<PAGE> 1
DEAR COMMON SENSE II FUND SHAREHOLDER:
Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization (the
"Plan") for the Common Sense II Government Fund, the Common Sense II Growth Fund
and the Common Sense II Growth and Income Fund (individually the "Common Sense
II Fund" or collectively the "Common Sense II Funds"). The Reorganization calls
for the Common Sense II Fund shareholders to become shareholders of the
respective Common Sense Government Fund, the Common Sense Growth Fund and the
Common Sense Growth and Income Fund (individually the "Common Sense Fund" or
collectively the "Common Sense Funds").
The enclosed materials include a combined Prospectus/Proxy Statement
containing information you need to make an informed decision. However, we
thought it would also be helpful for you to have, at the start, answers to some
of the important questions you might have about the proposed Reorganization. We
hope you find these explanations useful as you review your materials before
voting. For more detailed information about the Reorganization, please refer to
the combined Prospectus/Proxy Statement.
HOW WILL THE REORGANIZATION AFFECT ME?
Assuming shareholders of the Common Sense II Fund approve the Reorganization,
the assets and liabilities of the Common Sense II Fund will be combined with
those of each respective Common Sense Fund and you will become a shareholder of
the Common Sense Fund. You will receive shares of the Common Sense Fund equal in
value at the time of issuance to the shares of the Common Sense II Fund that you
hold immediately prior to the Reorganization. Class A shareholders of the Common
Sense II Fund will receive Class A shares of the Common Sense Fund; Class B
shareholders of the Common Sense II Fund will receive Class B shares of the
Common Sense Fund.
WHY IS THE REORGANIZATION BEING RECOMMENDED?
The Reorganization will result in combining the assets and liabilities of the
Common Sense II Fund with the assets and liabilities of the respective Common
Sense Fund and consolidating their operations thereby eliminating certain costs
associated with operating the Common Sense II Fund and the Common Sense Fund
separately.
HOW WILL THE PROPOSED REORGANIZATION AFFECT HOW MY ACCOUNT WILL BE MANAGED?
Each Common Sense Fund will continue to be managed by Van Kampen American
Capital Asset Management, Inc. as investment adviser. There will be no change to
a Fund's investment objective or advisory fee.
WILL THE OVERALL FUND EXPENSES CHANGE?
Yes. It is anticipated after the Reorganization that expense levels will be
reduced since each Common Sense II Fund's assets will be part of a larger
portfolio.
WHY DO I NEED TO VOTE?
Your vote is needed to ensure that a quorum of shareholders is represented at
the shareholders' meeting so that the proposed Reorganization can take place. We
encourage all shareholders to participate in the affairs of their Common Sense
II Fund.
HAVE MY FUND'S TRUSTEES APPROVED THE PROPOSED REORGANIZATION?
Yes. The Trustees have approved the Reorganization and recommend that
shareholders vote "FOR" the proposal.
<PAGE> 2
WILL THE REORGANIZATION RESULT IN A TAXABLE EVENT FOR FEDERAL INCOME TAX
REPORTING?
No. This transaction, in the opinion of counsel, will be a non-taxable event.
WILL THE SALES CHARGES APPLICABLE TO CLASS A AND CLASS B SHARES REMAIN THE SAME?
Yes. No change has been made.
WILL I STILL BE ABLE TO EXCHANGE BETWEEN COMMON SENSE FUNDS?
Yes. You may exchange shares from any other Common Sense Fund within the same
share class. Please refer to the Shareholder Services -- Exchange Privilege
section in the enclosed prospectus for complete details.
AFTER THE REORGANIZATION, HOW WILL MY COMMON SENSE II FUND BE LISTED IN THE
NEWSPAPER?
The listing will not change, except that the "II" will be removed from the
name of the Fund.
WILL MY ACCOUNT SERVICING FEATURES REMAIN THE SAME?
Essentially, all shareholder services that are currently in effect will remain
the same. However, if you have a Pre-Authorized Check (PAC) Plan, any drafts
returned for insufficient funds after the Reorganization will have a $25 charge
applied.
WILL MY ACCOUNT CONTINUE TO BE SERVICED BY MY PFS INVESTMENTS INC.
REPRESENTATIVE?
Yes. Your PFS Investments Inc. Representative will continue to service your
investment needs.
WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?
No. The full value of your shares of the Common Sense II Fund will be
exchanged for shares of the corresponding class of the Common Sense Fund without
any sales load, commission or other transactional fee being imposed. As more
fully discussed in the combined Prospectus/Proxy Statement, the holding period
for shareholders acquiring Class B shares of the Common Sense Fund in the
Reorganization subject to a contingent deferred sales charge will be measured
from the time (i) the holder purchased Class B shares from the Common Sense II
Fund or (ii) purchased Class B shares of any other Common Sense II Fund and
subsequently exchanged into Class B shares of the Common Sense II Fund. Each
Common Sense II Fund will bear the costs associated with the Reorganization.
WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE COMMON SENSE FUND? WHAT HAPPENS
TO MY ACCOUNT IF THE REORGANIZATION IS APPROVED?
If the Reorganization is approved, your interest in Class A or Class B shares
of the Common Sense II Fund will automatically be converted into the same class
of shares of the Common Sense Fund. No certificates for Common Sense Fund shares
will be issued in connection with the Reorganization, although such certificates
will be available upon request. If you currently hold certificates representing
your shares of the Common Sense II Fund, it is not necessary to surrender such
certificates.
WILL MY FUND-ACCOUNT NUMBER CHANGE AFTER THE REORGANIZATION?
No, your Fund Account Number will stay the same. Please continue to use your
existing account number for any communications with PFS Shareholder Services.
<PAGE> 3
WHAT IF I REDEEM MY COMMON SENSE II FUND SHARES BEFORE THE REORGANIZATION TAKES
PLACE?
If you choose to redeem your shares of Common Sense II Fund before the
Reorganization takes place, the redemption will be treated as a normal
redemption of shares and will be a taxable transaction, unless your account is
not subject to taxation, such as an individual retirement account or other
tax-qualified retirement plan.
WHAT IF I HAVE OTHER QUESTIONS?
We will be happy to answer your questions about this proxy solicitation.
Please call PFS Shareholder Services at 1-800-544-5445. Our Representatives are
available Monday through Friday from 9:00 a.m. to 6:00 p.m., Eastern Time, to
assist you.
Thank you for your investment in the Common Sense II Fund.
Very truly yours,
Common Sense Trust
/s/ DON G. POWELL
Don G. Powell
Chairman of the Board
<PAGE> 4
COMMON SENSE TRUST
---------------------
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
---------------------
TO BE HELD JULY 17, 1996
To the Shareholders of the Funds listed below:
Notice is hereby given to the holders of shares of beneficial interest of
Common Sense II Government Fund ("Government II"), Common Sense II Growth Fund
("Growth II") and Common Sense II Growth and Income Fund ("Growth and Income
II"), each of which is a separate series of Common Sense Trust (individually the
"Common Sense II Fund" or collectively the "Common Sense II Funds"), that a
Joint Special Meeting of the Shareholders of the Common Sense II Funds (the
"Meeting") will be held on Level 5 in Conference Room C of the Transco Tower,
2800 Post Oak Boulevard, Houston, Texas 77056, on Wednesday, July 17, 1996, at
2:30 p.m. Central Time, for the following purposes:
1. With respect to Government II, to approve a plan of reorganization
providing for the transfer of the assets and liabilities of Government II to
Common Sense Government Fund ("Government") in exchange for shares of
Government, the distribution of such shares to shareholders of Government II
and the subsequent dissolution of Government II;
2. With respect to Growth II, to approve a plan of reorganization providing
for the transfer of the assets and liabilities of Growth II to Common Sense
Growth Fund ("Growth") in exchange for shares of Growth, the distribution of
such shares to shareholders of Growth II and the subsequent dissolution of
Growth II;
3. With respect to Growth and Income II, to approve a plan of reorganization
providing for the transfer of the assets and liabilities of Growth and Income
II to Common Sense Growth and Income Fund ("Growth and Income") in exchange
for shares of Growth and Income, the distribution of such shares to
shareholders of Growth and Income II and the subsequent dissolution of Growth
and Income II; and
4. To transact such other business as may properly come before the Meeting.
Holders of record of the shares of each Common Sense II Fund at the close of
business on May 21, 1996 are entitled to notice of, and to vote at, the Meeting
and any adjournment thereof.
By order of the Trustees,
/s/ NORI L. GABERT
Nori L. Gabert
Vice President and Secretary
May 29, 1996
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
<PAGE> 5
PROSPECTUS/PROXY STATEMENT DATED MAY 20, 1996
ACQUISITION OF ASSETS AND LIABILITIES OF
COMMON SENSE II GOVERNMENT FUND
BY AND IN EXCHANGE FOR SHARES OF
COMMON SENSE GOVERNMENT FUND
ACQUISITION OF ASSETS AND LIABILITIES OF
COMMON SENSE II GROWTH FUND
BY AND IN EXCHANGE FOR SHARES OF
COMMON SENSE GROWTH FUND
ACQUISITION OF ASSETS AND LIABILITIES OF
COMMON SENSE II GROWTH AND INCOME FUND
BY AND IN EXCHANGE FOR SHARES OF
COMMON SENSE GROWTH AND INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 544-5445
This Prospectus/Proxy Statement is being furnished to shareholders of the
Common Sense Government II Fund ("Government II"), Common Sense II Growth Fund
("Growth II") and Common Sense II Growth and Income Fund ("Growth and Income
II"), each of which is a separate series of Common Sense Trust (the "Trust"),
(individually the "Common Sense II Fund" or collectively the "Common Sense II
Funds"), in connection with a proposed Agreement and Plan of Reorganization (the
"Plan"), to be submitted to shareholders of each of the Common Sense II Funds
for consideration at a Joint Special Meeting of Shareholders to be held on
Wednesday, July 17, 1996, at 2:30 p.m. Central Time, on Level 5 in Conference
Room C of the Transco Tower, 2800 Post Oak Boulevard, Houston, Texas 77056, and
any adjournments thereof (the "Meeting").
Each Plan provides for all of the assets of the respective Common Sense II
Fund to be acquired by Common Sense Government Fund ("Government"), Common Sense
Growth Fund ("Growth") and Common Sense Growth and Income Fund ("Growth and
Income"), respectively, each of which is a separate series of the Trust
(individually the "Common Sense Fund" or collectively the "Common Sense Funds"),
in exchange for Class A and Class B shares of the respective Common Sense Fund
and the assumption by the Common Sense Fund of the liabilities of the respective
Common Sense Fund (hereinafter referred to individually as the "Reorganization"
or collectively as the "Reorganizations"). Following the Reorganizations, shares
of the Common Sense Fund will be distributed to shareholders of the Common Sense
II Fund in liquidation of the Common Sense II Fund and the Common Sense II Fund
will be terminated. As a result of the proposed Reorganization, each shareholder
of the respective Common Sense II Fund will receive that number of shares of the
Common Sense Fund having an aggregate net asset value equal to the aggregate net
asset value of such shareholder's shares of the Common Sense II Fund. Holders of
Class A shares in the Common Sense II Fund will receive Class A shares of the
Common Sense Fund, and no sales charge will be imposed on the Class A shares of
the Common Sense Fund received by the Common Sense II Fund Class A shareholders.
Holders of Class B shares in the Common Sense II Fund will receive Class B
shares of the respective Common Sense Fund and the contingent deferred sales
charge ("CDSC") which is applicable to a shareholders' investment will continue
to apply, and, in calculating the applicable CDSC payable upon the subsequent
redemption of shares of the Common Sense Fund, the period during which a Common
Sense II Fund shareholder held shares of the respective Common Sense II Fund
will be counted.
Each Common Sense Fund, an open-end, management investment company, is one of
ten series of the Trust, which is authorized to issue an unlimited number of
Class A, Class B and Class 1 shares of beneficial interest, par value $0.01 per
share, for each series. Each Common Sense Fund has the same investment objective
as the respective Common Sense II Fund. Government Fund seeks high current
return consistent with preservation of capital through investments in debt
obligations issued or guaranteed by the U.S.
<PAGE> 6
Government, its agencies or instrumentalities; Growth Fund seeks capital
appreciation through investments in a portfolio of securities consisting
principally of common stocks and options on common stock; the Growth and Income
Fund seeks reasonable growth and income through investments principally in a
portfolio of equity securities that provide dividend or interest income,
including common stocks and securities convertible into common or preferred
stocks.
The investment policies of each Common Sense Fund are substantially identical
to those of the respective Common Sense II Fund. Certain differences exist
between each Common Sense Fund and each Common Sense II Fund with respect to the
ability to modify investment restrictions which are described herein under
"Comparison of Investment Objectives, Policies and Restrictions" in this
Prospectus/Proxy Statement.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATIONS TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Common Sense Funds
that shareholders of the Common Sense II Funds should know before voting on the
Reorganizations. Certain relevant documents listed below, which have been filed
with the Securities and Exchange Commission ("SEC"), are incorporated in whole
or in part by reference. A Statement of Additional Information dated May 20,
1996, relating to this Prospectus/Proxy Statement and the Reorganizations has
been filed with the SEC and is incorporated herein by reference. A Prospectus
and Statement of Additional Information containing additional information about
the Common Sense Funds, each dated May 20, 1996, have been filed with the SEC
and are incorporated herein by reference. A copy of the Common Sense Funds'
Prospectus accompanies this Prospectus/Proxy Statement. A Prospectus, dated
February 8, 1996, as supplemented March 14, 1996, and a Statement of Additional
Information containing additional information about the Common Sense II Funds,
dated February 8, 1996, as supplemented February 22, 1996 and April 3, 1996,
have been filed with the SEC and are incorporated herein by reference. Copies of
any of the foregoing documents are available upon request and without charge by
calling or writing the Trust at the telephone number or address shown above.
Included as Exhibit A of this Prospectus/Proxy Statement is a form of the Plan
to be entered into by each Fund.
