,750
------------
PRODUCER MANUFACTURING
18,000 AGCO Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 639,000
36,000 Allwaste, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 220,500
5,000 Ametek, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 81,250
9,600 AptarGroup, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 283,200
3,000 Beldon, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 67,500
2,000 Blount, Inc., Class A . . . . . . . . . . . . . . . . . . . . . 90,000
20,000 Briggs & Stratton Corp. . . . . . . . . . . . . . . . . . . . . 702,500
21,000 Cummins Engine Co., Inc. . . . . . . . . . . . . . . . . . . . . 929,250
30,000 Danaher Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 862,500
10,000 Detroit Diesel Corp. . . . . . . . . . . . . . . . . . . . . . . 232,500
2,000 Duracraft Corp. . . . . . . . . . . . . . . . . . . . . . . . . 64,500
4,000 Granite Construction, Inc. . . . . . . . . . . . . . . . . . . . 80,250
24,500 IDEX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 808,500
7,000 Indresco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 95,375
20,000 Juno Lighting, Inc. . . . . . . . . . . . . . . . . . . . . . . 405,000
5,000 Kaydon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 138,125
2,000 Kent Electrics Corp. . . . . . . . . . . . . . . . . . . . . . . 58,750
8,000 Kulicke & Soffa Industries, Inc. . . . . . . . . . . . . . . . . 343,000
40,000 Manville Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 465,000
12,000 Mueller Industries, Inc. . . . . . . . . . . . . . . . . . . . . 498,000
4,000 National Service Industries, Inc. . . . . . . . . . . . . . . . 112,000
1,000 Newpark Resources, Inc. . . . . . . . . . . . . . . . . . . . . 21,625
5,500 PEC Israel Economic Corp. . . . . . . . . . . . . . . . . . . . 151,938
8,000 Ruddick Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 166,000
9,000 Southdown, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 171,000
11,000 SPS Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . 343,750
16,000 Sterling Chemicals, Inc. . . . . . . . . . . . . . . . . . . . . 198,000
42,000 Thermo Instrument Systems, Inc. . . . . . . . . . . . . . . . . 976,500
5,000 United Waste Systems, Inc. . . . . . . . . . . . . . . . . . . . 145,000
14,000 Varity Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 586,250
6,000 Watts Industries, Inc., Class A . . . . . . . . . . . . . . . . 138,000
9,000 Wellman, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 247,500
7,000 York International Corp. . . . . . . . . . . . . . . . . . . . . 288,750
------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . 10,611,013
------------
RAW MATERIALS/PROCESSING INDUSTRIES
9,900 Amcast Industrial Corp. . . . . . . . . . . . . . . . . . . . . 195,525
35,000 Ecolab, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 796,250
6,000 First Mississippi Corp. . . . . . . . . . . . . . . . . . . . . 150,000
22,000 Georgia Gulf Corp. . . . . . . . . . . . . . . . . . . . . . . . 723,250
24,000 Handy & Harmon . . . . . . . . . . . . . . . . . . . . . . . . . 357,000
8,000 Inland Steel Industries, Inc. . . . . . . . . . . . . . . . . . 208,000
6,000 International Specialty Products, Inc. . . . . . . . . . . . . . 47,250
14,000 Jefferson Smurfit Corp. . . . . . . . . . . . . . . . . . . . . 190,750
2,000 Justin Industries, Inc. . . . . . . . . . . . . . . . . . . . . 22,000
6,000 Kaiser Aluminum Corp. . . . . . . . . . . . . . . . . . . . . . 67,500
22,000 Longview Fibre Co. . . . . . . . . . . . . . . . . . . . . . . . 360,250
18,000 Lubrizol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 627,750
29,000 Lyondell Petrochemical Co. . . . . . . . . . . . . . . . . . . . 725,000
20,000 Magma Copper Co., Class B . . . . . . . . . . . . . . . . . . . 330,000
3,000 Medusa Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 67,875
22,000 Minerals Technologies, Inc. . . . . . . . . . . . . . . . . . . 731,500
2,000 NCH Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,000
12,000 Olin Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 670,500
73,000 Owens-Illinois, Inc. . . . . . . . . . . . . . . . . . . . . . . 866,875
2,000 Pentair, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 91,000
10,000 Potlatchm, Corp. . . . . . . . . . . . . . . . . . . . . . . . . 422,500
16,000 Rayonier, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 530,000
9,000 Riverwood International Corp. . . . . . . . . . . . . . . . . . 196,875
25,000 RPM,Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490,625
10,000 Sealed Air Corp. . . . . . . . . . . . . . . . . . . . . . . . . 427,500
