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COMMON SENSE TRUST
GROWTH OPPORTUNITY FUND
SUPPLEMENT DATED MARCH 7, 1995 TO PROSPECTUS
DATED FEBRUARY 21, 1995
The Trustees of this Trust approved an Agreement and Plan of Reorganization
between the Growth Opportunity Fund of this Trust (the "Fund") and the Smith
Barney Growth Opportunity Fund ("Growth Opportunity Fund"), a series of Smith
Barney Investment Funds, Inc., a fund advised by Smith Barney Mutual Funds
Management, Inc. providing for the transfer of assets of the Fund to Growth
Opportunity Fund in exchange for shares of Growth Opportunity Fund at its net
asset value per share.
The reorganization, which is scheduled to occur on or before June 30, 1995,
is subject to approval by the holders of a majority of the outstanding shares of
the Fund. Further details of the proposed reorganization will be contained in
the proxy material to be mailed to shareholders in May 1995.
The Fund had assets of $57 million on February 28, 1995. The investment
objective and policies of the Fund are identical to those of Growth Opportunity
Fund.
The current portfolio manager of the Fund, Harvey Eisen, will serve as
portfolio manager of Growth Opportunity Fund.
The Fund will continue its normal operations prior to the reorganization.
Investors establishing new accounts after the proposed record date of April 26,
1995 will not receive proxy material and will not be entitled to vote on the
reorganization. Shareholders wishing to make additional investments in the Fund
should consider the foregoing.
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{COMMON SENSE LOGO}
FEBRUARY 21, 1995
Common Sense(R) Trust (the "Trust") is a diversified open-end management
investment company which offers shares in eleven separate Portfolios, one of
which is described in this Prospectus as follows:
Growth Opportunity Fund (formerly, Common Sense(R) II Aggressive
Opportunity Fund -- the "Fund") seeks capital appreciation by investing in
a portfolio of securities consisting principally of common stocks. Any
income realized on its investments will be purely incidental to its goal of
capital appreciation. The Fund may engage in portfolio management
strategies and techniques involving options, futures contracts and options
on futures. There is no assurance that the Fund will be successful in
achieving its goals.
THE 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 the 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 Fund. A copy of the Statement of
Additional Information may be obtained without charge by writing Common Sense(R)
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 Fund.
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.
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COMMON SENSE(R) TRUST
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<TABLE>
<S> <C>
CUSTODIAN: INVESTMENT ADVISER:
State Street Bank and Trust Company Smith Barney
225 Franklin Street Strategy Advisers Inc.
Boston, Massachusetts 02110 2 World Trade Center
100th Floor
TRANSFER AGENT: New York, New York 10048
Common Sense(R) Shareholder Services
3100 Breckinridge Blvd., Bldg. 200 DISTRIBUTOR:
Duluth, Georgia 30199-0062 Common Sense(R)
(800) 544-5445 Distributors
(800) 544-7278 Spanish-speaking 3100 Breckinridge Blvd., Bldg. 200
Representatives Duluth, Georgia 30199-0001
(800) 824-1721 TDD Service for
Hearing Impaired
</TABLE>
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus Summary.................... 2
Expense Synopsis...................... 4
Financial Highlights.................. 5
Multiple Pricing System............... 6
Goal and Investment Policies.......... 7
Investment Practices and Risks........ 7
The Trust and Its Management.......... 10
Purchase of Shares.................... 11
Distribution Plans.................... 13
Shareholder Services.................. 14
Redemption of Shares.................. 16
Dividends, Distributions and Taxes.... 17
Performance Information............... 18
Additional Information................ 18
</TABLE>
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No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust or by the Distributor. This Prospectus does not
constitute an offering by the Distributor in any jurisdiction in which such
offering may not lawfully be made.
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PROSPECTUS SUMMARY
Shares Offered.............. Shares of beneficial interest.
Type of Company............. Diversified, open-end management investment
company.
Goals....................... The Fund seeks capital appreciation. There is,
however, no assurance that the Fund will be
successful in achieving its goal.
Investment Policies and
Risks....................... The Fund invests principally in common stocks of
companies that the investment adviser believes have
above average potential for capital appreciation.
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. Any income from these investments will
be incidental to the goal of capital appreciation.
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 "Goal and Investment Policies,"
"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.
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The Fund may invest in small capitalization
companies. In addition, the Fund may also invest up
to 35% of its total assets in securities issued by
foreign issuers of developed and emerging market
countries. 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 economic developments, and the
possible imposition of exchange controls or other
foreign governmental laws or restrictions. See
"Investment Practices and Risks -- Foreign
Securities." Investments in the securities of small
capitalization companies may be subject to greater
investment risk than that assumed through
investment in the equity securities of large
capitalization companies because securities of such
companies may be more likely to experience
unexpected fluctuations in price. See "Investment
Practices and Risks -- Small Capitalization
Stocks."
Proposed Reorganization..... Subject to approval by the Trustees of the Trust
and shareholders, the Fund anticipates being
reorganized on or prior to June 30, 1995, such that
it will no longer be a portfolio of Common Sense
Trust.
Investment Adviser.......... Smith Barney Strategy Advisers, Inc. (the
"Adviser") serves as investment adviser to the
Trust. See "The Trust and Its Management."
Distributor................. Common Sense(R) Distributors (the "Distributor").
Multiple Pricing System..... The 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 the 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.............. These shares are offered at net asset value per
share plus a maximum initial sales charge of 5.50%
of the offering price. The 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.............. These shares 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. See
"Redemption of Shares." The 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 Fund may declare and pay dividends and capital
gains distributions annually. All dividends and
distributions are automatically reinvested in
shares of the Fund at net asset value per share
(without a sales charge) unless payment in cash is
requested. See "Dividends, Distributions and
Taxes."