2
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY......................................................................................... 4
Proposed Reorganization....................................................................... 4
Tax Consequences.............................................................................. 4
Investment Objectives and Policies............................................................ 5
Investment Adviser and Advisory Fees.......................................................... 5
Distribution of Shares........................................................................ 6
Distribution Expenses......................................................................... 7
Purchase and Redemption Procedures............................................................ 7
Exchange Privileges........................................................................... 7
Dividend Policy............................................................................... 7
Shareholder Voting Rights..................................................................... 8
RISK FACTORS.................................................................................... 8
COMPARISON OF FEES AND EXPENSES................................................................. 9
INFORMATION ABOUT THE REORGANIZATION............................................................ 16
Reasons for the Reorganization................................................................ 16
Agreement and Plan of Reorganization.......................................................... 16
Continuation of Shareholder Accounts and Plans; Share Certificates............................ 17
Federal Income Tax Consequences............................................................... 17
Capitalization................................................................................ 18
Record Date and Shareholder Information....................................................... 20
Performance Information....................................................................... 20
Ratification of Investment Objective, Policies and Restrictions of the Common Sense Fund...... 21
Legal Matters................................................................................. 21
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS.................................. 21
Investment Objectives......................................................................... 21
Investment Policies and Restrictions.......................................................... 22
Growth and Growth II.......................................................................... 22
Growth and Income and Growth and Income II.................................................... 22
Government and Government II.................................................................. 23
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS................................................. 23
General....................................................................................... 23
Dissenters' Rights............................................................................ 24
Limitation of Liability of Trustees and Shareholders.......................................... 24
Liquidation or Termination.................................................................... 24
Rights of Inspection.......................................................................... 24
ADDITIONAL INFORMATION ABOUT EACH COMMON SENSE FUND AND EACH COMMON SENSE II FUND............... 24
OTHER BUSINESS.................................................................................. 25
VOTING INFORMATION.............................................................................. 25
FINANCIAL STATEMENTS AND EXPERTS................................................................ 26
Exhibit A....................................................................................... A-1
Exhibit B....................................................................................... B-1
Exhibit C....................................................................................... C-1
</TABLE>
3
<PAGE> 8
SUMMARY
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, the
Prospectus of the Common Sense Funds dated May 20, 1996, the Prospectus of the
Common Sense II Funds dated February 8, 1996, as supplemented March 14, 1996,
the Statement of Additional Information of the Common Sense II Funds dated
February 8, 1996, as supplemented February 22, 1996 and April 3, 1996, and the
Plan, a copy of which is attached to this Prospectus/Proxy Statement as Exhibit
A.
PROPOSED REORGANIZATION. The Plan provides for the transfer of all of the
assets of each Common Sense II Fund in exchange for shares of the respective
Common Sense Fund and the assumption by the Common Sense Fund of the liabilities
of the Common Sense II Fund. (Each Common Sense Fund and each Common Sense II
Fund may also be referred to in this Prospectus/Proxy Statement as a "Fund" and
together, as the "Funds".) Following the Reorganizations, the Plan also calls
for the distribution of shares of each Common Sense Fund to the Common Sense II
Fund shareholders in liquidation of such Common Sense II Fund. (The foregoing
proposed transaction is referred to in this Prospectus/Proxy Statement
individually as the "Reorganization" or collectively as the "Reorganizations").
As a result of the Reorganizations, each shareholder of the Common Sense II Fund
will become the owner of that number of full and fractional shares of the Common
Sense Fund having an aggregate net asset value equal to the aggregate net asset
value of the shareholder's shares of the Common Sense II Fund as of the close of
business on the date that the Common Sense II Fund's assets are exchanged for
shares of the Common Sense Fund. (Shareholders of Class A and Class B shares of
the Common Sense II Fund will receive Class A and Class B shares, respectively,
of the Common Sense Fund). See "Information About the Reorganization."
For the reasons set forth below under "Information About the
Reorganization -- Reasons for the Reorganization," the Trustees of the Trust,
including the Trustees who are not interested persons ("Independent Trustees"),
as such term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), have unanimously concluded that each Reorganization would be in the
best interests of the shareholders of each Common Sense II Fund and that the
interests of the shareholders of each Common Sense II Fund would not be diluted
as a result of the transactions contemplated by the Reorganizations.
Accordingly, the Trustees have submitted the Plan for the approval by Common
Sense II Funds' shareholders.
THE TRUSTEES OF THE TRUST
RECOMMEND THAT YOU VOTE FOR THE REORGANIZATION.
The Trustees of the Trust have also approved the Plan, and accordingly, the
Common Sense Funds' participation in the Reorganizations.
Approval of the Reorganization will require the affirmative vote of a majority
of the outstanding shares of each Common Sense II Fund. See "Comparative
Information on Shareholders' Rights -- General".
TAX CONSEQUENCES. Prior to or at the completion of the Reorganization, each
Common Sense II Fund will have received an opinion of counsel that the
Reorganization has been structured so that no gain or loss will be recognized by
the Common Sense II Fund or its shareholders for federal income tax purposes as
a result of the receipt of shares of the Common Sense Fund in the
Reorganization. The holding period and aggregate tax basis of shares of the
Common Sense Fund that are received by each Common Sense II Fund shareholder
will be the same as the holding period and tax basis of the shares of the Common
Sense II Fund previously held by such shareholder. In addition, the holding
period and tax basis of the assets of the Common Sense II Fund in the hands of
the Common Sense Fund as a result of the Reorganization will be the same as in
the hands of the Common Sense II Fund immediately prior to the Reorganization
and no gain or loss will be recognized by the Common Sense Fund upon the receipt
of the assets of the Common Sense II Fund in exchange for shares of the Common
Sense Fund and the assumption by the Common Sense Fund of its liabilities. In
order to minimize any potential for undesirable federal income and excise tax
consequences in connection with the Reorganization, the Common Sense Fund and
Common Sense II Fund may distribute on or before the closing all or
substantially all of their respective undistributed net investment income
(including net capital gains) as of such date.
4
<PAGE> 9
INVESTMENT OBJECTIVES AND POLICIES. Each Common Sense Fund has the same
investment objective and substantially identical policies, the same advisory fee
structure and similar investment portfolios as the Common Sense II Fund. One
difference between each Common Sense Fund and Common Sense II Fund is that
certain investment restrictions of the Common Sense Fund have been structured as
"fundamental" requiring shareholder approval to change whereas the "fundamental"
restrictions of the Common Sense II Fund are limited only to those required by
the 1940 Act. In addition, the Common Sense II Funds have broader power to
invest in restricted securities than the Common Sense Funds.
Each Common Sense Fund has the same investment objective as the respective
Common Sense II Fund. Government Fund seeks high current return consistent with
preservation of capital through investments in debt obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; the Growth
Fund seeks capital appreciation through investments in a portfolio of securities
consisting principally of common stocks and options on common stock; the Growth
and Income Fund seeks reasonable growth and income through investments
principally in a portfolio of equity securities that provide dividend or
interest income, including common stocks and securities convertible into common
or preferred stocks.
See "Additional Information About Each Common Sense Fund And Each Common Sense
II Fund" and "Comparison of Investment Objectives, Policies and Restrictions."
INVESTMENT ADVISER AND ADVISORY FEES. Van Kampen American Capital Asset
Management, Inc. (the "Adviser") serves as investment adviser to each Common
Sense II Fund and each Common Sense Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified management company with more than
two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and over $50 billion under management or supervision.
Van Kampen American Capital's more than 40 open-end and 38 closed-end funds and
more than 2,800 unit investment trusts are professionally distributed by leading
financial advisers nationwide. The business address of the Adviser is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock, by the Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 13% of the common stock of VK/AC Holding, Inc.
Presently and after giving effect to the exercise of such options, no officer or
trustee of the Trust owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.
5
<PAGE> 10
The investment advisory fee of the Common Sense Fund and the respective Common
Sense II Fund are identical. The Trust pays the Adviser an annual fee, based on
the Fund's average daily net assets, calculated separately for each Fund, as
noted below:
Government Funds
0.60% of first
$1 billion
0.55% of next $1
billion
0.50% of next $1
billion
0.45% of next $1
billion
0.40% of next $1
billion
0.35% in excess
of $5 billion
Growth Funds and Growth and Income Funds
0.65% of first
$1 billion
0.60% of next $1
billion
0.55% of next $1
billion
0.50% of next $1
billion
0.45% in excess
of $4 billion
DISTRIBUTION OF SHARES. Shares of beneficial interest of each Common Sense
Fund and Common Sense II Fund are offered continuously for sale by PFS
Distributors, Inc. (the "Distributor"), an indirect subsidiary of Travelers
Group Inc., 65 East 55th Street, New York, New York 10022. The Distributor is
located at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-0001.
The Class A and Class B shares of the Common Sense Fund, which will be
received by the Common Sense II Funds' shareholders if the Reorganizations are
consummated, are identical to the Class A and Class B shares of the Common Sense
II Funds.
Class A shares of both Funds are sold at net asset value plus a maximum
initial sales charge of up to 5.50% for Growth and Growth and Income, and 4.75%
for Government. Certain purchases of Class A shares of both Funds qualify for
reduced initial sales charges. Purchases of Class A shares of each Common Sense
Fund and each Common Sense II Fund in amounts of $1 million or more are not
subject to an initial sales charge, but a CDSC of 1% may be imposed on certain
redemptions of Class A shares of the Common Sense Fund made within one year of
purchase. Class A shares of each Fund are subject to an ongoing service fee at
an annual rate of 0.25% of each Fund's aggregate average daily net assets
attributable to the Class A shares. Class A shares of each Common Sense Fund
acquired in the Reorganization will not be subject to a sales charge.
Class B shares of both Funds are sold at net asset value and are subject to a
CDSC if they are redeemed within five years of purchase. The CDSC schedule for
Class B shares of the Common Sense Fund will be the same as the Class B shares
of the Common Sense II Fund. With respect to Growth and Growth and Income, Class
B shares are subject to a CDSC of 5% of redemption proceeds during the first
year, declining each year thereafter to 0% after the fifth year. Class B shares
of Government are subject to a CDSC of 4% of redemption proceeds during the
first and second year, declining each year thereafter to 0% after the fifth
year. Class B shares of both Funds pay a combined annual distribution fee and
service fee at the rate of 1% of its average daily net assets attributable to
such class of shares. In addition, for both Funds Class B shares will convert
automatically to Class A shares six years after the shareholder's order to
purchase was accepted.
EACH COMMON SENSE FUND CURRENTLY OFFERS ONLY CLASS 1 SHARES TO THE GENERAL
PUBLIC. CLASS 1 SHARES OF THE GROWTH FUND AND GROWTH AND INCOME FUND ARE OFFERED
AT A SALES CHARGE OF 8.50% OF OFFERING PRICE. CLASS 1 SHARES OF THE GOVERNMENT
FUND ARE OFFERED AT A SALES CHARGE OF 6.75% OF OFFERING PRICE. UPON CONSUMMATION
OF THE REORGANIZATIONS, EACH COMMON SENSE FUND WILL OFFER CLASS A AND CLASS B
SHARES TO THE GENERAL PUBLIC. EACH COMMON SENSE FUND WILL THEN SUSPEND SALES TO
THE GENERAL PUBLIC OF CLASS 1 SHARES EXCEPT TO ACCOUNTS OF PREVIOUSLY
ESTABLISHED SHAREHOLDERS OR MEMBERS OF A FAMILY UNIT COMPRISING HUSBAND, WIFE
AND MINOR CHILDREN, AND CLASS 1 SHAREHOLDERS OF OTHER COMMON SENSE FUNDS
EXCHANGING THEIR CLASS 1 SHARES OF THE FUND FOR CLASS 1 SHARES OF ANOTHER FUND.
6
<PAGE> 11
For a description of the Class A and Class B shares issued by the Common Sense
Fund see "Purchase of Shares" and "Alternative Sales Arrangements" in the Common
Sense Funds' Prospectus.
DISTRIBUTION EXPENSES. The Trustees of the Trust, and the Class A and Class B
shareholders of each Fund have adopted two Distribution Plans pursuant to Rule
12b-1 of the 1940 Act hereinafter referred to as the "Class A Plan" and the
"Class B Plan." Under the Class A Plan, a Fund pays 0.25% per annum of its
average daily net assets attributable to such class of shares to the Distributor
as a service fee. The service fee is intended to cover personal services
provided to Class A shareholders of a Fund by representatives of PFS Investments
Inc. ("PFSI") and for the maintenance of their accounts. Under the Class B Plan,
Class B shares are subject to a combined annual distribution fee and service fee
at the rate of 1% of a Fund's aggregate average daily net assets attributable to
such class of shares. Payments to the Distributor under the Class B Plan
applicable to Class B shares are used to make service fee payments to PFSI of
0.25% per annum of average daily net assets. 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 relate
to the sale, promotion and marketing of the Class B shares.
PURCHASE AND REDEMPTION PROCEDURES. Information concerning applicable sales
charges, distribution fees and service fees is described above. The minimum
initial purchase requirement for each class of shares of each Fund is $250 and
$25 for subsequent investments. The Distributor may waive the minimum initial
amount for shares involving periodic investments. Each Fund and the Distributor
reserve the right to refuse any order for the purchase of shares. Shares of each
Fund may be purchased on any business day by completing the application included
in the then current Fund Prospectus and forwarding the application through PFSI
to PFS Shareholder Services (the "Transfer Agent"). Investments of $25,000 or
more may be made by bank wire to the Transfer Agent's bank.
Shares of each Fund may be redeemed by sending a written request in proper
form to the Transfer Agent. See "Redemption of Shares" in the accompanying
Prospectus of the Common Sense Fund.
EXCHANGE PRIVILEGES. Shares of each Fund may be exchanged for shares of the
same class of any other Common Sense Fund upon payment of the excess, if any, of
the sales charge applicable to the class of shares of the Fund being acquired
over the sales charge paid on the purchase.
Class B shareholders of a Fund have the ability to exchange their shares
("original shares") for the same class of shares of any other Fund 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 CDSC otherwise
due upon redemption of the original shares. For purposes of computing the CDSC
payable upon a redemption of 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 CDSC imposed by the original fund upon their
redemption from the Common Sense Family of Funds.
See "Shareholder Services -- Exchange Privilege" in the accompanying
Prospectus of the Common Sense Funds.
DIVIDEND POLICY. The dividend policy of the Common Sense Fund is identical to
that of the respective Common Sense II Fund. Growth distributes substantially
all its net investment income, less expenses, and any net realized capital gains
annually, normally in December. Growth and Income distributes its net investment
income, less expenses quarterly, normally in March, June, September and
December, and it distributes any net realized capital gains annually, normally
in December. With respect to Government, income dividends are declared each
business day, and paid monthly. Any taxable net realized short-term capital
gains may be distributed quarterly and any net realized long-term capital gains
are distributed annually. With respect to each Fund, unless a shareholder
otherwise instructs, dividends and capital gain distributions will be reinvested
automatically in additional shares of the same class at net asset value, subject
to no sales charge or CDSC.
Each Fund has qualified and intends to continue to qualify to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). While so qualified, so long as each Fund distributes all of its
investment company taxable income and any net realized gains to shareholders, it
is expected that a Fund will not be required to pay any federal income taxes on
the amount so distributed. A 4%
7
<PAGE> 12
nondeductible excise tax will be imposed on amounts not distributed if a Fund
does not meet certain distribution requirements by the end of each calendar
year. Each Fund anticipates meeting such distribution requirements.
See "Dividends, Distributions and Taxes" in the accompanying Prospectus of the
Common Sense Funds.
SHAREHOLDER VOTING RIGHTS. Each Common Sense Fund and Common Sense II Fund is
a separate series of the Trust. Shareholders of both Funds have identical voting
rights. Neither Fund holds an annual meeting of shareholders, and there is
normally no meeting of shareholders held 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 that time, the trustees of the
Trust then in office will call a shareholders' meeting for the election of
trustees.
In addition, under the laws of the Commonwealth of Massachusetts, shareholders
of each Fund do not have appraisal rights in connection with a combination or
acquisition of the assets of the Common Sense II Fund by another entity.
Shareholders of each Common Sense II Fund may, however, redeem their shares at
net asset value (subject to any applicable CDSC) prior to the date of the
Reorganization.