15,000 Terra Industries, Inc. . . . . . . . . . . . . . . . . . . . . 165,000
7,000 USG Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,625
21,000 Vigoro Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 840,000
4,000 Vulcan Materials Co. . . . . . . . . . . . . . . . . . . . . . . 232,500
37,500 Worthington Industries, Inc. . . . . . . . . . . . . . . . . . . 703,124
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . 11,527,024
------------
TECHNOLOGY
7,500 Altera Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 600,469
13,950 Analog Devices, Inc. . . . . . . . . . . . . . . . . . . . . . . 371,419
10,000 Aspect Telecommunications Corp. . . . . . . . . . . . . . . . . 416,250
4,000 Atmel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 171,000
3,000 Augat, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 61,125
22,400 Avnet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 994,000
16,000 BMC Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . 988,000
13,000 Chipcom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 419,250
3,000 Cirrus Logic, Inc. . . . . . . . . . . . . . . . . . . . . . . . 146,625
5,000 Conner Peripherals, Inc. . . . . . . . . . . . . . . . . . . . . 53,750
21,000 Credence Systems Corp. . . . . . . . . . . . . . . . . . . . . . 771,750
2,000 Cyrix Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 48,375
21,000 Electroglas, Inc. . . . . . . . . . . . . . . . . . . . . . . . 913,500
20,000 Electronics For Imaging . . . . . . . . . . . . . . . . . . . . 920,000
16,000 Exabyte Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
21,000 Filenet Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 708,750
22,000 Frame Technology Corp. . . . . . . . . . . . . . . . . . . . . . 462,000
4,000 FTP Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . 104,500
48,000 Gateway 2000, Inc. . . . . . . . . . . . . . . . . . . . . . . . 912,000
17,000 Harris Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 799,000
4,200 Input/Output, Inc. . . . . . . . . . . . . . . . . . . . . . . . 143,325
10,000 Integrated Device Technology, Inc. . . . . . . . . . . . . . . . 390,000
14,000 International Rectifier Corp. . . . . . . . . . . . . . . . . . 353,500
51,000 Intervoice, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 777,750
3,000 Komag, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 116,625
21,000 Lam Research Corp. . . . . . . . . . . . . . . . . . . . . . . . 1,050,000
25,000 LEGENT Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 675,000
1,000 Littelfuse, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 33,750
12,000 National Semiconductor Corp. . . . . . . . . . . . . . . . . . . 271,500
15,500 Novellus Systems, Inc. . . . . . . . . . . . . . . . . . . . . . 926,125
3,000 Pioneer Standard Electronics, Inc. . . . . . . . . . . . . . . . 58,500
5,000 Quantum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 91,250
4,000 Recoton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 63,000
19,000 S3, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444,125
14,000 Seagate Technology . . . . . . . . . . . . . . . . . . . . . . . 441,000
33,000 Sequent Computer Systems, Inc. . . . . . . . . . . . . . . . . . 548,624
34,000 Solectron Corp. . . . . . . . . . . . . . . . . . . . . . . . . 994,500
16,000 Sterling Software, Inc. . . . . . . . . . . . . . . . . . . . . 536,000
1,000 Symbol Technologies, Inc. . . . . . . . . . . . . . . . . . . . 32,875
9,000 Synopsys, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 488,250
15,000 Tandem Computers, Inc. . . . . . . . . . . . . . . . . . . . . . 193,125
18,000 Teradyne, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 893,250
6,000 3Com Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,750
5,737 U.S. Robotics Corp. . . . . . . . . . . . . . . . . . . . . . . 446,769
5,000 VLSI Technology, Inc. . . . . . . . . . . . . . . . . . . . . . 102,549
6,000 Wall Data, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 111,000
49,000 Western Digital Corp. . . . . . . . . . . . . . . . . . . . . . 784,000
11,000 Xilinx, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 838,750
------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . 22,203,595
------------
TRANSPORTATION
45,000 Arkansas Best Corp. . . . . . . . . . . . . . . . . . . . . . . 450,000
8,000 Arnold Industries, Inc. . . . . . . . . . . . . . . . . . . . . 142,000
</TABLE>
F-129
<PAGE> 274
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Market
of Shares Value
----------------------------------------------------------------------------------------------