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EXPENSE SYNOPSIS
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The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
<TABLE>
<CAPTION>
CLASS A SHARES(F) CLASS B SHARES(F)
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<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price)................. 5.50%(a) None
Sales charge imposed on dividend reinvestments........ None None
Deferred sales charge (as a percentage of original
purchase price or redemption proceeds, whichever is
lower).............................................. None 5% during the first
year, 4% during the
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(b)
Exchange fee.......................................... None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees....................................... 1.00% 1.00%
Rule 12b-1 fees(c).................................... .25% 1.00%(e)
Other expenses(d)..................................... 1.39% 1.40%
Total fund operating expenses......................... 2.64% 3.40%
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</TABLE>
(a) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares" -- page 12.
(b) See "Purchase of Shares -- Class B Shares" -- page 13.
(c) .25% for Class A shares, and 1% for Class B shares. See "Distribution
Plans" -- page 13.
(d) See "The Trust and Its Management" -- page 10.
(e) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
(f) For the period May 3, 1994 through October 31, 1994, on an annualized basis.
<TABLE>
<CAPTION>
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CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
EXAMPLE 1 YEAR 3 YEARS
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<S> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum $55.00
front-end sales charge and for Class B shares, a contingent
deferred sales charge assuming (1) an operating expense ratio
of 2.64% for Class A shares and 3.40% for Class B shares, (2) a
5% annual return throughout the period and (3) redemption at
the end of the period:
Class A.................................................... $ 80 $ 133
Class B.................................................... $ 85 $ 136
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A.................................................... $ 80 $ 133
Class B.................................................... $ 34 $ 104
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in the 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 the 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.
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FINANCIAL HIGHLIGHTS
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(For a share of beneficial interest outstanding throughout the period indicated)
The following information has been audited by the Fund's independent
auditors, Ernst & Young LLP. This summary should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
MAY 3, 1994(1)
THROUGH
OCTOBER 31, 1994
----------------------
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.................................................................... .21 .20
Expenses............................................................................. (.16) (.20)
------ ------
Net investment income................................................................ .05 .00
Net realized and unrealized gain on securities....................................... .34 .36
------ ------
Total from investment operations..................................................... .39 .36
------ ------
Net asset value, end of period....................................................... $12.20 $12.17
====== ======
TOTAL RETURN(3)...................................................................... 3.39% 3.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................................. $27.1 $12.1
Ratios to average net assets (annualized)
Expenses........................................................................... 2.64% 3.40%
Net investment income.............................................................. .86% .05%
Portfolio turnover rate.............................................................. 27% 27%
</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.
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MULTIPLE PRICING SYSTEM
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The Multiple Pricing System permits an investor to choose the method of
purchasing shares 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 are sold at net asset value plus an initial
maximum sales charge of up to 5.50% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of 0.25% of the 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 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 are subject to an ongoing service fee at an annual rate
of 0.25% of the 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 the
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 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 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 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 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 the 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 the 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 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. On-going
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 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. 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 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 the Fund's
shares may receive differing compensation for selling Class A or Class B shares.
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 ARE THE SAME AS THOSE OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A
SHARES. See "Distribution Plans."
6
<PAGE> 8
GENERAL. Dividends paid by the 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 the Fund may be exchanged,
subject to certain limitations, for shares of the same class of any other Common
Sense II Fund ("Common Sense II Fund") including the Fund. After March 31, 1995,
shareholders of a Common Sense II Fund will no longer have the right to exchange
shares of the Common Sense II Fund for shares of the Fund. 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 the 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.
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GOAL AND INVESTMENT POLICIES
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The Fund seeks capital appreciation through investments in securities
believed by the Adviser to have above average potential for capital
appreciation. Any income received on such securities is incidental to the goal
of capital appreciation. There can be no assurance that the Fund will achieve
its goal.
The Fund invests principally in common stocks. The Adviser uses a flexible
management style to select what it believes to be unusually attractive growth
investments on an individual company basis. Such securities generally include
those of companies with established records of growth in sales
or earnings, and companies with new products, new services, or new processes and
small capitalization companies. See "Investment Practices and Risks -- Small
Capitalization Stocks." The Fund may also invest in companies in cyclical
industries during periods when their securities appear attractive to the Adviser
for capital appreciation. In addition to common stocks of companies, the Fund
may invest in securities convertible into or exchangeable for common stocks,
such as convertible preferred stocks or convertible debentures, and warrants.
The Fund generally holds a portion of its assets in investment grade
short-term debt securities, investment grade corporate or government bonds, cash
and cash equivalents in order to provide liquidity. Such investments may be
increased when deemed appropriate by the Adviser for temporary defensive
purposes. Under such circumstances, the Fund may invest up to 100% of its assets
in short-term investments which may include repurchase agreements with domestic
banks or broker-dealers. See "Investment Practices and Risks -- Repurchase
Agreements." The Fund may invest up to 35% of its total assets in securities of
foreign issuers. See "Investment Practices and Risks -- Foreign Securities." The
Fund may engage in portfolio management strategies and techniques involving
options, futures contracts and options on futures. See "Investment Practices and
Risks -- Options, Futures Contracts and Related Options" and in the Statement of
Additional Information.
The Fund will not purchase any securities issued by any company primarily
engaged in the manufacture of alcohol or tobacco.
The goal and investment policies, the percentage limitations, and the kinds
of securities in which the Fund may invest are generally not fundamental
policies and may be changed by the Trustees, unless expressly governed by
certain 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 the Fund, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.