For purposes of voting with respect to the Reorganization, the Class A and
Class B shares of each Common Sense II Fund shall vote together as a single
class. See "Comparative Information on Shareholders' Rights."
RISK FACTORS
Due to the fact that each respective Common Sense Fund and Common Sense II
Fund have identical investment objectives and substantially identical policies
an investment in each Fund entails similar risks.
Government and Government II invest primarily in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. In order
to hedge against changes in interest rates, each Fund may purchase or sell
options on U.S. Government securities and engage in transactions involving
interest rate futures contracts and options on such contracts. The principal
reason for selling call or put options is to obtain, through the receipt of
premiums, a greater return than would be realized on the underlying securities
alone. By selling options, each Fund reduces its potential for capital
appreciation on debt securities if interest rates decline. Thus, if market
prices of debt securities increase, each Fund would receive a lower total return
from its optioned positions than it would have received if the options had not
been sold.
Growth and Growth II invest in common stocks and options on common stocks.
Each Fund may invest in options and other securities that have above average
volatility of price movement. Because prices of common stocks, options and other
investments fluctuate, the value of an investment in each Fund will vary based
upon the Fund's investment performance. Each Fund attempts to reduce overall
exposure to risk from declines in securities prices by spreading its investments
over many different companies in a variety of industries and by using stock
index options and stock index futures and options thereon. Certain policies of
the Funds, such as purchasing and selling options on stocks, purchasing options
on stock indices and purchasing stock index futures contracts and options
thereon involve inherently greater investment risk and could result in more
volatile price fluctuations.
Growth and Income and Growth and Income II invest in equity securities
including common and preferred stocks and securities convertible into common and
preferred stocks. Convertible securities rank senior to common stocks in a
corporation's capital structure. They are consequently of higher quality and
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security. Each Fund
may purchase convertible securities rated Ba or lower by Moody's Investors
Services, Inc. or BB or lower by Standard & Poor's Corporation or in non-rated
securities considered by the Adviser to be of comparable quality. Although each
Fund selects these securities primarily on the basis of their equity
characteristics, investors should be aware that debt securities rated in these
categories are considered high risk securities; the rating agencies consider
them speculative, and payment of interest and principal is not considered well
assured. To the extent that such convertible securities are acquired by a Fund,
there is a
8
<PAGE> 13
greater risk as to the timely payment of the principal of, and timely payment of
interest or dividends on, such securities than in the case of higher rated
convertible securities.
Growth, Growth II, Growth and Income and Growth and Income II may each invest
up to 20% of the value of their total assets in securities of foreign issuers.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Since each Fund may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of investments in the portfolio and the accrued
income and unrealized appreciation or depreciation of investments. Changes in
foreign currency rates relative to the U.S. dollar will affect the U.S. dollar
value of a Fund's assets denominated in that currency and the Fund's yield on
such assets.
For additional information see the respective sections of both the Common
Sense Funds' Prospectus and Statement of Additional Information and the Common
Sense II Funds' Prospectus and Statement of Additional Information entitled
"Goals and Investment Policies" and "Investment Practices and Risks."
COMPARISON OF FEES AND EXPENSES
Following are tables showing the current costs and expenses of each Common
Sense Fund and the respective Common Sense II Fund and pro forma costs and
expenses expected to be incurred by the Common Sense Fund after giving effect to
the Reorganization, each based on the maximum sales charge or maximum CDSC that
may be incurred at the time of purchase or redemption:
COMPARISON OF GROWTH AND GROWTH II
FEE COMPARISONS
<TABLE>
<CAPTION>
CLASS A SHARES(1) GROWTH** GROWTH II* PRO FORMA
- --------------------------------------------------------------------- -------- ---------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchases
(as a percentage of Offering Price)................................ 5.50% 5.50% 5.50%
Deferred Sales Charge
(as a percentage of the lesser of the original purchase price or
redemption value).................................................. None None None
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees...................................................... 0.61% 0.65%(3) 0.61%
Rule 12b-1 Fees...................................................... 0.25% 0.25% 0.25%
Other Expenses....................................................... 0.39% 2.00% 0.39%
Total Fund Operating Expenses
(before waivers and reimbursements)................................ 1.25% 2.90%(3) 1.25%
Expense Example of Total Operating Expenses Assuming Redemption at
the End of the Period (before waivers and reimbursements)(4)
One Year........................................................... $ 67 $ 83 $ 67
Three Years........................................................ $ 92 $ 140 $ 92
Five Years......................................................... $ 120 $ 199 $ 120
Ten Years.......................................................... $ 198 $ 360 $ 198
</TABLE>
9
<PAGE> 14
<TABLE>
<CAPTION>
CLASS A SHARES(1) GROWTH** GROWTH II* PRO FORMA
- --------------------------------------------------------------------- -------- ---------- ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period
(before waivers and reimbursements)(4)
One Year........................................................... $ 67 $ 83 $ 67
Three Years........................................................ $ 92 $ 140 $ 92
Five Years......................................................... $ 120 $ 199 $ 120
Ten Years.......................................................... $ 198 $ 360 $ 198
Total Fund Operating Expenses
(after waivers and reimbursements)................................. 1.25% 2.75% 1.25%
Expense Example of Total Operating Expenses Assuming Redemption at
the End of the Period
(after waivers and reimbursements)(4)
One Year........................................................... $ 67 $ 81 $ 67
Three Years........................................................ $ 92 $ 136 $ 92
Five Years......................................................... $ 120 $ 192 $ 120
Ten Years.......................................................... $ 198 $ 346 $ 198
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period
(after waivers and reimbursements)(4)
One Year........................................................... $ 67 $ 81 $ 67
Three Years........................................................ $ 92 $ 136 $ 92
Five Years......................................................... $ 120 $ 192 $ 120
Ten Years.......................................................... $ 198 $ 346 $ 198
<CAPTION>
CLASS B SHARES(2)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load Imposed on Purchases
(as a percentage of Offering Price)................................ None None None
Maximum Deferred Sales Charge
(as a percentage of the lesser of the original purchase price or
redemption value).................................................. 5.00% 5.00% 5.00%
</TABLE>
10
<PAGE> 15
<TABLE>
<CAPTION>
CLASS B SHARES(2) GROWTH** GROWTH II* PRO FORMA
- --------------------------------------------------------------------- -------- ---------- ---------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees...................................................... 0.61% 0.65%(3) 0.61%
Rule 12b-1 Fees...................................................... 1.00% 1.00% 1.00%
Other Expenses....................................................... 0.39% 2.00% 0.39%
Total Fund Operating Expenses
(before waivers and reimbursements)................................ 2.00% 3.65%(3) 2.00%
Expense Example of Total Operating Expenses Assuming Redemption at
the End of the Period
(before waivers and reimbursements)(4)
One Year........................................................... $ 72 $ 87 $ 72
Three Years........................................................ $ 96 $ 143 $ 96
Five Years......................................................... $ 125 $ 205 $ 125
Ten Years***....................................................... $ 196 $ 359 $ 196
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period
(before waivers and reimbursements)(4)
One Year........................................................... $ 20 $ 37 $ 20
Three Years........................................................ $ 63 $ 112 $ 63
Five Years......................................................... $ 108 $ 189 $ 108
Ten Years***....................................................... $ 196 $ 359 $ 196
Total Fund Operating Expenses
(after waivers and reimbursements)................................. 2.00% 3.50% 2.00%
Expense Example of Total Operating Expenses Assuming Redemption at
the End of the Period
(after waivers and reimbursements)(4)
One Year........................................................... $ 72 $ 86 $ 72
Three Years........................................................ $ 96 $ 139 $ 96
Five Years......................................................... $ 125 $ 198 $ 125
Ten Years***....................................................... $ 196 $ 345 $ 196
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period
(after waivers and reimbursements)(4)
One Year........................................................... $ 20 $ 35 $ 20
Three Years........................................................ $ 63 $ 107 $ 63
Five Years......................................................... $ 108 $ 182 $ 108
Ten Years***....................................................... $ 196 $ 345 $ 196
</TABLE>
- ---------------
(1) Class A Shares of Growth received pursuant to the Reorganization will not be
subject to a sales charge.
(2) Class B Shares of both Funds are subject to a contingent deferred sales
charge equal to 5.00% of the lesser of the then current net asset value or
the original purchase price on Class B Shares redeemed during the first year
after purchase, which charge is reduced to zero over a five year period as
follows: Year 1 -- 5%, Year 2 -- 4%, Year 3 -- 3%, Year 4 -- 2.5%, Year
5 -- 1.5%, and Year 6 -- 0%.
(3) Before voluntary expense waiver. After application of the expense waiver,
management fees would be 0.50% for each class of shares, and total fund
operating expenses would be 2.75% and 3.50% for Class A and B shares,
respectively.
(4) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return with either redemption or no redemption at the
end of each time period as noted.
11
<PAGE> 16
* For the year ended October 31, 1995.
** Shares established for the Reorganization with Growth II. Operating
expenses, with the exception of the 12b-1 fees, are based on expenses of the
Growth Class 1 shares for the year ended October 31, 1995.
*** Based on conversion to Class A shares after six years.
COMPARISON OF GROWTH AND INCOME AND GROWTH AND INCOME II
FEE COMPARISONS
<TABLE>
<CAPTION>
GROWTH & GROWTH &
CLASS A SHARES(1) INCOME** INCOME II* PRO FORMA
- --------------------------------------------------------------------- -------- ---------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchases
(as a percentage of Offering Price)................................ 5.50% 5.50% 5.50%
Deferred Sales Charge
(as a percentage of the lesser of the original purchase price or
redemption value).................................................. None None None
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees...................................................... 0.65% 0.65%(3) 0.65%
Rule 12b-1 Fees...................................................... 0.25% 0.25% 0.25%
Other Expenses....................................................... 0.31% 1.69% 0.31%
Total Fund Operating Expenses
(before waivers and reimbursements)................................ 1.21% 2.59%(3) 1.21%
Expense Example of Total Operating Expenses Assuming Redemption at
the End of the Period
(before waivers and reimbursements)(4)
One Year........................................................... $ 67 $ 80 $ 67
Three Years........................................................ $ 91 $ 131 $ 91
Five Years......................................................... $ 118 $ 185 $ 118
Ten Years.......................................................... $ 194 $ 331 $ 194
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period
(before waivers and reimbursements)(4)
One Year........................................................... $ 67 $ 80 $ 67
Three Years........................................................ $ 91 $ 131 $ 91
Five Years......................................................... $ 118 $ 185 $ 118
Ten Years.......................................................... $ 194 $ 331 $ 194
Total Fund Operating Expenses
(after waivers and reimbursements)................................. 1.21% 2.44% 1.21%
Expense Example of Total Operating Expenses Assuming Redemption at
the End of the Period
(after waivers and reimbursements)(4)
One Year........................................................... $ 67 $ 78 $ 67
Three Years........................................................ $ 91 $ 127 $ 91
Five Years......................................................... $ 118 $ 178 $ 118
Ten Years.......................................................... $ 194 $ 317 $ 194
</TABLE>
12
<PAGE> 17
<TABLE>
<CAPTION>
GROWTH & GROWTH &
CLASS A SHARES(1) INCOME** INCOME II* PRO FORMA
- --------------------------------------------------------------------- -------- ---------- ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period
(after waivers and reimbursements)(4)
One Year........................................................... $ 67 $ 78 $ 67
Three Years........................................................ $ 91 $ 127 $ 91
Five Years......................................................... $ 118 $ 178 $ 118
Ten Years.......................................................... $ 194 $ 317 $ 194
CLASS B SHARES(2)
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load Imposed on Purchases
(as a percentage of Offering Price)................................ None None None
Maximum Deferred Sales Charge
(as a percentage of the lesser of the original purchase price or
redemption value).................................................. 5.00% 5.00% 5.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees...................................................... 0.65% 0.65%(3) 0.65%
Rule 12b-1 Fees...................................................... 1.00% 1.00% 1.00%
Other Expenses....................................................... 0.31% 1.65% 0.31%
Total Fund Operating Expenses
(before waivers and reimbursements)................................ 1.96% 3.30%(3) 1.96%
Expense Example of Total Operating Expenses Assuming Redemption at
the End of the Period
(before waivers and reimbursements)(4)
One Year........................................................... $ 71 $ 84 $ 71
Three Years........................................................ $ 94 $ 133 $ 94
Five Years......................................................... $ 123 $ 188 $ 123
Ten Years***....................................................... $ 191 $ 329 $ 191
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period
(before waivers and reimbursements)(4)
One Year........................................................... $ 20 $ 33 $ 20
Three Years........................................................ $ 62 $ 102 $ 62
Five Years......................................................... $ 106 $ 172 $ 106
Ten Years***....................................................... $ 191 $ 329 $ 191
Total Fund Operating Expenses
(after waivers and reimbursements)................................. 1.96% 3.15% 1.96%
Expense Example of Total Operating Expenses Assuming Redemption at
the End of the Period
(after waivers and reimbursements)(4)
One Year........................................................... $ 71 $ 83 $ 71
Three Years........................................................ $ 94 $ 129 $ 94
Five Years......................................................... $ 123 $ 181 $ 123
Ten Years***....................................................... $ 191 $ 314 $ 191
</TABLE>
13
<PAGE> 18
<TABLE>
<CAPTION>
GROWTH & GROWTH &
CLASS B SHARES(2) INCOME** INCOME II* PRO FORMA
- --------------------------------------------------------------------- -------- ---------- ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period
(after waivers and reimbursements)(4)
One Year........................................................... $ 20 $ 32 $ 20
Three Years........................................................ $ 62 $ 97 $ 62
Five Years......................................................... $ 106 $ 165 $ 106
Ten Years***....................................................... $ 191 $ 314 $ 191
</TABLE>
- ---------------
(1) Class A Shares of Growth and Income received pursuant to the Reorganization
will not be subject to a sales charge.
(2) Class B Shares of both Funds are subject to a contingent deferred sales
charge equal to 5.00% of the lesser of the then current net asset value or
the original purchase price on Class B Shares redeemed during the first year
after purchase, which charge is reduced to zero over a five year period as
follows: Year 1 -- 5%; Year 2 -- 4%; Year 3 -- 3%, Year 4 -- 2.5%; Year
5 -- 1.5% and Year 6 -- 0%.
(3) Before voluntary expense waiver. After application of the expense waiver,
management fees would be 0.50% for each class of shares, and total fund
operating expenses would be 2.44% and 3.15% for Class A and B shares,
respectively.
(4) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return with either redemption or no redemption at the
end of each time period as noted.
* For the year ended October 31, 1995.
** Shares established for the Reorganization with Growth and Income II.
Operating expenses, with the exception of the 12b-1 fees are based on
expenses of the Growth and Income Class 1 shares for the year ended October
31, 1995.