<S> <C> <C>
6,800 Consolidated Freightways, Inc. . . . . . . . . . . . . . . . . . 173,400
28,000 Illinois Central Corp. . . . . . . . . . . . . . . . . . . . . . 983,500
2,000 M.S. Carriers, Inc. . . . . . . . . . . . . . . . . . . . . . . 47,750
29,000 Northwest Airlines, Inc., Class A . . . . . . . . . . . . . . . 866,375
19,000 Pittston Company Services Group . . . . . . . . . . . . . . . . 451,250
9,000 Skywest, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 142,875
------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . 3,257,150
------------
UTILITIES
8,000 Atlantic Energy . . . . . . . . . . . . . . . . . . . . . . . . 145,000
37,100 Boston Edison Co. . . . . . . . . . . . . . . . . . . . . . . . 890,400
3,000 C-TEC Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 63,750
4,300 Central Hudson Gas & Electric . . . . . . . . . . . . . . . . . 111,263
2,000 Cilcorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 72,750
44,000 Delmarva Power & Lighting Co. . . . . . . . . . . . . . . . . . 863,500
28,000 DQE, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 941,500
8,000 Eastern Utilities Association . . . . . . . . . . . . . . . . . 191,000
42,000 Illinova Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 976,500
35,000 Lincoln Telecommunications . . . . . . . . . . . . . . . . . . . 542,500
33,500 Oklahoma Gas & Electric Co. . . . . . . . . . . . . . . . . . . 1,151,562
3,000 Orange & Rockland Utilities . . . . . . . . . . . . . . . . . . 95,250
40,000 Pinnacle West Capital Corp. . . . . . . . . . . . . . . . . . . 855,000
47,000 Portland General Corp. . . . . . . . . . . . . . . . . . . . . . 963,500
16,000 Public Services Co. of New Mexico . . . . . . . . . . . . . . . 202,000
14,200 Southern New England Telecommunications . . . . . . . . . . . . 466,825
------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . 8,532,300
------------
TOTAL COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . 131,564,668
------------
Convertible Preferred Stock
1,600 FHP International, $1.25, Series A . . . . . . . . . . . . . . . 37,800
------------
Principal
Amount
(000) Repurchase Agreement
-----------
$ 2,045 SBC Capital Markets, Inc., 5.92%, 5/1/95 . . . . . . . . . . . . 2,045,000
------------
TOTAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . 133,647,468
Other assets and liabilities, net . . . . . . . . . . . . . . . 3,104,847
------------
NET ASSETS at April 30, 1995 . . . . . . . . . . . . . . . . . . $136,752,315
============
</TABLE>
Note 3-Investment Activity
During the period, the cost of purchases and proceeds from sales and maturities
of investments, excluding short-term investments and forward commitments were:
<TABLE>
<CAPTION>
Growth Emerging International
Growth II and Income II Government II Growth II Equity II
--------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Purchases . . . . . . . . . . . . $30,793,450 $ 13,201,730 $ 4,995,488 $3,091,395 $2,690,697
Sales . . . . . . . . . . . . . . $15,296,700 $ 5,868,037 $ 1,308,908 $ 135,205 $ -
</TABLE>
At the end of the period, the Trust held the following long futures contracts:
<TABLE>
<CAPTION>
Number Market Unrealized
Fund Description of Contracts Value Appreciation
---- ----------- ------------ ------ ------------
<S> <C> <C> <C> <C>
Growth II Standard & Poor's 500 Index
expiring June 1995 8 $ 2,067,000 $108,643
=========== ========
Growth and Income II Standard & Poor's 500 Index
expiring June 1995 4 $ 1,033,500 $ 44,782
=========== ========
</TABLE>
At the end of the period, International Equity II held the following forward
currency exchange contracts:
<TABLE>
<CAPTION>
Unrealized
Settlement U.S. Dollar Appreciation
Currency Date Value (Depreciation)
-------- ---------- ----------- --------------
<S> <C> <C> <C>
Australian Schilling
494,769 (payable) . . . . . 05/08/95 $ 50,777 $ 47
British Pound Sterling
12,763 (payable) . . . . . 05/12/95 20,539 (97)
13,307 (payable) . . . . . 05/15/95 21,415 (31)
French Franc
279,173 (payable) . . . . . 05/31/95 56,812 (804)
Singapore Dollar
33,043 (payable) . . . . . 05/02/95 23,712 (55)
-------- ------
$173,255 $ (940)
======== ======
</TABLE>
F-130
<PAGE> 275
Notes to Financial Statements, continued
--------------------------------------------------------------------------------
The following table presents the identified cost of investments (and foreign
currency for International Equity II) at the end of the period for federal
income tax purposes, the associated net unrealized appreciation and capital
loss carryforward which will expire in 2002.