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INVESTMENT PRACTICES AND RISKS
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REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers. 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, thereby determining the yield during the holding period. The Fund
will not invest more than 15% of its net assets in securities subject to
repurchase agreements that do not mature within seven days and in any other
illiquid securities. See the Statement of Additional Information.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund expects to
utilize options, futures contracts and options thereon in several different
ways, depending upon the status of the Fund's portfolio and the Adviser's
expectations concerning the securities 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 the
Fund, if the Adviser is not successful in employing such instruments in managing
the Fund's investments, the Fund's performance will be worse than if the Fund
did not make such investments. In addition, the Fund would pay commissions and
other costs in connection with such investments, which may increase the Fund's
expenses and reduce its return.
The 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
the Fund will be considered an illiquid security. Any OTC Option written by the
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. The 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. The Fund may not invest more than 15% of its net assets in illiquid
securities and
7
<PAGE> 9
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.
SMALL CAPITALIZATION STOCKS. The Fund may invest in the securities of small
capitalization companies, both domestic and foreign. Investments in such
companies may offer greater opportunities for growth of capital than larger,
more established companies, but may also involve certain risks. Small
capitalization companies often have limited product use, market or financial
resources, and may be dependent on one or two people for management.
The securities of small capitalization companies that the 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 Fund may be subject to greater investment
risk than that assumed through investment in the equity securities of larger
capitalization companies because securities of such companies may be more likely
to experience unexpected fluctuations in price.
FOREIGN SECURITIES. The Fund may also invest in securities of foreign
issuers of developed and emerging market countries, including non-U.S. dollar
denominated securities, Eurodollar securities and securities issued, assumed or
guaranteed by foreign governments or political subdivisions or instrumentalities
thereof. The Fund will limit its investment in foreign securities to 35% of its
total assets, taken at market value at the time of each investment.
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 the 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 exchange 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.
The 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. The 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
the 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, the Fund will incur costs 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.
The 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 the 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.
8
<PAGE> 10
FOREIGN CURRENCY TRANSACTIONS. The value of the Fund's portfolio
securities that are traded in foreign markets may be affected by changes in
currency exchange rates and exchange control regulations. In addition, the Fund
will incur costs in connection with conversions between various currencies. The
Fund's foreign currency exchange transactions generally will be conducted on a
spot basis (that is, cash basis) at the spot rate for purchasing or selling
currency prevailing in the foreign currency exchange market. The Fund purchases
and sells foreign currency on a spot basis in connection with the settlement of
transactions in securities traded in such foreign currency. The Fund does not
purchase and sell foreign currencies as an investment.
The Fund also may enter into contracts with banks or other foreign currency
brokers and dealers to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
The Fund may attempt to hedge against changes in the value of the U.S.
dollar in relation to a foreign currency by entering into a forward contract for
the purchase or sale of the amount of foreign currency invested or to be
invested, or by buying or selling a foreign currency futures contract for such
amount. Such hedging strategies may be employed before the Fund purchases a
foreign security traded in the hedged currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received. Hedging against a change in
the value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the price of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions reduce
or preclude the opportunity for gain if the value of the hedged currency should
move in the direction opposite to the hedged position. The Fund will not
speculate in foreign currency forward or futures contracts or through the
purchase and sale of foreign currencies.
FORWARD COMMITMENTS. The Fund may purchase or sell debt 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.
RESTRICTED SECURITIES. The Fund may invest up to 15% of its net assets in
restricted securities and other illiquid assets (but see herein for information
regarding state restrictions). As used herein, restricted securities are those
that have been sold in the United States without registration under the
Securities Act of 1933 ("1993 Act") 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 1933 Act 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 the 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 the 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 the 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 Fund's Trustees
believe accurately reflects fair value.
Notwithstanding the foregoing, due to various state regulations, the Fund
will not invest more than 10% of its 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 Fund's shares cease to be
qualified under the laws of such states or if such regulations are amended or
otherwise cease to be operative, the Fund would not be subject to this 10%
restriction.
LOANS OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities in an amount up to 33 1/3% of total
assets to unaffiliated brokers, dealers and financial institutions. The borrower
at all times during the loan must maintain cash equal to at least 100% of the
value of the securities loaned. During the time portfolio securities are on
loan, the borrower pays the Fund any dividends or interest paid on such
securities, and the Fund may invest the cash collateral in short-term
instruments and earn additional income. There are risks of delay in recovery and
in some cases even loss of rights in the collateral should the borrower of the
securities fail financially.
PORTFOLIO TURNOVER. The Fund purchases securities which are believed by the
Adviser to have above average potential for capital appreciation. Common stocks
are disposed of in situations where it is believed that potential for such
appreciation has lessened or that other common stocks have a greater potential.
Therefore, the Fund may purchase and sell securities without regard to the
length of time the security is to be, or has been held. The rate may exceed
100%, which is higher than that of many other investment companies. A 100%
turnover rate occurs, for example, if all the Fund's portfolio securities are
replaced during one year. High portfolio activity increases the Fund's
transaction costs, including brokerage commissions.
9
<PAGE> 11
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Fund 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 on a
continuing basis. 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 them 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 Fund.
The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, The Travelers
Inc. ("Travelers"), including Smith Barney Inc. and Robinson Humphrey, Inc. When
such transactions are made, in accordance with Rule 17e-1 under the 1940 Act,
commissions paid must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time."