*** Based on conversion to Class A shares after six years.
COMPARISON OF GOVERNMENT AND GOVERNMENT II
FEE COMPARISONS
<TABLE>
<CAPTION>
CLASS A SHARES(1) GOVERNMENT** GOVERNMENT II* PRO FORMA
- -------------------------------------------------------------- ------------ -------------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchases
(as a percentage of Offering Price)......................... 4.75% 4.75% 4.75%
Deferred Sales Charge
(as a percentage of the lesser of the original purchase
price or redemption value).................................. None None None
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees............................................... 0.60% 0.60% 0.60%
Rule 12b-1 Fees............................................... 0.25% 0.25% 0.25%
Other Expenses................................................ 0.23% 1.89% 0.23%
Total Fund Operating Expenses................................. 1.08% 2.74% 1.08%
Expense Example of Total Operating Expenses Assuming
Redemption at the End of the Period(3)
One Year.................................................... $ 58 $ 74 $ 58
Three Years................................................. $ 80 $ 128 $ 80
Five Years.................................................. $ 104 $ 186 $ 104
Ten Years................................................... $ 173 $ 340 $ 173
</TABLE>
14
<PAGE> 19
<TABLE>
<CAPTION>
CLASS A SHARES(1) GOVERNMENT** GOVERNMENT II* PRO FORMA
- -------------------------------------------------------------- ------------ -------------- ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses Assuming No
Redemption at the End of the Period(3)
One Year.................................................... $ 58 $ 74 $ 58
Three Years................................................. $ 80 $ 128 $ 80
Five Years.................................................. $ 104 $ 186 $ 104
Ten Years................................................... $ 173 $ 340 $ 173
CLASS B SHARES(2)
- --------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load Imposed on Purchases
(as a percentage of Offering Price)......................... None None None
Maximum Deferred Sales Charge
(as a percentage of the lesser of the original purchase
price or redemption value).................................. 4.00% 4.00% 4.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees............................................... 0.60% 0.60% 0.60%
Rule 12b-1 Fees............................................... 1.00% 1.00% 1.00%
Other Expenses................................................ 0.23% 1.88% 0.23%
Total Fund Operating Expenses................................. 1.83% 3.48% 1.83%
Expense Example of Total Operating Expenses Assuming
Redemption at the End of the Period(3)
One Year.................................................... $ 60 $ 76 $ 60
Three Years................................................. $ 91 $ 138 $ 91
Five Years.................................................. $ 117 $ 197 $ 117
Ten Years***................................................ $ 177 $ 344 $ 177
Expense Example of Total Operating Expenses Assuming No
Redemption at the End of the Period(3)
One Year.................................................... $ 19 $ 35 $ 19
Three Years................................................. $ 58 $ 107 $ 58
Five Years.................................................. $ 99 $ 181 $ 99
Ten Years***................................................ $ 177 $ 344 $ 177
</TABLE>
- ---------------
(1) Class A Shares of Government received pursuant to the Reorganization will
not be subject to a sales charge.
(2) Class B Shares of both Funds are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B Shares redeemed during the first year
after purchase, which charge is reduced to zero, over a five year period as
follows: Years 1 and 2 -- 4%, Year 3 -- 3%, Year 4 -- 2.5%, Year 5 -- 1.5%,
and Year 6 -- 0%.
(3) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return with either redemption or no redemption at the
end of each time period as noted.
* For the year ended October 31, 1995.
** Shares established for the Reorganization with Government II. Operating
expenses, with the exception of the 12b-1 fees, are based on expenses of
Government Class 1 shares for the year ended October 31, 1995.
*** Based on conversion to Class A shares after six years.
15
<PAGE> 20
INFORMATION ABOUT THE REORGANIZATION
REASONS FOR THE REORGANIZATION. In determining whether to recommend approval
of the Reorganization to shareholders of each Common Sense II Fund, the Trustees
considered a number of factors, including, but not limited to: (1) there would
be no change in the capabilities and resources of the Adviser and other service
providers to the Common Sense Fund in the areas of marketing, investment and
shareholder services; (2) expenses and advisory fees applicable to the Common
Sense II Fund and the respective Common Sense Fund before the Reorganization and
the estimated expense ratios of the Common Sense Fund after the Reorganization;
(3) the reduced fund expenses expected to be incurred by Common Sense II Fund
shareholders after the Reorganization; (4) the terms and conditions of the Plan
and whether the Reorganization would result in dilution of Common Sense II Fund
shareholder interests; (5) the costs estimated to be incurred by the Common
Sense II Fund as a result of the Reorganization; and (6) the anticipated tax
consequences of the Reorganization. Based upon these and other factors, the
Trustees unanimously determined that the Reorganization is in the best interests
of the shareholders of each Common Sense II Fund.
The Trustees also considered the benefits to be derived by shareholders of
each Common Sense II Fund from the sale of its assets to the respective Common
Sense Fund. In this regard, the Trustees considered the potential benefits of
Common Sense II Fund shareholders being associated with a larger entity and the
economies of scale that could be realized by the participation by shareholders
of each Common Sense II Fund in the combined fund. On March 29, 1996, Growth had
net assets of approximately $2.86 billion; by comparison Growth II had net
assets of approximately $88.92 million on that date. With respect to Growth and
Income, it had net assets of approximately of $919.8 million on March 29, 1996;
by comparison Growth and Income II had net assets of approximately $58.79
million. On that same date, Government had net assets of approximately $312.5
million; by comparison Government II had net assets of approximately $21.8
million on that date.
In light of the foregoing, the Trustees of the Trust, including the
Independent Trustees, have determined that it is in the best interests of each
Common Sense II Fund and its shareholders to combine with the respective Common
Sense Fund. The Trustees also determined that a combination of each Common Sense
II Fund and the respective Common Sense Fund would not result in a dilution of
the Common Sense II Fund's shareholders' interests.
The Trustees also concluded that the proposed Reorganization would be in the
best interests of shareholders of each Common Sense Fund and that the interests
of the shareholders of each Common Sense Fund will not be diluted as a result of
the transactions contemplated by the Reorganization.
AGREEMENT AND PLAN OF REORGANIZATION. The material features of the Plan are
summarized below. This summary does not purport to be complete and is subject in
all respects to the provisions of, and is qualified in its entirety by reference
to, the Plan, a copy of the form of which is attached hereto as Exhibit A. The
affirmative vote of a majority of the outstanding shares entitled to vote of
each Common Sense II Fund is required to approve the Plan at a meeting of
shareholders at which a quorum is present.
Pursuant to the Plan, the Common Sense Fund would acquire all of the assets
and the liabilities of the respective Common Sense II Fund on the date of the
Closing (term defined herein) in exchange for Class A and Class B shares of the
respective Common Sense Fund.
Subject to Common Sense II Fund shareholder approval of the Reorganization,
the closing (the "Closing") will occur on the later of receipt of all necessary
regulatory approvals and the final adjournment of the Meeting or such later date
as soon as practicable thereafter as the Common Sense Fund and the Common Sense
II Fund may mutually agree.
On the date of Closing, the Common Sense II Fund will transfer to the
respective Common Sense Fund all of the assets and liabilities of the Common
Sense II Fund. The Trust will in turn transfer to the Common Sense II Fund a
number of Class A and Class B shares of the Common Sense Fund approximately
equal in value to the value of the net assets of the Common Sense II Fund
transferred to the Common Sense Fund as of the date of Closing, as determined in
accordance with the valuation method described in the Common
16
<PAGE> 21
Sense Funds' then current prospectus. In order to minimize any potential for
undesirable federal income and excise tax consequences in connection with the
Reorganization, the Common Sense Fund and the Common Sense II Fund may
distribute on or before the Closing all or substantially all of their respective
undistributed net investment income (including net capital gains) as of such
date.
The Common Sense II Fund expects to distribute the Class A and Class B shares
of the Common Sense Fund to the shareholders of the Common Sense II Fund
promptly after the Closing. After such distribution and the winding up of its
affairs, each Common Sense II Fund will be terminated.
The consummation of the Reorganization is subject to the conditions set forth
in the Plan. The Plan may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the
Common Sense II Fund, provided that no such amendment after such approval shall
be made if it would have a material adverse effect on the interests of Common
Sense II Fund shareholders. The Plan may also be terminated by the non-breaching
party if there has been a material misrepresentation, material breach of any
representation or warranty, material breach of contract or failure of any
condition to Closing.
Approval of the Plan will require the affirmative vote of a majority of the
outstanding shares of each Common Sense II Fund. If the Reorganization is not
approved by shareholders of each Common Sense II Fund, the Trustees of the Trust
will consider other possible courses of action, including liquidation of each
Common Sense II Fund.
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES. If the
Reorganization is approved, the Common Sense Fund will establish an account for
each Common Sense II Fund shareholder containing the appropriate number of
shares of the Common Sense Fund. Shareholders of the Common Sense II Fund who
are accumulating Common Sense II Fund shares under the dividend reinvestment
plan, or pre-authorized check plan, or who are receiving payment under the
systematic withdrawal plan with respect to Common Sense II Fund shares, will
retain the same rights and privileges after the Reorganization in connection
with the Common Sense Fund Class A or Class B shares received in the
Reorganization through identical plans maintained by the Common Sense Fund.
It will not be necessary for shareholders of the Common Sense II Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the Common Sense II Fund, such certificates will become null and void.
FEDERAL INCOME TAX CONSEQUENCES. The following is a general discussion of the
material federal income tax consequences of the Reorganization to shareholders
of the Common Sense II Fund and shareholders of the Common Sense Fund. It is
based upon the Code, legislative history, Treasury regulations, judicial
authorities, published positions of the Internal Revenue Service (the "Service")
and other relevant authorities, all as in effect on the date hereof and all of
which are subject to change or different interpretations (possibly on a
retroactive basis). This summary is limited to shareholders who hold their
Common Sense II Fund shares as capital assets. No advance rulings have been or
will be sought from the Service regarding any matter discussed in this
Prospectus/Proxy Statement. Accordingly, no assurances can be given that the
Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisors to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of section 368(a)(1) of the Code. It is a condition to closing that the
Trust and the respective Common Sense II Fund receive an opinion from Sullivan &
Worcester LLP substantially to the effect that for federal income tax purposes:
1. The acquisition by the Common Sense Fund of the assets of the Common Sense
II Fund in exchange solely for Class A and Class B shares of the Common
Sense Fund and the assumption by the Common Sense Fund of the liabilities
of the Common Sense II Fund will qualify as a tax-free reorganization
within the meaning of Section 368(a)(1) of the Code.
17
<PAGE> 22
2. No gain or loss will be recognized by the Common Sense II Fund or the
Common Sense Fund upon the transfer to the Common Sense Fund of the assets
of the Common Sense II Fund in exchange solely for the Class A and Class B
shares of the Common Sense Fund and the assumption by the Common Sense Fund
of the liabilities of the Common Sense II Fund.
3. The Common Sense Fund's basis in the Common Sense II Fund assets received
in the Reorganization will, in each instance, equal the basis in such
assets in the hands of the Common Sense II Fund immediately prior to the
transfer, and the Common Sense Fund's holding period of such assets will,
in each instance, include the period during which the assets were held by
the Common Sense II Fund.
4. No gain or loss will be recognized by the shareholders of the Common Sense
II Fund upon the exchange of their shares of the Common Sense II Fund for
the Class A or Class B shares, respectively, of the Common Sense Fund.
5. The aggregate tax basis in the Class A and Class B shares of the Common
Sense Fund received by the shareholders of the Common Sense II Fund will be
the same as the aggregate tax basis of the shares of the Common Sense II
Fund surrendered in exchange therefore.
6. The holding period of the Class A and Class B shares of the Common Sense
Fund received by the shareholders of the Common Sense II Fund will include
the holding period of the shares of the Common Sense II Fund surrendered in
exchange therefor if such surrendered shares of the Common Sense II Fund
are held as capital assets by such shareholder.
In rendering its opinion, Sullivan & Worcester LLP may rely upon certain
representations of the management of the Trust and assume that the
Reorganization will be consummated as described in the Plan and that redemptions
of shares of the Common Sense II Fund occurring prior to the Closing will
consist solely of redemptions in the ordinary course of business.
Each Common Sense Fund intends to be taxed under the rules applicable to
regulated investment companies as defined in Section 851 of the Code, which are
the same rules currently applicable to the Common Sense II Fund and its
shareholders.
CAPITALIZATION. The following table sets forth the capitalization of each
Common Sense II Fund and each Common Sense Fund as of October 31, 1995 and the
pro forma combined capitalization of both as if the Reorganization had occurred
on that date. These numbers may differ at the time of Closing.
18
<PAGE> 23
CAPITALIZATION TABLE AS OF OCTOBER 31, 1995
<TABLE>
<CAPTION>
GROWTH FUNDS
-----------------------------------------------
GROWTH GROWTH II PRO FORMA
-------------- ----------- --------------
<S> <C> <C> <C>
NET ASSETS
Class 1 shares........................................... $2,611,504,909 -- $2,611,504,909
Class A shares........................................... -- $21,087,078 21,087,078
Class B shares........................................... -- 33,336,710 33,336,710
-------------- ----------- --------------
Total............................................. $2,611,504,909 $54,423,788 $2,665,928,697
============== =========== ==============
NET ASSET VALUE PER SHARE
Class 1 shares........................................... $17.46 -- $17.46
Class A shares........................................... -- $14.57 14.57
Class B shares........................................... -- 14.41 14.41
SHARES OUTSTANDING
Class 1 shares........................................... 149,533,377 -- 149,533,377
Class A shares........................................... -- 1,447,190 1,447,190
Class B shares........................................... -- 2,313,448 2,313,448
-------------- ----------- --------------
Total............................................. 149,533,377 3,760,638 153,294,015
============== =========== ==============
EXPENSE RATIOS
Class 1 shares........................................... 1.00% -- 1.00%
Class A shares........................................... -- 2.75%(1) 1.25%
Class B shares........................................... -- 3.50%(1) 2.00%
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND INCOME FUNDS
-------------------------------------------
GROWTH AND GROWTH AND
INCOME INCOME II PRO FORMA
------------ ----------- ------------
<S> <C> <C> <C>
NET ASSETS
Class 1 shares.............................................. $828,318,800 -- $828,318,800
Class A shares.............................................. -- $13,501,578 13,501,578
Class B shares.............................................. -- 21,165,346 21,165,346
------------ ----------- ------------
Total................................................ $828,318,800 $34,666,924 $862,985,724
============ =========== ============
NET ASSET VALUE PER SHARE
Class 1 shares.............................................. $16.95 -- $16.95
Class A shares.............................................. -- $13.92 13.92
Class B shares.............................................. -- 13.88 13.88
SHARES OUTSTANDING
Class 1 shares.............................................. 48,862,007 -- 48,862,007
Class A shares.............................................. -- 970,197 970,197
Class B shares.............................................. -- 1,525,260 1,525,260
------------ ----------- ------------
Total................................................ 48,862,007 2,495,457 51,357,464
============ =========== ============
EXPENSE RATIOS
Class 1 shares.............................................. 0.96% -- 0.96%
Class A shares.............................................. -- 2.44%(2) 1.21%
Class B shares.............................................. -- 3.15%(2) 1.96%
</TABLE>
- ---------------
(1) After voluntary expense waiver. In absence of the waiver the total operating
expenses would be 2.90% and 3.65% for Class A and Class B shares,
respectively.