<TABLE>
<CAPTION>
Growth Emerging International
Growth II and Income II Government II Growth II Equity II
--------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Identified cost . . . . . . . . . $27,916,399 $ 15,436,800 $ 11,207,571 $4,387,516 $3,333,210
=========== ============ ============ ========== ==========
Gross unrealized appreciation . . $ 2,032,781 $ 1,258,802 $ 196,956 $ 140,971 $ 205,215
Gross unrealized depreciation . . (147,583) (123,764) (29,418) (51,573) (15,805)
----------- ------------ ------------ ---------- ----------
Net unrealized appreciation . . . $ 1,885,198 $ 1,135,038 $ 167,538 $ 89,398 $ 189,410
=========== ============ ============ ========== ==========
Capital loss carryforward . . . . $ 177,804 $ 120,455 $ 35,561 $ - $ -
=========== ============ ============ ========== ==========
</TABLE>
Note 4-Capital
Each Fund offers two classes of shares at their respective net asset values per
share, plus a sales charge which is imposed either at the time of purchase (the
Class A shares) or at the time of redemption on a contingent deferred basis
(the Class B shares). All classes of shares have the same rights, except that
Class B shares bear the cost of distribution fees and certain other class
specific expenses. Class B shares automatically convert to Class A shares six
years after purchase, subject to certain conditions. Realized and unrealized
gains or losses, investment income and expenses (other than class specific
expenses) are allocated daily to each class of shares based upon the relative
proportion of net assets of each class.
The Trust has an unlimited number of each class of shares of $.01 par value
beneficial interest authorized. Transactions in shares of beneficial interest
for the period were as follows:
<TABLE>
<CAPTION>
Growth Emerging International
Growth II and Income II Government II Growth II Equity II
--------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Shares sold
Class A . . . . . . . . . . . . 567,705 305,669 218,047 202,079 229,035
Class B . . . . . . . . . . . . 905,177 442,205 228,718 91,130 34,454
----------- ------------ ------------ ---------- ----------
1,472,882 747,874 446,765 293,209 263,489
----------- ------------ ------------ ---------- ----------
Shares issued for distributions
reinvested
Class A . . . . . . . . . . . . - 3,554 12,338 - -
Class B . . . . . . . . . . . . - 2,257 7,952 - -
----------- ------------ ------------ ---------- ----------
- 5,811 20,290 - -
----------- ------------ ------------ ---------- ----------
Shares redeemed
Class A . . . . . . . . . . . . (52,415) (49,354) (86,038) (165) (164)
Class B . . . . . . . . . . . . (48,683) (32,159) (28,960) (696) (101)
----------- ------------ ------------ ---------- ----------
(101,098) (81,513) (114,998) (861) (265)
----------- ------------ ------------ ---------- ----------
Shares outstanding . . . . . . . . 1,371,784 672,172 352,057 292,348 263,224
=========== ============ ============ ========== ==========
</TABLE>
Note 5-Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Trust
at the annual rate of $3,880 plus a fee of $260 per day for the Board meeting
attended.
<TABLE>
<CAPTION>
Growth Emerging International
Growth II and Income II Government II Growth II Equity II
--------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Trustees' fees for the period . . $11,503 $11,269 $11,268 - -
======= ======= ======= = =
</TABLE>
F-131
<PAGE> 276
Growth II Fund Financial Highlights
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout the
periods indicated (Unaudited).