INVESTMENT RESTRICTIONS. The 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 the 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 the
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;
2. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (This does not restrict the Fund from
investing in obligations of the U.S. Government and repurchase agreements
secured thereby.);
3. 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 or payments 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;
4. Make any investment in real estate, commodities or commodities
contracts, except that the Fund may enter into transactions in forward
commitments, futures contracts, foreign currency futures and related options;
and may purchase and 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;
5. Make loans of money or securities, except (a) by investment in
repurchase agreements in accordance with applicable requirements set forth in
the Fund's Prospectus or (b) by lending its portfolio securities in amounts not
to exceed 33 1/3% of the Fund's total assets, provided that such loans are
secured by cash collateral that is at least equal to the market value. See
"Investment Practices and Risks" herein; and
6. Underwrite securities of other companies, except insofar as the 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.
- --------------------------------------------------------------------------------
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
Fund. The Fund was formerly named Common Sense II Aggressive Opportunity Fund.
The Adviser, 2 World Trade Center, 100th Floor, New York, New York 10048, an
indirect wholly owned subsidiary of Travelers, determines the investment of the
Trust's assets, provides administrative services and manages the Trust's
business and affairs. Travelers is a financial services holding company engaged,
through its subsidiaries, principally in three business segments -- investment
services, consumer finance services and insurance services. PFS Investments, an
affiliate of Travelers, is engaged in selling securities, primarily shares of
the Trust and other open-end investment companies. Mr. Kenneth Durham is
President and a Director of PFS Investments, and Vice President of the Trust.
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 an
investment advisory agreement dated December 19, 1994, (the "Advisory
Agreement"), the Trust pays the Adviser a monthly fee computed on average daily
net assets of the Fund at the annual rate of 1.00%.
Under the Advisory Agreement, 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 may, from time to time, agree to waive their respective
investment advisory fees or any portion thereof or elect to reimburse the Fund
for ordinary business expenses in excess of an agreed upon amount.
10
<PAGE> 12
Harvey Eisen is primarily responsible for the day-to-day management of the
Fund's investment portfolio. Mr. Eisen is Vice President of the Fund and Vice
President of the Adviser. He also serves as Senior Vice President of Investment
Operations for Travelers, a position he has held since February, 1992. Prior to
that time, he was President and Chief Investment Officer of SunAmerica Asset
Management, Inc.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
GENERAL
The 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 are offered continuously for sale by the
Distributor, a wholly owned subsidiary of PFS Distributors, Inc., an affiliate
of Primerica Financial Services, Inc. and are available through PFS Investments.
PFS Distributors, Inc. is an indirect wholly owned subsidiaries of Travelers.
See "The Trust and Its Management." Initial investments in the Fund must be at
least $1,000 and subsequent investments must be at least $100. The Distributor
may waive the minimum amount for initial investment for shares involving
periodic investments. Shares of the Trust may be sold in foreign countries where
permissible. The Fund and 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 the 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 Common Sense(R) 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.
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 CSSS 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 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 for each class is determined
by dividing the value of the Fund's securities, cash, and other assets
(including accrued interest) attributable to such class less all liabilities
(including accrued expenses) attributable to such 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 represents an interest in the same portfolio of
investments of the 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
11
<PAGE> 13
reduced by the amount of the distribution fee and incremental expenses, if any,
associated with such distribution fee. Sales personnel of PFS Investments
distributing the 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 is the next determined net
asset value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<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 $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>
* 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 Fund 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, until March 31, 1995, Class A shares are
offered at the 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 and 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 table
applies to the total amount being invested by any person in shares of the 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.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the 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 table.
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 table also
12
<PAGE> 14
includes purchases of shares of the 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 table
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.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE AS A PERCENTAGE OF
PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
- --------------------------------------------------------------------------------
First............................................. 5%
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.
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 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 Fund'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 Fund 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.
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DISTRIBUTION PLANS
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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 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 charge. 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, the 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 the Fund by representatives of PFS Investments and the
maintenance of their accounts.
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<PAGE> 15
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 the 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 the 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 the 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 the 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. The 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 the 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 the 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 unreimbursed expenses incurred by the
Distributor under the Class B Plan and carried forward for the Fund were
approximately $517,000 or 4.26% 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.
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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 affect 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 8:00 a.m. to 9:00
p.m. Monday through Friday, and 10:00 a.m. to 4:00 p.m. on Saturday (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 Fund.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the 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 Common
Sense II 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 the 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
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<PAGE> 16
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 $100.
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. 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 the Fund may be exchanged for shares of the
same class of any of Common Sense II Growth Fund, Common Sense II Growth and
Income Fund and Common Sense II Government Fund (collectively, Common Sense II
Funds) 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. After March 31,
1995, shareholders of the Common Sense II Funds will no longer have the right to
exchange their shares of the Common Sense II Funds for shares of the Fund. Upon
the earlier of the consummation of the reorganization of the Fund or June 30,
1995, shareholders of the Fund will no longer have the right to exchange their
shares of the Fund for shares of the Common Sense II Funds.
Class B shareholders of the Fund have the ability to exchange their shares
("original shares") for the same class of shares of any other Common Sense II
Fund 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.
Shares of the fund to be acquired must be registered for sale in the
investor's state. 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 gains 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.
A prospectus for the Common Sense II Funds may be obtained from the
Distributor. An investor considering an exchange into another Common Sense II
Fund should refer to the prospectus for additional information regarding such
fund prior to investing.
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 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. After March 31, 1995, shareholders of the Common Sense II Funds will no
longer have the right to exchange their shares of the Common Sense II Funds for
shares of the Fund. Upon the earlier of the consummation of the reorganization
of the Fund or June 30, 1995, shareholders of the Fund will no longer have the
right to exchange their shares of the Fund for shares of the Common Sense II
Funds.