(2) After voluntary expense waiver. In absence of the waiver the total operating
expenses would be 2.59% and 3.30% for Class A and Class B shares,
respectively.
19
===========
<PAGE> 24
<TABLE>
<CAPTION>
GOVERNMENT FUNDS
----------------------------------------------
GOVERNMENT GOVERNMENT II PRO FORMA
------------ -------------- ------------
<S> <C> <C> <C>
NET ASSETS
Class 1 shares............................................ $329,014,955 -- $329,014,955
Class A shares............................................ -- $ 9,836,130 9,836,130
Class B shares............................................ -- 9,483,073 9,483,073
------------ ----------- ------------
Total.............................................. $329,014,955 $ 19,319,203 $348,334,158
============ =========== ============
NET ASSET VALUE PER SHARE
Class 1 shares............................................ $10.67 -- $10.67
Class A shares............................................ -- $12.14 12.14
Class B shares............................................ -- 12.14 12.14
SHARES OUTSTANDING
Class 1 shares............................................ 30,839,945 -- 30,839,945
Class A shares............................................ -- 809,931 809,931
Class B shares............................................ -- 780,836 780,836
------------ ----------- ------------
Total..................................................... 30,839,945 1,590,767 32,430,712
============ =========== ============
EXPENSE RATIOS
Class 1 shares............................................ 0.83% -- 0.83%
Class A shares............................................ -- 2.74% 1.08%
Class B shares............................................ -- 3.48% 1.83%
</TABLE>
RECORD DATE AND SHAREHOLDER INFORMATION. The Trustees have fixed the close of
business on May 21, 1996, as the record date (the "Record Date") for the
determination of holders of shares of each Common Sense II Fund entitled to vote
at the Meeting. Shareholders of each such Fund on the Record Date will be
entitled to one vote for each share held, with no cumulative rights. At the
close of business on May 21, 1996, each Common Sense II Fund had outstanding the
number of shares set forth below:
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
SHARES SHARES SHARES
NAME OF FUND OUTSTANDING OUTSTANDING OUTSTANDING
- ----------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Growth II........................................................ 2,468,202 3,998,651 6,467,253
Growth and Income II............................................. 1,557,520 2,669,399 4,226,919
Government II.................................................... 830,037 1,071,984 1,902,021
</TABLE>
The persons who owned beneficially more than 5% of any class of each Common
Sense II Fund's outstanding shares as of May 21, 1996, to the knowledge of
management of the Common Sense II Funds, are set forth at Exhibit B hereto.
PERFORMANCE INFORMATION. As of the date of this Prospectus/Proxy Statement,
each Common Sense Fund has offered only Class 1 shares and has not offered
either Class A or Class B shares; and each Common Sense II Fund has offered only
Class A and Class B shares and has not offered Class 1 shares. The performance
information for Class A and Class B shares of each Common Sense II Fund and the
performance information for Class 1 shares of each Common Sense Fund is noted
below. The performance of Class 1 shares of each Common Sense Fund will differ
from that of Class A or Class B shares of each Common Sense II Fund because of
the difference in sales charges and/or expenses paid by shareholders investing
in either Class A or Class B shares of the Common Sense II Fund.
Growth's, Growth and Income's and Government's average annual total return for
Class 1 shares for the one-year and five-year periods ended October 31, 1995 and
since inception (April 14, 1987) through October 31, 1995 was 13.48%, 12.07% and
6.59%; 15.24%, 13.29% and 7.00%; and 9.52%, 8.69%, and 7.02%, respectively.
The average annual total return for Growth II, Growth and Income II, and
Government II for Class A shares for the one-year period ended October 31, 1995
and since inception (May 3, 1994) through December 31, 1995 was 15.73%, 13.60%
and 5.97%, and 10.76%, 8.55% and 2.87%, respectively. The average
20
<PAGE> 25
annual total return for Growth II, Growth and Income II, and Government II for
Class B shares for the one-year period ended October 31, 1995 and since
inception (May 3, 1994) through October 31, 1995 was 16.50%, 14.19% and 6.42%;
and 11.68%, 9.37% and 2.91%, respectively. The total return figures include the
effect of the maximum sales charge or maximum CDSC applicable to purchases and
sales of shares of both the Common Sense Funds and Common Sense II Funds.
Government's annualized current yield for Class 1 shares for the 30-day period
ending October 31, 1995 was 5.55%. Government II's annualized current yield
(non-subsidized) for Class A shares and Class B shares for the 30 day period
ending October 31, 1995 was 3.48% and 2.88% respectively. The yield for the
respective classes of shares for Government and Government II is not fixed and
will fluctuate in response to prevailing interest rates and the market value of
portfolio securities, and as a function of the type of securities owned by the
Fund, portfolio maturity and the Fund's expenses.
The total return figures above assume reinvestment of all dividends and
distributions. They are not necessarily indicative of future results. The
performance of a Fund is a result of conditions in the securities markets,
portfolio management and operating expenses. Although information such as that
shown herein is useful in reviewing a Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE COMMON
SENSE FUND. Approval of the Reorganization will constitute the ratification by
Common Sense II Fund shareholders of the investment objective, policies and
restrictions, distribution plans and advisory agreement of each Common Sense
Fund. For a discussion of the investment objective, policies and restrictions of
each Common Sense Fund, see "Comparison of Investment Objectives, Policies and
Restrictions" and the Common Sense Fund Prospectus accompanying this
Prospectus/Proxy Statement. Approval of the Reorganization will constitute
approval of amendments to any of the fundamental investment restrictions of the
Common Sense II Fund that might otherwise be interpreted as impeding the
Reorganization, but solely for the purpose of and to the extent necessary for,
consummation of the Reorganization.
LEGAL MATTERS. Certain legal matters concerning the issuance of Class A and
Class B shares of the Common Sense Fund and certain legal matters concerning the
federal income tax consequences of the Reorganization will be passed upon by
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, DC 20036.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The following discussion is based upon and qualified in its entirety by the
descriptions of the respective investment objectives, policies and restrictions
set forth in the respective Prospectuses and Statements of Additional
Information of the Funds. The investment objectives, policies and restrictions
of the Common Sense Funds can be found in the Prospectus of the Common Sense
Funds under the caption "Goals and Investment Policies" and "Investment
Practices and Risks." The Common Sense Funds' Prospectuses also offer additional
funds advised by the Adviser. These additional funds are not involved in the
Reorganizations; their investment objectives, policies and restrictions are not
discussed in this Prospectus/Proxy Statement and their shares are not offered
hereby. The investment objectives, policies and restrictions of the Common Sense
II Funds can be found in the Prospectus of the Common Sense II Funds under the
caption "Goals and Investment Policies" and "Investment Practices and Risks."
INVESTMENT OBJECTIVES. The investment objective of each Common Sense Fund is
the same as the investment objective of the respective Common Sense II Fund.
Each Fund's investment objective is considered non-fundamental and may be
changed by the Trustees of the Trust. Certain of each Fund's investment policies
are considered non-fundamental and may be changed by the Trustees, provided such
change is not prohibited by the investment restrictions (which are set forth in
the applicable Statement of Additional Information) or applicable law, and any
such change will first be disclosed in the then current prospectus.
21
<PAGE> 26
INVESTMENT POLICIES AND RESTRICTIONS. Each Common Sense Fund has substantially
identical policies as the Common Sense II Fund except that the Common Sense II
Fund has broader power to invest in restricted securities than the Common Sense
Fund.
Each Fund has adopted investment restrictions which may not be changed without
the approval of the holders of a majority, as defined in the 1940 Act, of the
voting securities of the respective Fund. The investment restrictions for each
of the Common Sense Funds and the Common Sense II Funds are similar, the only
difference being that certain investment restrictions of the Common Sense Fund
have been structured as "fundamental" requiring shareholder approval of any
change whereas the "fundamental" restrictions of the Common Sense II Funds are
limited to those required by the 1940 Act.
GROWTH AND GROWTH II. Each Fund seeks capital appreciation through investments
in common stocks and options on common stocks.
Portfolio securities are selected by the Adviser using an investment research
process blending traditional security analysis and quantitative security
selection techniques. Such process includes focusing on securities of companies
that the Adviser believes either: (1) experienced above-average and consistent
long-term growth of earnings and have excellent prospects for outstanding future
growth in earnings; (2) are presently experiencing or expected to have a
material increase in profits and sales; (3) are undervalued either in that such
securities are selling at prices that do not reflect the current market value of
its securities and there is reason to expect realization of this potential in
the form of increased equity values or that the potential improving prospects of
the security is not reflected in the price of the security; (4) will experience
a fundamental change in structure that potentially may result in higher
earnings; or (5) will produce new products, new services or new processes. Each
Fund may invest in options and other securities that have above average
volatility of price movement. Because prices of common stocks, options and other
investments fluctuate, the value of an investment in a Fund will vary based upon
the Fund's investment performance. Each Fund attempts to reduce overall exposure
to risk from declines in securities prices by spreading its investments over
many different companies in a variety of industries and by using stock index
options and stock index futures and options thereon. There is no assurance that
a Fund will be successful in achieving its goal.
Each Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets each Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. Such
investments may be increased by the Fund, up to 100% of its assets, when deemed
appropriate by the Adviser for temporary defensive purposes.
GROWTH AND INCOME AND GROWTH AND INCOME II. Each Fund seeks reasonable growth
and income through investments in equity securities including common and
preferred stocks and securities convertible into common and preferred stocks.
Portfolio securities are selected by the Adviser using an investment research
process blending traditional security analysis and quantitative security
selection techniques. Such process includes focusing on securities of companies
that the Adviser believes either: (1) experienced above-average and consistent
long-term growth of earnings and have excellent prospects for outstanding future
growth in earnings; (2) are presently experiencing or expected to have a
material increase in profits and sales; (3) are undervalued either in that such
securities are selling at prices that do not reflect the current market value of
its securities and there is reason to expect realization of this potential in
the form of increased equity values or that the potential improving prospects of
the security is not reflected in the price of the security; (4) will experience
a fundamental change in structure that potentially may result in higher
earnings; or (5) will produce new products, new services or new processes. In
general, each Fund intends to invest primarily in securities that have yielded a
dividend or interest income to security holders within the past twelve months;
however, it may invest in non-income producing investments held for anticipated
increase in value. There is no assurance that each Fund will be successful in
achieving its goal.
Convertible securities rank senior to common stocks in a corporation's capital
structure. They are consequently of higher quality and entail less risk than the
corporation's common stock, although the extent to
22
<PAGE> 27
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as fixed income security. Each Fund
may purchase convertible securities rated Ba or lower by Moody's Investors
Service, Inc. or BB or lower by Standard & Poor's Corporation or in non-rated
securities considered by the Adviser to be of comparable quality. Although each
Fund selects these securities primarily on the basis of their equity
characteristics, investors should be aware that debt securities rated in these
categories are considered high risk securities; the rating agencies consider
them speculative, and payment of interest and principal is not considered well
assured. To the extent that such convertible securities are acquired by each
Fund there is a greater risk as to the timely payment of the principal of, and
timely payment of interest or dividends on, such securities than in the case of
higher rated convertible securities.
Each Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets each Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. Such
investments may be increased by a Fund, up to 100% of its assets, when deemed
appropriate by the Adviser for temporary defensive purposes. Short-term
investments may include repurchase agreements with banks or broker-dealers. Each
Fund may also invest up to 20% of its total assets in securities of foreign
issuers and in investment companies.
GOVERNMENT AND GOVERNMENT II. Each Fund seeks to provide investors with a high
current return consistent with preservation of capital. Each Fund invests
primarily in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. In order to hedge against changes in interest
rates, each Fund may purchase or sell options on U.S. Government securities and
engage in transactions involving interest rate futures contracts and options on
such contracts. Each Fund may invest in repurchase agreements fully
collateralized by U.S. Government securities. Each Fund may also purchase or
sell U.S. Government securities on a forward commitment basis. Shares of each
Fund are not insured or guaranteed by the U.S. Government, its agencies or
instrumentalities or by any other person or entity. There is no assurance that
each Fund will be successful in achieving its goal.
Each Fund may also engage in transactions involving obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are supported
by any of the following: (a) the full faith and credit of the U.S. Government,
(b) the right of the issuer to borrow an amount limited to a specific line of
credit from the U.S. Government, (c) discretionary authority of the U.S.
Government agency or instrumentality, or (d) the credit of the instrumentality.
Agencies and instrumentalities include but are not limited to: Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association. Each Fund expects in any event that at all times at least 80% of
its assets will be invested in U.S. Government securities.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
GENERAL. Each Common Sense Fund and each Common Sense II Fund is a separate
series of the Trust and each is an open-end management investment company
registered under the 1940 Act, which continuously offers to sell shares to the
public. The Trust is organized under the laws of the Commonwealth of
Massachusetts as a Massachusetts business trust and is governed by an Agreement
and Declaration of Trust ("Declaration of Trust"), Bylaws and Trustees. The
Trust is authorized to issue an unlimited number of Class A, Class B and Class 1
shares of beneficial interest of $.01 par value, in the Common Sense Funds and
the Common Sense II Funds. Shares are fully paid, non-assessable and have no
preemptive or conversion rights.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. Each class of shares represents interests in the assets of each
Fund and has identical voting, dividend, liquidation and other rights on the
same terms and conditions, except that the distribution fees and/or service fees
and any incremental transfer agency fees related to each class of shares of each
Fund are borne solely by that class, and each class of shares of each Fund has
exclusive voting rights with respect to provisions of the Trust's Class A Plan
and Class B Plan which pertain to that class of each Fund. All shares
23
<PAGE> 28
have equal voting rights, except that only shares of the respective Fund are
entitled to vote on matters concerning only that Fund. There will normally be no
meetings of shareholders for the purpose of electing trustees unless and until
such time as less than a majority of the trustees holding office have been
elected by shareholders, at which time the trustees then in office will call a
shareholders' meeting for the election of trustees. Shareholders may, in
accordance with the Declaration of Trust, cause a meeting of shareholders to be
held for the purpose of voting on the removal of trustees. Except as set forth
above, the trustees shall continue to hold office and appoint successor
trustees.
DISSENTERS' RIGHTS. Neither the Declaration of Trust, the Bylaws, nor
Massachusetts law grants the shareholders of the Funds any rights in the nature
of dissenters' rights of appraisal with respect to any action upon which the
shareholders may be entitled to vote.
LIMITATION OF LIABILITY OF TRUSTEES AND SHAREHOLDERS. The Declaration of Trust
for the Trust, a copy of which is on file in the office of the Secretary of
State of the Commonwealth of Massachusetts, refers to the Trustees under the
Declaration collectively as Trustees, not as individuals or personally; and
provides that no Trustee, officer or shareholder of the Trust shall be held to
any personal liability, nor shall resort be had to their private property for
the satisfaction of any obligation or liability of any Fund, but the assets of
the applicable Fund only shall be liable. The Declaration of Trust also provides
that a Trustee or officer will be personally liable for his or her own bad
faith, willful misfeasance, gross negligence or reckless disregard in connection
with the Trust property or the affairs of the Trust.