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------- -----------------------------------
SIX MONTHS MAY 3, 1994(1) SIX MONTHS MAY 3, 1994(1)
ENDED THROUGH ENDED THROUGH
APRIL 30, 1995 OCTOBER 31, 1994(2) APRIL 30, 1995 OCTOBER 31, 1994(2)
-------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . $11.89 $11.81 $11.85 $11.81
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . .10 .29 .07 .28
Expenses(4) . . . . . . . . . . . . . . . . . (.11) (.29) (.10) (.32)
------ ------ ------ ------
Net investment income (loss) . . . . . . . . (.01) .00 (.03) (.04)
Net realized and unrealized gain
on securities . . . . . . . . . . . . . . . .81 .08 .78 .08
------ ------ ------ ------
Total from investment operations . . . . . . .80 .08 .75 .04
------ ------ ------ ------
Net asset value, end of period . . . . . . . $12.69 $11.89 $12.60 $11.85
====== ====== ====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . . . 6.64% .76% 6.24% .42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . $11.2 $4.4 $17.0 $5.8
Average net assets (millions) . . . . . . . . $ 7.3 $2.1 $10.6 $2.1
Ratios to average net assets (annualized)(4)
Expenses . . . . . . . . . . . . . . . . . 2.78% 4.89% 3.52% 5.79%
Expenses, without expense reimbursement . . 3.61% - 4.36% -
Net investment loss . . . . . . . . . . . . (.28%) (.05%) (1.04%) (.78%)
Net investment loss, without expense
reimbursement . . . . . . . . . . . . . . (1.11%) - (1.87%) -
Portfolio turnover rate . . . . . . . . . . . 97% 151% 97% 151%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding
(3) Total return has not been annualized and does not consider the effect of
sales charges.
(4) See Note 2
See Notes to Financial Statements.
F-132
<PAGE> 277
Growth and Income II Fund Financial Highlights, continued
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout the
periods indicated (Unaudited).
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------- -----------------------------------
SIX MONTHS MAY 3, 1994(1) SIX MONTHS MAY 3, 1994(1)
ENDED THROUGH ENDED THROUGH
APRIL 30, 1995 OCTOBER 31, 1994(2) APRIL 30, 1995 OCTOBER 31, 1994(2)
-------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . $11.71 $11.81 $11.70 $11.81
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . .11 .42 .18 .42
Expenses . . . . . . . . . . . . . . . . . . (.08) (.21) (.18) (.25)
------ ------ ------ ------
Net investment income . . . . . . . . . . . . .03 .21 .00 .17
Net realized and unrealized gains or losses
on securities . . . . . . . . . . . . . . . .885 (.26) .864 (.251)
------ ------ ------ ------
Total from investment operations . . . . . . .915 (.05) .864 (.081)
------ ------ ------ ------
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME . . . . . . . . . . . . . . . . . . (.095)(5) (.05) (.054)(5) (.029)
------ ------ ------ ------
Net asset value, end of period . . . . . . . $12.53 $11.71 $12.51 $11.70
====== ====== ====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . . . 7.88% (.42%) 7.43% (.68%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . $7.0 $3.5 $9.0 $3.6
Average net assets (millions) . . . . . . . . $5.2 $1.9 $5.9 $1.5
Ratios to average net assets (annualized)(4)
Expenses . . . . . . . . . . . . . . . . . 2.77% 3.37% 3.53% 4.42%
Expenses, without expense reimbursement . . 3.20% 3.40% 3.95% 4.45%
Net investment income . . . . . . . . . . . .89% 3.38% .12% 3.00%
Net investment income (loss), without
expense reimbursement . . . . . . . . . . .47% 3.35% (.31%) 2.97%
Portfolio turnover rate . . . . . . . . . . . 61% 215% 61% 215%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding
(3) Total return has not been annualized and does not consider the effect of
sales charges.
(4) See Note 2
(5) Includes $.044 and $.047 per share for Class A and Class B, respectively,
in excess of net investment income - see Note 1H.
See Notes to Financial Statements.
F-133
<PAGE> 278
Government II Fund Financial Highlights, continued
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated (Unaudited).