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 the 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.
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<PAGE> 17
Under the plan, sufficient shares of the 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 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.
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 Fund at pre-set intervals. This
practice will result in more shares being purchased when the Fund's net asset
value is relatively low, and fewer shares being purchased when the 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 the Fund 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 the 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 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.
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<PAGE> 18
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinvest any portion or all of the proceeds of such
redemption in Class A shares of the 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. After March
31, 1995, shareholders of the Common Sense II Funds will no longer have the
right to exchange their shares of the Common Sense II Funds for shares of the
Fund. Upon the earlier of the consummation of the reorganization of the Fund or
June 30, 1995, shareholders of the Fund will no longer have the right to
exchange their shares of the Fund for shares of the Common Sense II Funds.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
Unless the shareholder instructs otherwise, all dividends and capital gains
distributions of the Fund are automatically reinvested in additional shares of
the Fund. See "Shareholder Services -- Reinvestment Plan." Dividends and
distributions paid by the 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 from stocks and interest earned from other investments are the
main source of income for the Fund. When the 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 Fund distributes substantially all of its net investment income, less
expenses, and any net realized capital gains 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.
TAXES. The 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, the 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.
Dividends and interest received by the 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.
Under Code Section 988, foreign currency gains or losses from certain
forward contracts not traded in the interbank market generally are treated as
ordinary income or loss. Such Code Section 988 gains or losses will increase or
decrease the amount of the Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. Additionally, if Code
Section 988 losses exceed other investment company taxable income during a
taxable year, the Fund would not be able to make any ordinary dividend
distributions, and any distributions made before the losses were realized but in
the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing each shareholder's basis in his or her Fund
shares.
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 the
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 the 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 the 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 the 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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PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the 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 the Fund. Other
total return quotations, aggregate or average, over other time periods may also
be included.
The total return of the 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); 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 the Fund's portfolio, the 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.
Total return is calculated separately for the Fund's Class A and Class B
shares. Class A total return figures include the maximum sales charge of 5.50%
for Class A shares; 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.
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 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.
Additionally, the Fund may reference information from financial programs
such as CNN, FNN, The MacNeil/Lehrer News Hour and Wall Street Week.
The 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 Fund 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 Fund 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 Trust expects to include additional performance information regarding
the 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
Fund. 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 the Fund, shareholders of the 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 the
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 the
Fund are borne solely by that class, and each class of shares has exclusive
voting rights with respect to provisions of the Trust's Class A Plan and Class B
Plan which pertain to that class. An order has been received from the SEC
permitting the issuance and sale of multiple classes of shares representing
interests in the Fund's existing portfolio. 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,
18
<PAGE> 20
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 the Fund but the assets of the
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. Common Sense(R) 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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<PAGE> 21
STATEMENT OF ADDITIONAL INFORMATION
COMMON SENSE TRUST
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
FEBRUARY 21, 1995
Common Sense Trust (the "Trust") is a diversified, open-end management
investment company with thirteen separate Portfolios, one of which is discussed
herein: the Growth Opportunity Fund (the "Fund").
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. 400, Duluth, Georgia
30199-0001.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
DEPOSITARY RECEIPTS................................................................... 2
REPURCHASE AGREEMENTS................................................................. 2
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS........................................ 2
FORWARD COMMITMENTS................................................................... 7
LOANS OF PORTFOLIO SECURITIES......................................................... 7
INVESTMENT RESTRICTIONS............................................................... 8
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 10
INVESTMENT ADVISORY AGREEMENT......................................................... 13
DISTRIBUTOR........................................................................... 15
DISTRIBUTION PLANS.................................................................... 15
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 16
DETERMINATION OF NET ASSET VALUE...................................................... 17
PURCHASE AND REDEMPTION OF SHARES..................................................... 18
EXCHANGE PRIVILEGE.................................................................... 20
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 21
OTHER INFORMATION..................................................................... 23
FINANCIAL STATEMENTS.................................................................. 24
APPENDIX.............................................................................. 26
</TABLE>
<PAGE> 22
GENERAL INFORMATION
Smith Barney Strategy Advisers Inc. (the "Adviser") is a wholly owned
subsidiary of Smith Barney Advisers, Inc. Common Sense Distributors (the
"Distributor") is a wholly owned subsidiary of PFS Distributors, Inc., an
affiliate of Primerica Financial. Common Sense Shareholder Services (the
"Transfer Agent"), is a wholly owned 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 and the Adviser are
indirect wholly owned subsidiaries of The Travelers Inc. ("Travelers").
Travelers is engaged primarily in the insurance, financial and service
businesses.
As of January 19, 1995, no person was known to own beneficially or to hold
of record as much as 5% of the outstanding shares of the Fund, except that 57.9%
of the outstanding Class A shares of the Fund and 50.4% of the outstanding Class
B shares of the Fund were owned of record by Van Kampen American Capital Trust
Company, 2800 Post Oak Boulevard, Houston, Texas 77056, acting as custodian for
certain employee benefit plans and individual retirement accounts.
DEPOSITARY RECEIPTS
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs in
registered form, are designed for use in United States securities markets and
EDRs, in bearer form, are designed for use in European securities markets.
REPURCHASE AGREEMENTS
The 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 (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
SELLING CALL AND PUT OPTIONS
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. The 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.
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<PAGE> 23
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 Fund sells call options
only on a covered basis, which means that, at all times the Fund owns or has the
right to acquire the underlying securities subject to the call option at all
times during the option period.
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. The 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. The Fund generally sells put options when the Advisers
wish 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, the 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. The
Fund would also realize a gain if an option it has sold lapses unexercised.