Under Massachusetts law, there is a possibility that, under certain
circumstances, shareholders of a Massachusetts business trust may be held
personally liable for the Trust's obligations. The Declaration of Trust provides
that if any shareholder of the Trust is charged or held to be personally
responsible for any obligation of liability of the Trust solely by reason of
being a shareholder and not because of such shareholder's acts or omissions or
some other reason, the Trust shall, upon request, assume the defense against
such claim and satisfy any judgment. The shareholder shall be entitled to
indemnification out of the assets of the Trust. Therefore, any risk of a
shareholder incurring a loss due to shareholder liability is limited to
circumstances in which the Trust itself is unable to meet its obligations and
express disclaimers of shareholder liabilities is determined not to be
effective. However, the Trustees consider the possibility of the Trust being
unable to meet its obligations as remote, in light of the nature of the Trust's
assets and operations.
LIQUIDATION OR TERMINATION. In the event of the liquidation or termination of
any series of the Trust, the shareholders of the respective funds are entitled
to receive, when, and as declared by the Trustees, as the case may be, the
excess of the assets belonging to the respective fund over the liabilities of
such fund. In either case, the assets so distributed to shareholders will be
distributed among the shareholders in proportion to the number of shares of a
fund's class held by them and recorded on the books of the respective fund.
RIGHTS OF INSPECTION. Shareholders of the Trust have the same inspection
rights as are permitted shareholders of a Massachusetts corporation under
Massachusetts corporate law. Currently, each shareholder of a Massachusetts
corporation is permitted to inspect the records, accounts and books of a
corporation for any legitimate business purpose.
The foregoing is only a summary of certain characteristics of the operations
of each Common Sense Fund and each Common Sense II Fund. The foregoing is not a
complete description of the documents cited. Shareholders should refer to the
provisions of the trust documents and state laws governing each Fund for a more
thorough description.
ADDITIONAL INFORMATION ABOUT
EACH COMMON SENSE FUND
AND EACH COMMON SENSE II FUND
EACH COMMON SENSE FUND. Information concerning the operation and management of
each Common Sense Fund is incorporated herein by reference from the Prospectus
dated May 20, 1996, a copy of which is included herewith, and in the Statement
of Additional Information dated May 20, 1996, which has been filed with the SEC.
A copy of such Statement of Additional Information is available upon request and
without charge by
24
<PAGE> 29
writing the Trust at 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia
30199-0062 or by calling (800) 544-5445.
Management's Discussion of each Common Sense Fund as of the Annual Report
dated October 31, 1995 is attached hereto as Exhibit C.
EACH COMMON SENSE II FUND. Information about each Common Sense II Fund is
incorporated herein by reference from its current Prospectus dated February 8,
1996, as supplemented March 14, 1996, and in the Statement of Additional
Information dated February 8, 1996, as supplemented February 22, 1996 and April
3, 1996, which has been filed with the SEC. A copy of the Prospectus and the
Statement of Additional Information is available upon request and without charge
by writing the Trust at 3100 Breckinridge Boulevard, Duluth, Georgia 30199 or by
calling (800) 544-5445.
Each Common Sense Fund and each Common Sense II Fund are subject to the
informational requirements of the 1940 Act and in accordance therewith file
reports and other information including proxy material, reports and charter
documents with the SEC. These reports can be inspected and copies obtained at
the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its Regional Office at Northwest Atrium Center,
500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such material
can also be obtained from the SEC's Public Reference Branch, Office of Consumer
Affairs and Information Services, SEC, Washington, D.C. 20549 at prescribed
rates.
OTHER BUSINESS
The Trustees of the Trust do not intend to present any other business at the
Meeting. If, however, any other matters are properly brought before the Meeting,
the persons named in the accompanying form of proxy will vote thereon in
accordance with their judgment.
As a general matter, each Common Sense II Fund and each Common Sense Fund does
not intend to hold future regular annual or special meetings of shareholders
unless required by the 1940 Act. Any shareholder who wishes to submit proposals
for consideration at a meeting of shareholders of each Common Sense Fund should
send such proposal to the Trust, 2800 Post Oak Boulevard, Houston, Texas 77056
c/o the Secretary. To be considered for presentation at a shareholders' meeting
rules promulgated by the SEC require that, among other things, a shareholder's
proposal must be received at the offices of the Trust a reasonable time before a
solicitation is made. Timely submission of a proposal does not necessarily mean
that such proposal will be included.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with a solicitation
of proxies by the Trustees of the Trust on behalf of each Common Sense II Fund
to be used at the Joint Special Meeting of Shareholders to be held at 2:30 p.m.
Central Time on July 17, 1996, on Level 5 in Conference Room C of the Transco
Tower, 2800 Post Oak Boulevard, Houston, Texas and at any adjournments thereof.
This Prospectus/Proxy Statement, along with a Notice of the Meeting and a proxy
card, is first being mailed to shareholders of each Common Sense II Fund on or
about May 29, 1996. Only shareholders of record as of the close of business on
the Record Date will be entitled to notice of, and to vote at, the Meeting or
any adjournment thereof. The holders of a majority of the shares of each Common
Sense II Fund outstanding at the close of business on the Record Date present in
person or represented by proxy will constitute a quorum for the Meeting. For
purposes of determining a quorum for transacting business at the Meeting,
abstentions and broker "non-votes" (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have discretionary power) will
be treated as shares that are present but which have not been voted. For this
reason, abstentions and broker non-votes will have the effect of a "no" vote for
purposes of obtaining the requisite approval of the Plan. If the enclosed form
of proxy is properly executed and returned in time to be voted at the Meeting,
the proxies named therein will vote the shares represented by the proxy in
accordance with the instructions marked thereon, Unmarked proxies will be voted
FOR the proposed
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<PAGE> 30
Reorganization and FOR any other matters deemed appropriate. A proxy may be
revoked at any time on or before the Meeting by written notice to the Trust,
2800 Post Oak Boulevard, Houston, Texas 77056 c/o the Secretary. Unless revoked,
all valid proxies will be voted in accordance with the specifications thereon
or, in the absence of such specifications, FOR approval of the Plan and the
Reorganization contemplated thereby.
Approval of the Plan will require the affirmative vote of a majority of the
outstanding shares of each Common Sense II Fund. Shareholders of Class A and
Class B shares of the Common Sense II Fund shall vote together as a single
Class. Shareholders of each Common Sense II Fund are entitled to one vote for
each share.
Proxy solicitations will be made primarily by mail, but proxy solicitations
also may be made by telephone, facsimile, telegraph or personal interviews
conducted by officers, directors and regular and temporary employees of the
Trust, the Transfer Agent, the Distributor and First Data Investors Services
Group, a proxy solicitation firm that has been engaged to assist in proxy
solicitation at an estimated cost of approximately $97,000.
Expenses of the Reorganization, including the costs of proxy solicitation, the
preparation of this Prospectus/Proxy Statement and enclosures attached hereto
and reimbursement of expenses for forwarding solicitation material to beneficial
owners of shares of each Common Sense II Fund will be borne by such Fund.
In the event that sufficient votes to approve the Reorganization are not
received by July 17, 1996, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of the best interests of all shareholders.
The votes of the shareholders of each Common Sense Fund are not being
solicited by this Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of each of the series constituting the Common Sense
Trust as of and for the periods ended October 31, 1995 have been audited by
Ernst & Young LLP, independent auditors, and are incorporated herein by
reference in reliance on the reports of such firm given on their authority as
experts in accounting and auditing.
OTHER INFORMATION
The trustees and officers of each Common Sense II Fund as a group own less
than one percent of the outstanding shares of each Common Sense II Fund.
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<PAGE> 31
EXHIBIT A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION FOR EACH FUND
This Agreement and Plan of Reorganization (the "Agreement") dated May 20,
1996, is adopted by Common Sense Trust, a Massachusetts business trust (the
"Trust"), on behalf of the Trust's Common Sense Fund (the "Acquiring Fund") and
on behalf of the Trust's Common Sense II Fund (the "Acquired Fund"), in
connection with the reorganization of the Acquiring Fund and the Acquired Fund.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1)(D) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all of the assets of the
Acquired Fund in exchange for Class A and Class B shares of beneficial interest
of the Acquiring Fund (collectively, the "Acquiring Fund Shares" and each, an
"Acquiring Fund Share") and the assumption by the Acquiring Fund of all
liabilities of the Acquired Fund and the distribution, after the Closing Date
herein referred to, of Acquiring Fund Shares to the Shareholders of the Acquired
Fund in liquidation of the Acquired Fund and the termination of the Acquired
Fund, all upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, each of the Acquiring Fund and the Acquired Fund are series of the
Trust;
WHEREAS, the Trustees of the Trust have determined that entering into this
Agreement for the Acquiring Fund to acquire the assets and liabilities of the
Acquired Fund is in the best interests of the shareholders of each respective
fund;
NOW, THEREFORE, in consideration of the mutual promises contained herein, and
intending to be legally bound hereby, the Parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set forth
in Sections 7 and 8 hereof, the Trust will convey, transfer and deliver to the
Acquiring Fund at the closing, provided for in Section 2 hereof, all of the
existing assets of the Acquired Fund (including accrued interest to the Closing
Date) consisting of all or substantially all of its property, including, without
limitation, all cash, securities and other marketable securities and dividends
or interest receivables which are owned by the Acquired Fund and any deferred or
prepaid expenses acceptable to the Acquiring Fund as more fully set forth on
Schedule I hereto, and as amended from time to time prior to the Closing Date
(as defined below), free and clear of all liens, encumbrances and claims
whatsoever (the assets so transferred collectively being referred to as the
"Assets").
B. CONSIDERATION. In consideration thereof, the Acquiring Fund agrees that on
the Closing Date the Acquiring Fund will (i) deliver to the Trust, in exchange
for such Assets, full and fractional Class A and Class B shares of the Acquiring
Fund having a net asset value per share calculated as provided in Section 3A
hereof, in an amount equal to the aggregate dollar value of the Assets
determined pursuant to Section 3A of this Agreement net of any liabilities of
the Acquired Fund described in Section 3E hereof (the "Liabilities")
(collectively, the "Acquiring Fund Shares") and (ii) assume all of the Acquired
Fund's Liabilities. All Acquiring Fund Shares delivered to the Trust in exchange
for such Assets shall be delivered at net asset value without sales load,
commission or other transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur on (a) the later of receipt of all
necessary regulatory approvals and the final adjournment of the meeting of
shareholders of the Acquired Fund at which this Agreement will be considered and
approved or (b) such later date as soon as practicable thereafter, as the
Parties may select (the "Closing Date"). On the Closing Date, the Acquiring Fund
shall deliver to the Trust the Acquiring Fund Shares in the amount determined
pursuant to Section 1B hereof and the Trust thereafter shall, in order to
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effect the distribution of such shares to the Acquired Fund shareholders,
instruct the Acquiring Fund to register the pro rata interest in the Acquiring
Fund Shares (in full and fractional shares) of each of the holders of record of
shares of the Acquired Fund in accordance with their holdings of either Class A
or Class B shares and shall provide as part of such instruction a complete and
updated list of such holders (including addresses and taxpayer identification
numbers), and the Acquiring Fund agrees promptly to comply with said
instruction. The Acquiring Fund shall have no obligation to inquire as to the
validity, propriety or correctness of such instruction, but shall assume that
such instruction is valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the Acquired Fund to
be transferred and assumed, respectively, by the Acquiring Fund shall be
computed as of the close of business on the Closing Date, using the valuation
procedures set forth in the then current Prospectus and Statement of Additional
Information of the Acquiring Fund (collectively, the "Acquiring Fund
Prospectus"). The net asset value of Acquiring Fund Shares shall be the net
asset value per share determined as of the close of business on the Valuation
Date by the Acquiring Fund using the same valuation procedures as set forth in
the Acquiring Fund Prospectus.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street Bank
and Trust Company, 225 Franklin Street, Post Office Box 1713, Boston,
Massachusetts 02105-1713, as custodian for the Acquiring Fund (the "Custodian")
for the benefit of the Acquiring Fund, duly endorsed in proper form for transfer
in such condition as to constitute a good delivery thereof, free and clear of
all liens, encumbrances and claims whatsoever. in accordance with the custom of
brokers, and shall be accompanied by all necessary state stock transfer stamps,
the cost of which shall be borne by the Acquired Fund.
C. FAILURE TO DELIVER SECURITIES. If the Trust is unable to make delivery
pursuant to Section 3B hereof to the Custodian of any of the Acquired Fund's
securities for the reason that any of such securities purchased by the Acquiring
Fund have not yet been delivered to it by the Acquired Fund's broker or brokers,
then, in lieu of such delivery, the Trust shall deliver to the Custodian, with
respect to said securities, executed copies of an agreement of assignment and
due bills executed on behalf of said broker or brokers, together with such other
documents as may be required by the Acquiring Fund or Custodian, including
brokers' confirmation slips.
D. SHAREHOLDER ACCOUNTS. The Acquiring Fund, in order to assist the Trust in
the distribution of the Acquiring Fund Shares to the Acquired Fund shareholders
after delivery of the Acquiring Fund Shares to the Trust, will establish
pursuant to the request of the Trust an open account with the Acquiring Fund for
each shareholder of the Acquired Fund and, upon request by the Trust, shall
transfer to such account the exact number of full and fractional shares of the
Acquiring Fund then held by the Trust specified in the instruction provided
pursuant to Section 2 hereof. The Acquiring Fund is not required to issue
certificates representing Acquiring Fund Shares unless requested to do so by a
shareholder. Upon liquidation or dissolution of the Acquired Fund, certificates
representing shares of beneficial interest of the Acquired Fund shall become
null and void.
E. LIABILITIES. The Liabilities shall include all of the Acquired Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.
F. EXPENSES. The Acquired Fund shall bear the expenses for the transactions
contemplated herein.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no event
later than one year after the Closing Date, the Trust shall voluntarily dissolve
and completely liquidate the Acquired Fund, by taking, in accordance with the
Trust's Agreement and Declaration of Trust ("Declaration of Trust") and federal
securities laws, all steps as shall be necessary and proper to effect a complete
liquidation and dissolution of the Acquired Fund. Immediately after the Closing
Date, the stock transfer books relating to the Acquired Fund shall be closed and
no transfer of shares shall thereafter be made on such books.
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4. THE ACQUIRED FUND'S REPRESENTATIONS AND WARRANTIES.
The Trust, on behalf of the Acquired Fund, hereby represents and warrants to
the Acquiring Fund which representations and warranties are true and correct on
the date hereof, and agrees with the Acquiring Fund that:
A. ORGANIZATION. The Trust is a Massachusetts business trust duly formed and
in good standing under the laws of the Commonwealth of Massachusetts and is duly
authorized to transact business in the Commonwealth of Massachusetts. The
Acquired Fund is a separate series of the Trust duly designated in accordance
with the applicable provisions of the Declaration of Trust. The Trust and the
Acquired Fund are qualified to do business in all jurisdictions in which they
are required to be so qualified, except jurisdictions in which the failure to so
qualify would not have a material adverse effect on either the Trust or the
Acquired Fund. The Trust has all material federal, state and local
authorizations necessary to own on behalf of the Acquired Fund all of the
properties and assets allocated to the Acquired Fund and to carry on its
business and the business of the Acquired Fund as now being conducted, except
authorizations which the failure to so obtain would not have a material adverse
effect on the Trust or the Acquired Fund.