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------- -----------------------------------
SIX MONTHS MAY 3, 1994(1) SIX MONTHS MAY 3, 1994(1)
ENDED THROUGH ENDED THROUGH
APRIL 30, 1995 OCTOBER 31, 1994(2) APRIL 30, 1995 OCTOBER 31, 1994(2)
-------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . $11.54 $11.91 $11.54 $11.91
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . .49 .38 .50 .38
Expenses(4) . . . . . . . . . . . . . . . . . (.16) (.15) (.21) (.18)
------ ------ ------ ------
Net investment income . . . . . . . . . . . . .33 .23 .29 .20
Net realized and unrealized gains or losses
on securities . . . . . . . . . . . . . . . .3396 (.40) .3406 (.41)
------ ------ ------ ------
Total from investment operations . . . . . . .6696 (.17) .6306 (.21)
------ ------ ------ ------
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME (.3396)(5) (.20) (.3006)(5) (.16)
------ ------ ------ ------
Net asset value, end of period . . . . . . . $11.87 $11.54 $11.87 $11.54
====== ====== ====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . . . 5.96% (1.53%) 5.61% (1.83%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . $6.4 $4.6 $5.3 $2.8
Average net assets (millions) . . . . . . . . $5.2 $3.9 $3.9 $1.1
Ratios to average net assets (annualized)(4)
Expenses . . . . . . . . . . . . . . . . . 2.78% 2.32% 3.52% 3.25%
Expenses, without expense reimbursement . . 3.15% - 3.89% -
Net investment income . . . . . . . . . . . 5.59% 3.54% 4.84% 3.49%
Net investment income, without expense
reimbursement . . . . . . . . . . . . . . 5.22% - 4.47% -
Portfolio turnover rate . . . . . . . . . . . 14% 155% 14% 155%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding
(3) Total return has not been annualized and does not consider the effect of
sales charges.
(4) See Note 2
(5) Includes $.0114 and $.0105 per share for Class A and Class B, respectively,
in excess of net investment income - see Note 1H.
See Notes to Financial Statements.
F-134
<PAGE> 279
Emerging Growth II Fund Financial Highlights, continued
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout the
period indicated (Unaudited). February 21, 1995(1) through April 30, 1995
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(2)
Net asset value, beginning of period . . . . . . . . . . . $11.81 $11.81
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . . .07 .05
Expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . (.08) (.06)
------ ------
Net investment loss . . . . . . . . . . . . . . . . . . . . (.01) (.01)
Net realized and unrealized gain on securities . . . . . . .60 .59
------ ------
Total from investment operations . . . . . . . . . . . . . .59 .58
------ ------
Net asset value, end of period . . . . . . . . . . . . . . $12.40 $12.39
====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . . . . . . . . . . 5.00% 4.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . . $2.5 $1.1
Average net assets (millions) . . . . . . . . . . . . . . . $0.9 $0.2
Ratios to average net assets (annualized)(4)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2.92% 2.89%
Expenses, without expense reimbursement . . . . . . . . . 6.84% 6.82%
Net investment loss . . . . . . . . . . . . . . . . . . . (.22%) (.50%)
Net investment loss, without expense reimbursement . . . . (4.15%) (4.43%)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 12% 12%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding
(3) Total return has not been annualized and does not consider the effect of
sales charges.
(4) See Note 2
See Notes to Financial Statements.
F-135
<PAGE> 280
International Equity II Fund Financial Highlights
--------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout the
period indicated (Unaudited). February 21, 1995* through April 30, 1995
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(2)
Net asset value, beginning of period . . . . . . . . . . . $11.81 $11.81
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . . .10 .06
Expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . (.08) (.02)
------ ------
Net investment income . . . . . . . . . . . . . . . . . . . .02 .04
Net realized and unrealized gain on securities . . . . . . .86 .83
------ ------
Total from investment operations . . . . . . . . . . . . . .88 .87
------ ------
Net asset value, end of period . . . . . . . . . . . . . . $12.69 $12.68
====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . . . . . . . . . . 7.45% 7.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . . $2.9 $0.4
Average net assets (millions) . . . . . . . . . . . . . . . $1.7 $0.0
Ratios to average net assets (annualized)(4)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2.87% 1.03%
Expenses, without expense reimbursement . . . . . . . . . 7.33% 5.49%
Net investment income . . . . . . . . . . . . . . . . . . .82% 1.89%
Net investment loss, without expense reimbursement . . . . (3.64%) (2.57%)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 0% 0%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding
(3) Total return has not been annualized and does not consider the effect of
sales charges.
(4) See Note 2
See Notes to Financial Statements.
F-136