The Fund may sell options that are listed on an Exchange as well as options
that are traded over-the-counter. The 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, the 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 the
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, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the 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
The 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, the 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, the 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.
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<PAGE> 24
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 the 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 Fund may purchase either listed or over-the-counter options.
OPTIONS ON STOCK INDEXES
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 the 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
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 Fund 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 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.
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, the 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
4
<PAGE> 25
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 the 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 the 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. The 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 stock 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.
In the event of the bankruptcy of a broker through which the 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. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the Advisers.
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, the 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 the 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
5
<PAGE> 26
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 Advisers 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, the 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 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 the 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 the 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.
OPTIONS ON FUTURES CONTRACTS
The 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 the 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. The 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.
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
Advisers' 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
6
<PAGE> 27
potential risk to the Growth II 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.
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 and the Subadviser 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 the 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, the 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.
The Fund pays commissions on futures contracts and options transactions.
FORWARD COMMITMENTS
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 foregoes 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
The Fund 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 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. The
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<PAGE> 28
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. The Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which may not be changed
without the approval of the holders of a majority of its outstanding shares.
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 the Fund shall
not:
1. Make any investment in real estate, commodities or commodities
contracts, except that the Fund may enter into transactions in forward
commitments, futures contracts, foreign currency futures and related
options and may purchase and 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;
2. Underwrite securities of other companies, except insofar as the 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;
3. Make loans of money or securities, except (a) by investment in
repurchase agreements in accordance with applicable requirements set
forth in the Fund's Prospectus or (b) by lending its portfolio
securities in amounts not to exceed 33 1/3% of the Fund's total assets,
provided that such loans are secured by cash collateral that is at least
equal to the market value. See "Investment Practices and Risks" in the
Prospectus.
4. 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.
5. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry; (This does not restrict the Fund
from investing in obligations of the U.S. Government and repurchase
agreements secured thereby); and
6. 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 or payments 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.
7. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the 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
8
<PAGE> 29
options, futures contracts and foreign currency futures and options
thereon, 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 Fund, which may be changed by the Trustees without a vote of shareholders.
These restrictions provide that the Fund shall not:
1. Purchase securities on margin, except that the 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 the 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 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;
6. Purchase an illiquid security if, as a result of such purchase, more
than 15% of the Fund's net assets would be invested in such securities.
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;
8. 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;
9. Purchase any security issued by any company deriving more than 25% of
its gross revenues from the manufacture of alcohol or tobacco; and
10. Make short sales of securities, unless at the time of sale it 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.
The Fund may, notwithstanding any other fundamental investment policy or
limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.
The Trust has made an undertaking with certain states that at least 30 days
prior to any change by the Fund in its goal the Fund will provide written notice
to shareholders of such change and will waive any fee if
9
<PAGE> 30
the shareholder redeems or exchanges the account. The Trust has made an
undertaking with a certain state that with respect to the Fund Rule 144A
securities will be included as an illiquid security to meet the 15% limitation
on investing in illiquid securities. With respect to another state, the Fund has
undertaken not to invest more than 10% of its net assets in restricted
securities, restricted securities eligible for resale pursuant to Rule 144A are
not included in this limitation. The Trust has undertaken with a certain state
that the Fund limits 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. The 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. In addition, the Fund has
undertaken that in the event it converts to a master/feeder structure it will
comply with the NASAA Guidelines for Registration of a Master Fund/Feeder Fund.
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.(2)
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.
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.
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
instruments), Fueltech, Inc. (combustion) and Vista Chemical Co.(2)(3)
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).(2)
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, Long Island Jewish Medical Center, and ICI Mutual Insurance Group;
formerly President of Shearson Lehman Brothers, Inc.; formerly President and
Director of Primerica Holdings, Inc.; formerly Director of Woodmere Academy.
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.
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
10
<PAGE> 31
University; Director of Alex. Brown & Sons, Inc., Beneficial Corporation (bank
holding company), and Millipore Corporation (bio-technology).(2)
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).(2)(3)
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.
DON G. POWELL, Chairman of the Board, Trustee and President. 2800 Post Oak
Blvd., Houston, Texas 77056. President, Chief Executive Officer and Director of
Van Kampen American Capital Asset Management, Inc. ("ACAM"), President, Chief
Executive Officer and Director of Van Kampen American Capital, Inc.(1)(2)(4)
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).(2)
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).(2)(3)
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; and formerly Chairman of the Board and Director of
the Subadviser.(2)
STEPHEN L. BOYD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President -- Portfolio Manager of ACAM; Vice President and Portfolio
Manager of American Capital Enterprise Fund, Inc., American Capital Exchange
Fund, and the Growth Fund of Common Sense Trust; formerly Senior Vice President
and Chief Investment Officer of Wertheim Asset Management Services, Inc.(4)
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 the Transfer Agent and the Adviser; Vice President
of PFS Services, Inc.; Director of PFS Asset Management, Inc.; formerly
Marketing Manager of PFS Distributors, Inc.
HARVEY EISEN, Vice President. 2 World Trade Center, 100th Floor, New York,
New York 10048. Vice President of the Adviser, Senior Vice President of
Investment Operations for Travelers. Formerly President and Chief Investment
Officer of Sun America Asset Management, Inc.
ROBERT B. EVANS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President and Portfolio Manager of American Capital Municipal Bond Fund,
Inc., the High Yield Municipal Portfolio and the Insured Municipal Portfolio of
American Capital Tax-Exempt Trust, American Capital Texas Municipal Securities,
Inc., the Municipal Bond Fund of Common Sense Trust, and Mosher, Inc. Mr. Evans
has been associated with ACAM since 1991.(4)
HUEY P. FALGOUT, JR. Assistant Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Assistant Secretary of ACAM. Formerly associate
with Johnson and Gibbs.(4)
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Secretary of ACAM.