B. REGISTRATION. The Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act") as an open-end, diversified management
investment company and such registration has not been revoked or rescinded. The
Acquired Fund is duly designated as a series of the Trust pursuant to the terms
of the Declaration of Trust. The Trust is in compliance in all material respects
with the 1940 Act and the rules and regulations thereunder with respect to its
activities and those undertaken on behalf of the Acquired Fund. All of the
outstanding shares of beneficial interest of the Acquired Fund have been duly
authorized and are validly issued, fully paid and non-assessable and not subject
to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of net assets and the related
statements of operations and changes in net assets of the Acquired Fund for the
year ended October 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, and are in accordance with generally accepted accounting principles
applied on a consistent basis, and such statements (copies of which have been
furnished to the Acquiring Fund) fairly reflect the financial condition of the
Acquired Fund as of such date, and there are no contingent liabilities for the
Acquired Fund as of such date not disclosed therein.
D. MATERIAL AGREEMENTS. The Trust is in compliance as to the Acquired Fund
with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting the Acquired Fund's operations or its assets;
and the Trust has no material agreements or other commitments (other than this
Agreement) which if terminated with respect to the Acquired Fund will result in
liabilities to the Acquired Fund prior to the Closing Date.
E. TAXES. At the date hereof and on the Closing Date, all federal and other
material tax returns and reports of the Acquired Fund required by law to have
been filed by such dates shall have been filed, and all federal and other taxes
shown thereon shall have been paid so far as due, or provision shall have been
made for the payment thereof, and to the best of the Trust's knowledge no such
return is currently under audit and no assessment has been asserted with respect
to any such return. For the most recent fiscal year of its operations, the
Acquired Fund has met the requirements of Subchapter M of the Code for
qualification and treatment as a regulated investment company.
F. CORPORATE AUTHORITY. The Trust on behalf of the Acquired Fund has the
necessary power under its Declaration of Trust to enter into this Agreement and
to consummate the transactions contemplated herein. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein have been duly authorized by the Trust's Trustees, and
except for obtaining approval of the holders of the shares of beneficial
interest of the Acquired Fund, no other corporate acts or proceedings by the
Trust or the Acquired Fund are necessary to authorize this Agreement and the
transactions contemplated herein. This Agreement has been duly executed and
delivered by the Trust on behalf of the Acquired Fund and constitutes a legal,
valid and binding obligation of the Trust enforceable in accordance with its
terms subject to bankruptcy laws and other equitable remedies.
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<PAGE> 34
G. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Trust on behalf of the Acquired Fund does
not and will not (i) result in a material violation of any provision of the
Declaration of Trust or the Certificate of Designation of Series of the Acquired
Fund, or any amendment thereto, (ii) result in a material violation of any
statute, law, judgment, writ, decree, order, regulation or rule of any court or
governmental authority applicable to the Trust, (iii) result in a material
violation or breach of, or constitute a default under any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument or
obligation to which the Trust is subject, or (iv) result in the creation or
imposition or any lien, charge or encumbrance upon any property or assets of the
Trust.
H. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:
(1) any change in the business, results of operations, assets, or financial
condition or the manner of conducting the business of the Acquired Fund, other
than changes in the ordinary course of its business, or any pending or
threatened litigation, which has had or may have a material adverse effect on
such business, results of operations, assets or financial condition;
(2) issued any option to purchase or other right to acquire shares of the
Acquired Fund granted by the Trust to any person other than subscriptions to
purchase shares at net asset value in accordance with terms in the Prospectus
for the Acquired Fund;
(3) any entering into, amendment or termination of any contract or agreement
with respect to the Acquired Fund by the Trust, except as otherwise contemplated
by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of business,
by the Acquired Fund for borrowed money or any commitment to borrow money
entered into by the Acquired Fund or the Trust on behalf of the Acquired Fund;
(5) any amendment of the Declaration of Trust or of the Certificate of
Designation of Series of the Acquired Fund; or
(6) any grant or imposition of any lien, claim, charge or encumbrance (other
than encumbrances arising in the ordinary course of business with respect to
covered options) upon any asset of the Acquired Fund other than a lien for taxes
not yet due and payable.
I. TITLE. On the Closing Date, the Acquired Fund will have good and marketable
title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable and full right, power and authority to sell,
assign, transfer and deliver such Assets; upon delivery of such Assets, the
Acquiring Fund will receive good and marketable title to such Assets, free and
clear of all liens, mortgages, pledges, encumbrances, charges, claims and
equities other than a lien for taxes not yet due and payable.
J. PROXY STATEMENT. The Trust's Proxy Statement, at the time of delivery by
the Trust to the shareholders of the Acquired Fund in connection with a special
meeting of shareholders to approve this transaction, and the Trust's Prospectus
and Statement of Additional Information with respect to the Acquired Fund on the
forms incorporated by reference into such Proxy Statement and as of their
respective dates (collectively, the "Trust's Prospectus/Proxy Statement"), and
at the time the Registration Statement becomes effective, the Registration
Statement insofar as it relates to the Trust and the Acquired Fund and each of
them at all times subsequent thereto and including the Closing Date, as amended
or as supplemented if it shall have been amended or supplemented, conform and
will conform, in all material respects, to the applicable requirements of the
applicable federal and state securities laws and the rules and regulations of
the SEC thereunder, and do not and will not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that no representations or
warranties in this Section 4J apply to statements or omissions made in reliance
upon and in conformity with written information concerning the Acquiring Fund
furnished to the Trust by the Acquiring Fund.
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<PAGE> 35
K. BROKERS. There are no brokers or finders fees payable by the Trust or
Acquired Fund in connection with the transactions provided for herein.
L. FAIR MARKET VALUE. The fair market value on a going concern basis of the
Assets will equal or exceed the Liabilities to be assumed by the Acquiring Fund
and those to which the Assets are subject.
M. LIABILITIES. Except as otherwise provided for herein, the Trust shall use
reasonable efforts, consistent with its ordinary operating procedures, to repay
in full any indebtedness for borrowed money for the account of the Acquired Fund
and have discharged or reserved against all of the Acquired Fund's known debts,
liabilities and obligations including expenses, costs and charges whether
absolute or contingent, accrued or unaccrued.
5. THE ACQUIRING FUND'S REPRESENTATIONS AND WARRANTIES.
The Trust, on behalf of the Acquiring Fund, hereby represents and warrants to
the Acquired Fund, which representations and warranties are true and correct on
the date hereof, and agrees with the Acquired Fund that:
A. ORGANIZATION. The Trust is a Massachusetts business trust duly formed and
in good standing under the laws of the Commonwealth of Massachusetts and is duly
authorized to transact business in the Commonwealth of Massachusetts. The
Acquiring Fund is a separate series of the Trust duly designated in accordance
with the applicable provisions of the Declaration of Trust. The Trust and the
Acquiring Fund are qualified to do business in all jurisdictions in which they
are required to be so qualified, except jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Acquiring Fund. The
Acquiring Fund has all material federal, state and local authorization necessary
to own all of its properties and assets and to carry on its business and the
business thereof as now being conducted, except authorizations which the failure
to so obtain would not have a material adverse effect on the Acquiring Fund.
B. REGISTRATION. The Trust is registered under the 1940 Act as an open-end,
diversified management company and such registration has not been revoked or
rescinded. The Acquiring Fund is duly designated as a series of the Trust
pursuant to the terms of the Declaration of Trust. The Trust is in compliance in
all material respects with the 1940 Act and the rules and regulations thereunder
with respect to its activities and those undertaken on behalf of the Acquiring
Fund. All of the outstanding shares of the Acquiring Fund have been duly
authorized and are validly issued, fully paid and nonassessable and not subject
to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of net assets and the related
statements of operations and changes in net assets of the Acquiring Fund for the
year ended October 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, and are in accordance with generally accepted accounting principles
applied on a consistent basis, and such statements (copies of which have been
furnished to the Acquired Fund) fairly reflect the financial condition of the
Acquiring Fund as of such date, and there are no contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
D. MATERIAL AGREEMENTS. The Trust is in compliance as to the Acquiring Fund
with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting its operations or its assets.
E. TAXES. At the date hereof and on the Closing Date, all federal and other
material tax returns and reports of the Acquiring Fund required by laws to have
been filed by such dates shall have been filed, and all federal and other taxes
shall have been paid so far as due, or provision shall have been made for the
payment thereof, and to the best of the Trust's knowledge no such return is
currently under audit and no assessment has been asserted with respect to any
such return. For the most recent fiscal year of operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company.
F. CORPORATE AUTHORITY. The Trust on behalf of the Acquiring Fund has the
necessary power to enter into this Agreement and to consummate the transactions
contemplated herein. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein have been duly
authorized by the Trust's Trustees, no other corporate acts or proceedings by
the Trust or the Acquiring
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<PAGE> 36
Fund are necessary to authorize this Agreement and the transactions contemplated
herein. This Agreement has been duly executed and delivered by the Trust on
behalf of the Acquiring Fund and constitutes a valid and binding obligation of
the Trust enforceable in accordance with its terms subject to bankruptcy laws
and other equitable remedies.
G. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Trust on behalf of the Acquiring Fund does
not and will not (i) result in a material violation of any provision of the
Declaration of Trust, or any amendment thereto, (ii) result in a material
violation of any statute, law, judgment, writ, decree, order, regulation or rule
of any court or governmental authority applicable to the Trust or (iii) result
in a violation or breach of, or constitute a default under, or result in the
creation or imposition or any lien, charge or encumbrance upon any property or
assets of the Trust pursuant to any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument or obligation to which the Trust is
subject.
H. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Acquiring Fund
which would materially affect its financial condition.
I. SHARES OF THE ACQUIRING FUND: REGISTRATION. The Acquiring Fund Shares to be
issued pursuant to Section 1 hereof will be duly registered under the Securities
Act and all applicable state securities laws.
J. SHARES OF THE ACQUIRING FUND: AUTHORIZATION. The shares of the Acquiring
Fund to be issued pursuant to Section 1 hereof have been duly authorized and,
when issued in accordance with this Agreement, will be validly issued and fully
paid and nonassessable by the Acquiring Fund and conform in all material
respects to the description thereof contained in the Acquiring Fund's
Prospectus.
K. ABSENCE OF CHANGES. From the date hereof through the Closing Date, there
shall not have been any change in the business, results of operations, assets or
financial condition or the manner of conducting the business of the Acquiring
Fund, other than changes in the ordinary course of its business, which has had a
material adverse effect on such business, results of operations, assets or
financial condition.
L. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein filed on Form N-14, the ("Registration Statement"), as of the
effective date of the Registration Statement, and at all times subsequent
thereto up to and including the Closing Date, as amended or as supplemented if
they shall have been amended or supplemented, will conform, in all material
respects, to the applicable requirements of the applicable federal securities
laws and the rules and regulations of the SEC thereunder, and will not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that no representations or warranties in this Section apply to statements or
omissions made in reliance upon and in conformity with written information
concerning the Trust or the Acquired Fund furnished by the Trust.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the Trust on behalf of the Acquiring Fund and the Acquired Fund
each agrees that (except as expressly contemplated or permitted by this
Agreement):
A. OTHER ACTIONS. The Acquired Fund shall operate only in the ordinary course
of business consistent with prior practice. No party shall take any action that
would, or reasonably would be expected to, result in any of its representations
and warranties set forth in this Agreement being or becoming untrue in any
material respect.
B. GOVERNMENT FILINGS; CONSENTS. The Trust, on behalf of the Acquiring Fund
and the Acquired Fund, shall file all reports required to be filed by the Trust
with the SEC between the date of this Agreement and the Closing Date and shall
deliver to the other party copies of all such reports promptly after the same
are filed. Except where prohibited by applicable statutes and regulations, each
party shall promptly provide the other (or its counsel) with copies of all other
filings made by such party with any state, local or federal government
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<PAGE> 37
agency or entity in connection with this Agreement or the transactions
contemplated hereby. Each of the Acquired Fund and the Acquiring Fund shall use
all reasonable efforts to obtain all consents, approvals, and authorizations
required in connection with the consummation of the transactions contemplated by
this Agreement and to make all necessary filings with the Secretary of State of
the Commonwealth of Massachusetts.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the Trust's
Prospectus/Proxy Statement, each Party hereto will cooperate with the other and
furnish to the other the information relating to the Trust, Acquired Fund or the
Acquiring Fund, as the case may be, required by the Securities Act or the
Exchange Act and the rules and regulations thereunder, as the case may be, to be
set forth in the Registration Statement or the Prospectus/Proxy Statement, as
the case may be. The Trust shall promptly prepare and file with the SEC the
Prospectus/Proxy Statement on behalf of the Acquired Fund and the Trust on
behalf of the Acquiring Fund shall promptly prepare and file with the SEC the
Registration Statement, in which the Prospectus/Proxy Statement will be included
as a prospectus. The Acquiring Fund shall use all reasonable efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing. The Acquiring Fund shall also take any action
(other than qualifying to do business in any jurisdiction in which it is now not
so qualified) required to be taken under any applicable state securities laws in
connection with the issuance of the Acquiring Fund's shares in the transactions
contemplated by this Agreement.
D. SHAREHOLDERS MEETING. The Trust shall call a meeting of the Acquired Fund
shareholders to be held as promptly as practicable for the purpose of voting
upon the approval of this Agreement and the transactions contemplated herein,
and shall furnish a copy of the Prospectus/Proxy Statement and form of proxy to
each shareholder of the Acquired Fund as of the record date for such meeting of
shareholders. The Trust's Trustees shall recommend to the Acquired Fund
shareholders approval of this Agreement and the transactions contemplated
herein, subject to fiduciary obligations under applicable law.
E. DISTRIBUTION OF THE SHARES. At Closing the Trust covenants that it shall
cause to be distributed the Acquiring Fund Shares in the proper pro rata amount
for the benefit of the Acquired Fund's shareholders and such that neither the
Trust nor the Acquired Fund shall continue to hold amounts of said shares so as
to cause a violation of Section 12(d)(1) of the 1940 Act. The Trust covenants
further that, pursuant to Section 3G, it shall liquidate and dissolve the
Acquired Fund as promptly as practicable after the Closing Date.
F. BROKERS OR FINDERS. Except as disclosed in writing to the other Party prior
to the date hereof, the Trust represents that no agent, broker, investment
banker, financial advisor or other firm or person is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement, and each Party
shall hold the other harmless from and against any and all claims, liabilities
or obligations with respect to any such fees, commissions or expenses asserted
by any person to be due or payable in connection with any of the transactions
contemplated by this Agreement on the basis of any act or statement alleged to
have been made by such first party or its affiliate.
G. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement, the proper officers and Trustees of each Party to this Agreement
shall take all such necessary action.