(4)
11
<PAGE> 32
JAMES A. GILLIGAN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President -- Portfolio Manager of the Adviser; Vice President and
Portfolio Manager of American Capital Equity Income Fund, Inc., American Capital
Growth and Income Fund, Inc., and American Capital Utilities Income Fund, Inc.
Formerly Security Analyst of the Adviser.(4)
JOHN A. HELMS, Vice President. 3120 Breckinridge Blvd., Bldg. 1200, Duluth,
Georgia 30199-0001. Executive Vice President and Secretary of PFS Asset
Management, Inc., PFS Custodial Services, Inc., PFS Investments Inc., PFS
Distributors, Inc., PFS Services, Inc., PFS Primerica Corporation and Primerica
Financial; Vice President and Secretary of the Distributor, the Transfer Agent
and CSCS; Executive Vice President, Clerk/Secretary and Director of Primerica
Life Insurance Company; Assistant General Counsel of Primerica; Executive Vice
President, Vice President and/or Secretary of several other affiliates and
subsidiaries of PFS Primerica Corporation; formerly a Partner in the law firm of
Trotter, Smith and Jacobs; formerly Senior Vice President, General Counsel,
Secretary and Director of Life of Georgia; and Senior Vice President, General
Counsel and Secretary of Georgia U.S. Corporation.
GARY M. LEWIS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President -- Portfolio Manager of the Adviser since December 1987.
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.(4)
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 ACAM.(4)
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income and
Director of ACAM.(4)
JOHN R. REYNOLDSON, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Investment Vice President of ACAM; Vice President and Portfolio
Manager of the Government Fund of Common Sense Trust, American Capital
Government Target Series -- Portfolio '97, American Capital Life Investment
Trust -- Government Portfolio, American Capital World Portfolio Series,
Inc. -- American Capital Global Government Securities Fund, American Capital
Federal Mortgage Trust, American Capital Government Securities, Inc. and
American Capital U.S. Government Trust for Income.(4)
ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
ACAM; Executive Vice President of Van Kampen American Capital, Inc.(4)
DAVID R. TROTH, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of ACAM; Vice President and Portfolio Manager
of American Capital Bond Fund, Inc., American Capital Corporate Bond Fund, Inc.,
the Money Market Fund of Common Sense Trust, American Capital Reserve Fund,
Inc., and the Money Market Portfolio of American Capital Life Investment
Trust.(4)
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.
J. DAVID WISE, Assistant Secretary. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President, Associate General Counsel, Compliance Review Officer and
Assistant Secretary of ACAM.(4)
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of ACAM; President and Chief Operating Officer of
Van Kampen American Capital Services, Inc.;
12
<PAGE> 33
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.(4)
- ---------------
(1) A director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Enterprise Fund, Inc., American Capital Equity Income
Fund, Inc., American Capital Federal Mortgage Trust, American Capital Global
Managed Assets Fund, Inc., American Capital Government Securities, Inc.,
American Capital Government Target Series, American Capital Growth and
Income Fund, Inc., American Capital American Capital Harbor Fund, Inc.,
American Capital High Yield Investments, Inc., American Capital Life
Investment Trust, American Capital Municipal Bond Fund, Inc., American
Capital Pace Fund, Inc., American Capital Real Estate Securities Fund, Inc.,
American Capital Reserve Fund, Inc., American Capital Small Capitalization
Fund, Inc., American Capital Tax-Exempt Trust, American Capital Texas
Municipal Securities, Inc., American Capital U.S. Government Trust for
Income, American Capital Utilities Income Fund, Inc. and American Capital
World Portfolio Series, Inc.
(2) A director of American Capital Bond Fund, Inc., American Capital Convertible
Securities, Inc. and American Capital Income Trust, closed-end investment
companies not advised by the Adviser.
(3) Managing General Partner of American Capital Exchange Fund, an open-end
investment company not advised by the Adviser.
(4) An officer and/or director/trustee of other investment companies advised or
subadvised by ACAM.
No compensation was paid by the Fund 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 Advisor, respectively.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION(1)
RETIREMENT BENEFITS FROM REGISTRANT AND
AGGREGATE COMPENSATION ACCRUED AS PART OF FUND COMPLEX PAID TO
NAME OF PERSON FROM FUND FUND EXPENSES DIRECTORS
--------------------------- ---------------------- ------------------- --------------------
<S> <C> <C> <C>
Dr. Donald M. Carlton 0 N/A 38,000
Dr. A. Benton Cocanougher 0 N/A 38,000
Stephen Randolph Gross 0 N/A 42,000
Dr. Norman Hackerman 0 N/A 47,000
Robert D. H. Harvey 0 N/A 42,000
Dr. Alan G. Merten 0 N/A 36,000
Dr. Steven Muller 0 N/A 38,000
Dr. F. Robert Paulsen 0 N/A 52,000
Dr. R. Richardson Pettit 0 N/A 38,000
Alan B. Shepard, Jr. 0 N/A 48,250
Miller Upton 0 N/A 47,000
Benjamin N. Woodson 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.
INVESTMENT ADVISORY AGREEMENT
The Trust and the Adviser are parties to an investment advisory agreement
with respect to the Fund, dated December 19, 1994 (the "Advisory Agreement").
Under the 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
13
<PAGE> 34
data and for formulating and implementing investment programs in furtherance of
the 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 Agreement, the Trust bears the cost of its accounting
services, which includes maintaining the Fund's financial books and records and
calculating the daily net asset value. 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 Van Kampen American Capital Asset Management, Inc. 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 Fund assets and
to place orders for the purchase and sale of its portfolio securities. Under the
Advisory Agreement, the Trust pays the Adviser a monthly fee calculated at the
annual rate of 1.00% of the Fund's average daily net assets.
The average daily net assets of the Fund are determined by taking the
average of all of the determinations of net asset value of the 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 Travelers 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 Travelers to receive in
connection with the Trust's portfolio transactions or other arrangements which
may benefit the Trust.
The 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 the Advisory Agreement and (4) payments made by the Fund pursuant
to the Distribution Plans. The 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.
The Advisory Agreement 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 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 the Fund to exclude
shareholder service costs from the calculation of the expense limitation.
14
<PAGE> 35
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the Fund
pursuant to a written agreement, dated May 2, 1994 (the "Underwriting
Agreement"). The Distributor has entered into a selling agreement with PFS
Investments giving PFS Investments the exclusive right to sell shares of the
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 the 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 Fund is 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 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 Fund 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 the 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, the 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 nets as 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 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.
15
<PAGE> 36
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 Plans 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 the Fund, which fees would increase if the Plans were
successful and the Fund attained and maintained significant asset levels.
For the Plan year ended June 30, 1994, the Fund's aggregate expenses under
the Class A Plan were $1,660 or 0%, (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 fiscal year ended
June 30, 1994, the Fund's aggregate expenses under the Class B Plan were $1,596
or .15% (not annualized) of the Class B shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$1,197 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 $399
for fees paid to Service Organizations for servicing Class B shareholders and
administering the Class B Plan.
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 Trust 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 Advisers.
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, (d) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody), and (d)
furnishing other products or services that assist the Advisers in fulfilling
their investment-decision making responsibilities.
Pursuant to provisions of the 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
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<PAGE> 37
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 fee paid by the Fund under the Advisory Agreement is 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.
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 Fund and to the accounts managed solely
by the Adviser 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 Advisers 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 Fund may from time to time place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser, including Smith Barney
Inc. and Robinson Humphrey, Inc. 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.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined each day the
New York Stock Exchange (the "NYSE") (currently 4:00 p.m., New York time) is
open. The NYSE 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.
The net asset value of the 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 NYSE, (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.
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<PAGE> 38
The assets belonging to the Class A shares and the Class B shares of the
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 Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through PFS Investments.
MULTIPLE PRICING SYSTEM
The 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 $1,000 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 $100 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 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 apply to the purchases of Class A shares of the Fund where the
aggregate investment is $50,000 or more. An aggregate investment includes all
shares of the Fund 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
Class A shares of the Fund and/or shares of other common Sense Funds having a
current value of $25,000, and that person purchases $30,000 of additional
shares, 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
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<PAGE> 39
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 the Fund and
shares of other Common Sense 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.
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.
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<PAGE> 40
(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 NYSE 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 NYSE is closed for other than
customary weekends or holidays; (b) trading on the NYSE 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 Common Sense
Shareholder Services ("CSSS") to act on written exchange instructions from any
person representing himself to be the investor or the agent of the investor and
believed by CSSS to be genuine. CSSS' records of such instructions are binding.
For purposes of determining the sales charge rate previously paid on Class
A shares of the 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
the 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
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<PAGE> 41
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 Fund distributes dividends and capital gains annually. 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. The 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 the 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.
The 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). The Fund expects to be treated as a separate
entity for purposes of determining federal tax treatment.
The 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. The 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 the 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 the record date 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 the 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.
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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 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 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 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 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 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.
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<PAGE> 43
OTHER INFORMATION
PERFORMANCE INFORMATION
The Fund's, overall total return (computed in the manner described in the
Prospectus) for Class A and Class B shares for the period from inception (May 3,
1994) through fiscal year end October 31, 1994, was -2.32% and -1.95%,
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 Fund 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 Fund 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 Fund
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 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
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<PAGE> 44
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
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 serves as Custodian for the Fund. It is also anticipated
that foreign sub-custodians will be used for certain of the Fund's investments
in foreign securities. Any such sub-custodian shall be utilized pursuant to an
agreement between the custodian and the foreign sub-custodian that has been
approved by the Directors pursuant to Rule 17f-5 under the 1940 Act. The
Custodian and sub-custodians generally domestically, and frequently abroad, do
not actually hold certificates for the securities in their custody, but instead
have book records with domestic and foreign securities depositories, which in
turn have book records with the transfer agents of the issuers of the
securities.
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 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.
FINANCIAL STATEMENTS
Financial Statements including Investment Portfolio, Statement of Net
Assets, Statement of Operations, Statement of Changes in Net Assets, Notes to
Financial Statements, Financial Highlights and Report of
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<PAGE> 45
Independent Auditors on such financial statements, are hereby incorporated by
reference to the Fund's Annual Report previously filed with the SEC on or about
December 29, 1994.
The following example assumes a purchase of Class A shares of the Fund
aggregating less than $50,000 subject to the schedule of sales charges set forth
in the Prospectus at a price based upon the net asset value of Class A shares of
the Fund.
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER
SHARE -- OCTOBER 31, 1994.
<TABLE>
<S> <C>
Net Asset Value Per Class A Share $12.20
Class A Per Share Sales Charge -- 5.50% of offering price (5.82% of
net asset value per share) $ .71
------
Class A Per Share Offering Price the Public $12.91
</TABLE>
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<PAGE> 46
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 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> 47
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.
27