H. TAX STATUS OF REORGANIZATION. The intention of the Parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. The Trust, on behalf of the Acquired Fund and the Acquiring
Fund, shall not take any action, or cause any action to be taken (including,
without limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to the
Closing Date, the Trust on behalf of the Acquired Fund and the Acquiring Fund
will take such action, or cause such action to be taken, as is reasonably
necessary to enable Sullivan & Worcester LLP, counsel to both Parties, to render
the tax opinion required herein.
I. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date, the
Acquired Fund shall declare and pay to its shareholders a dividend or other
distribution in an amount large enough so that it will have
A-7
<PAGE> 38
distributed substantially all (and in any event not less than 98%) of its
investment company taxable income (computed without regard to any deduction for
dividends paid) and realized net capital gain, if any, for the current taxable
year through the Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Acquired Fund, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest of the Acquired Fund present in
person or by proxy at a meeting of said shareholders in which a quorum is
constituted.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations and
warranties of the Acquiring Fund contained herein shall be true in all material
respects as of the Closing Date, and as of the Closing Date there shall have
been no material adverse change in the financial condition, results of
operations, business properties or assets of the Acquiring Fund since April 30,
1996, and the Acquired Fund shall have received a certificate of the President
or Vice President of the Trust on behalf of the Acquiring Fund satisfactory in
form and substance to the Acquired Fund so stating. The Acquiring Fund shall
have performed and complied in all material respects with all agreements,
obligations and covenants required by this Agreement to be so performed or
complied with by it on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and exemptions
under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity asking any of the foregoing be pending. There shall
not have been any action taken or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions contemplated
by this Agreement, which makes the consummation of the transactions contemplated
by this Agreement illegal or which has a material adverse affect on the business
operations of the Acquiring Fund.
F. TAX OPINION. The Trust on behalf of the Acquired Fund shall have obtained
an opinion from Sullivan & Worcester LLP, counsel for the Trust and the Acquired
Fund, dated as of the Closing Date, addressed to the Trust on behalf of the
Acquired Fund, that the consummation of the transactions set forth in this
Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Code.
G. OPINION OF COUNSEL. The Trust shall have received the opinion of Sullivan &
Worcester LLP, counsel for the Trust, dated as of the Closing Date, addressed to
the Trust on behalf of the Acquired Fund substantially in the form of and to the
effect that: (i) the Trust is duly formed and in good standing as a business
trust under the laws of the Commonwealth of Massachusetts; (ii) the Trustees
have duly designated the Acquired Fund as a series of the Trust pursuant to the
terms of the Declaration of Trust; (iii) the Acquiring Fund is registered as an
open-end, diversified management company under the 1940 Act; (iv) this Agreement
and the reorganization provided for herein and the execution of this Agreement
have been duly authorized and approved by all requisite action of Trust and this
Agreement has been duly executed and delivered by the Trust on behalf of the
Acquiring Fund and (assuming the Agreement is a valid and binding obligation of
the other parties thereto) is a valid and binding obligation of the Trust; (v)
neither the execution or delivery by the Trust of this Agreement nor the
consummation by the Trust or Acquiring Fund of the transactions contemplated
thereby contravene the Trust's Declaration of Trust, or, to the best of their
knowledge, violate any provision of any statute or any published regulation or
any judgment or order disclosed to them by the Trust as being applicable to the
Trust or the Acquiring Fund; (vi) to the best of their knowledge based solely on
the certificate of an appropriate officer of the Trust attached hereto, there is
no
A-8
<PAGE> 39
pending or threatened litigation which would have the effect of prohibiting any
material business practice or the acquisition of any material property or the
conduct of any material business of the Acquiring Fund or might have a material
adverse effect on the value of any assets of the Acquiring Fund; (vii) except as
to financial statements and schedules and other financial and statistical data
included or incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions, as of the effective
date of the Registration Statement filed pursuant to the Agreement, the portions
thereof pertaining to the Trust and the Acquiring Fund comply as to form in all
material respects with the requirements of the Securities Act, the Securities
Exchange Act and the 1940 Act and the rules and regulations of the SEC
thereunder and no facts have come to counsel's attention which would cause them
to believe that as of the effectiveness of the portions of the Registration
Statement applicable to the Trust and Acquiring Fund, the Registration Statement
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading; and (viii) to the best of their knowledge and
information and subject to the qualifications set forth below, the execution and
delivery by the Trust of the Agreement and the consummation of the transactions
therein contemplated do not require, under the laws of the Commonwealth of
Massachusetts or the federal laws of the United States, the consent, approval,
authorization, registration, qualification or order of, or filing with, any
court or governmental agency or body (except such as have been obtained).
Counsel need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing (a) which may be
required as a result of the involvement of other Parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the Acquired Fund of any material benefit
under the Agreement; or (c) which can be readily obtained without significant
delay or expense to the Acquired Fund, without loss to the Acquired Fund of any
material benefit under the Agreement and without any material adverse effect on
the Acquired Fund during the period such consent, approval, authorization,
registration, qualification or order was obtained. The foregoing opinion relates
only to consents, approvals, authorizations, registrations, qualifications,
orders or filings under (a) laws which are specifically referred to in this
opinion, (b) laws of the Commonwealth of Massachusetts and the federal laws of
the United States of America which, in counsel's experience, are normally
applicable to transactions of the type provided for in the Agreement and (c)
court orders and judgments disclosed to them by the Trust in connection with
this opinion. In addition, although counsel need not specifically consider the
possible applicability to the Trust of any other laws, orders or judgments,
nothing has come to their attention in connection with their representation of
the Trust and the Acquiring Fund in this transaction that has caused them to
conclude that any other consent, approval, authorization, registration,
qualification, order or filing is required.
H. OFFICER CERTIFICATES. The Trust shall have received a certificate of an
authorized officer of the Trust on behalf of the Acquiring Fund, dated as of the
Closing Date, certifying that the representations and warranties set forth in
Section 5 are true and correct on the Closing Date, together with certified
copies of the resolutions adopted by the Trustees shall be furnished to the
Trust.
8. CONDITIONS TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Acquiring Fund of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest of the Acquired Fund present in
person or by proxy at a meeting of said shareholders in which a quorum is
constituted.
B. REPRESENTATIONS WARRANTIES AND AGREEMENTS. Each of the representations and
warranties of the Acquired Fund contained herein shall be true in all material
respects as of the Closing Date, and as of the Closing Date there shall have
been no material adverse change in the financial condition, results of
operations, business, properties or assets of the Acquired Fund since April 30,
1996 and the Acquiring Fund shall have received a certificate of the President
or Vice President of the Trust on behalf of the Acquired Fund satisfactory in
form and substance to the Acquiring Fund so stating. The Trust and the Acquired
Fund shall
A-9
<PAGE> 40
have performed and complied in all material respects with all agreements,
obligations and covenants required by this Agreement to be so performed or
complied with by them on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and exemptions
under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No Injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.
F. TAX OPINION. The Trust, on behalf of the Acquiring Fund, shall have
obtained an opinion from Sullivan & Worcester LLP, counsel for the Trust and the
Acquired Fund, dated as of the Closing Date, addressed to the Acquiring Fund,
that the consummation of the transactions set forth in this Agreement comply
with the requirements of a reorganization as described in Section 368 (a) of the
Code.
G. OPINION OF COUNSEL. The Trust shall have received the opinion of Sullivan &
Worcester LLP, counsel for the Trust, dated as of the Closing Date, addressed to
the Trust on behalf of the Acquiring Fund substantially in the form of and to
the effect that: (i) the Trust is duly formed and in good standing as a business
trust under the laws of the Commonwealth of Massachusetts; (ii) the Trustees of
the Trust have duly designated the Acquired Fund as a series of the Trust
pursuant to the terms of the Declaration of Trust of the Trust; (iii) the
Acquired Fund is registered as an open-end, diversified management company under
the 1940 Act; (iv) this Agreement and the reorganization provided for herein and
the execution of this Agreement have been duly authorized and approved by all
requisite action of the Trust and this Agreement has been duly executed and
delivered by the Trust and (assuming the Agreement is a valid and binding
obligation of the other parties thereto) is a valid and binding obligation of
the Trust; (v) neither the execution or delivery by the Trust of this Agreement
nor the consummation by the Trust or Acquired Fund of the transactions
contemplated thereby contravene the Trust's Declaration of Trust, or, to the
best of their knowledge, violate any provision of any statute or any published
regulation or any judgment or order disclosed to them by the Trust as being
applicable to the Trust or the Acquired Fund; (vi) to the best of their
knowledge based solely on the certificate of an appropriate officer of the Trust
attached hereto, there is no pending or threatened litigation which would have
the effect of prohibiting any material business practice or the acquisition of
any material property or the conduct of any material business of the Acquired
Fund or might have a material adverse effect on the value of any assets of the
Acquired Fund; (vii) except as to financial statements and schedules and other
financial and statistical data included or incorporated by reference therein and
subject to usual and customary qualifications with respect to Rule 10b-5 type
opinions, as of the effective date of the Registration Statement filed pursuant
to the Agreement, the portions thereof pertaining to the Trust and the Acquired
Fund comply as to form in all material respects with the requirements of the
Securities Act, the Securities Exchange Act and the 1940 Act and the rules and
regulations of the Commission thereunder and no facts have come to counsel's
attention which would cause them to believe that as of the effectiveness of the
portions of the Registration Statement applicable to the Trust and Acquired
Fund, the Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and (viii) to the best
of their knowledge and information and subject to the qualifications set forth
below, the execution and delivery by the Trust of the Agreement and the
consummation of the transactions therein contemplated do not require, under the
laws of the Commonwealth of Massachusetts or the federal laws of the United
States. the consent, approval, authorization, registration, qualification or
order of, or filing with, any court or governmental agency or body (except such
as have been obtained). Counsel need express no opinion, however, as to any such
consent, approval, authorization, registration, qualification, order or filing
(a) which may be required as a result of the involvement of other Parties to the
Agreement in the transactions contemplated by the Agreement because of
A-10
<PAGE> 41
their legal or regulatory status or because of any other facts specifically
pertaining to them; (b) the absence of which does not deprive the Acquiring Fund
of any material benefit under the Agreement; or (c) which can be readily
obtained without significant delay or expense to the Acquiring Fund, without
loss to the Acquiring Fund of any material benefit under the Agreement and
without any material adverse effect on the Acquiring Fund during the period such
consent, approval, authorization, registration, qualification or order was
obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a) laws
which are specifically referred to in this opinion, (b) laws of the Commonwealth
of Massachusetts and the federal laws of the United States of America which, in
counsel's experience, are normally applicable to transactions of the type
provided for in the Agreement and (c) court orders and judgments disclosed to
them by the Trust in connection with this opinion. In addition, although counsel
need not specifically consider the possible applicability to the Trust of any
other laws, orders or judgments, nothing has come to their attention in
connection with their representation of the Trust and the Acquired Fund in this
transaction that has caused them to conclude that any other consent, approval,
authorization, registration, qualification, order or filing is required.
J. OFFICER CERTIFICATES. The Trust shall have received a certificate of an
authorized officer of the Trust on behalf of the Acquired Fund, dated as of the
Closing Date, certifying that the representations and warranties set forth in
Section 4 are true and correct on the Closing Date, together with certified
copies of the resolutions adopted by the Trustees and shareholders.
9. AMENDMENT; TERMINATIONS; NON-SURVIVAL OF COVENANTS, WARRANTIES AND
REPRESENTATIONS.
(A) The Parties hereto may, by agreement in writing authorized by their
Trustees, amend this Agreement at any time before or after approval thereof by
the shareholders of the Acquired Fund but after such approval, no amendment
shall be made which substantially changes the terms hereof.
(B) At any time prior to the Closing Date, any of the Parties may by written
instrument signed by it (i) waive any inaccuracies in the representations and
warranties made to it contained herein and (ii) waive compliance with any of the
covenants or conditions made for its benefit contained herein.
(C) The Acquired Fund may terminate this Agreement at any time prior to the
Closing Date by notice to the Acquiring Fund if (i) a material condition to its
performance hereunder or a material covenant of the Acquiring Fund contained
herein shall not be fulfilled on or before the date specified for the
fulfillment thereof or (ii) a material default or material breach of this
Agreement shall be made by the Acquiring Fund.
(D) The Acquiring Fund may terminate this Agreement at any time prior to the
Closing Date by notice to the Acquired Fund if (i) a material condition to its
performance hereunder or a material covenant of the Acquired Fund contained
herein shall not be fulfilled on or before the date specified for the
fulfillment thereof or (ii) a material default or material breach of this
Agreement shall be made by the Acquired Fund.
(E) This Agreement may be terminated at any time prior to the Closing Date
whether before or after approval by the shareholders of the Acquired Fund,
without liability on the part of either Party hereto or its Trustees, officers
or shareholders by any Party on written notice to the other Party, and shall be
terminated without liability as of the close of business on July 30, 1996, or
such later date as agreed upon by the Parties, if the Closing Date is not on or
prior to such date.
(F) No representation, warranties or covenants in or pursuant to this
Agreement (including certificates of officers) shall survive the Reorganization.
10. LIMITED LIABILITY.
Copies of the Declaration of Trust, as amended, establishing the Trust are on
file with the Secretary of the Commonwealth of Massachusetts and with the City
Clerk for the City of Boston, and notice is hereby given that this Agreement is
executed on behalf of the Trust by officers of the Trust as officers and not
individually and that the obligations of or arising out of this Agreement are
not binding upon any of the Trustees, officers
A-11
<PAGE> 42
shareholders, employees or agents of the Trust individually but are binding only
upon the assets and property of the Acquired Fund or the Acquiring Fund.
11. NOTICES.
All notices hereunder shall be sufficiently given for all purposes hereunder
if in writing and delivered personally or sent by registered mail or certified
mail, postage prepaid, addressed to Common Sense Trust, 2800 Post Oak Boulevard,
Houston, Texas 77056, c/o Secretary. Any notice shall be deemed to have been
served or given as of the date such notice is delivered personally or mailed.
12. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the Parties
hereto and their successors and assigns. This Agreement shall not be assigned by
any Party without the prior written consent of the other Parties.
13. GENERAL.
This Agreement supersedes all prior agreements between the Parties (written or
oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the Parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the Trust, on
behalf of the Acquiring Fund and the Acquired Fund, and delivered to each of the
Parties hereto. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. This Agreement is for the sole benefit of the Parties thereto,
and nothing in this Agreement, expressed or implied, is intended to confer upon
any other person any rights or remedies under or by reason of this Agreement.
This Agreement shall be governed by and construed in accordance with the laws of
the Commonwealth of Massachusetts without regard to principles of conflicts or
choice of law.
A-12
<PAGE> 43
IN WITNESS WHEREOF, the Parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
COMMON SENSE TRUST,
ON BEHALF OF COMMON
SENSE FUND
By: ____________________________
Title: ___________________________
Attest: ______________________
Title: ______________________
COMMON SENSE TRUST,
ON BEHALF OF COMMON
SENSE II FUND
By: ____________________________
Title: ___________________________
Attest: ______________________
Title: ______________________
A-13
<PAGE> 44
EXHIBIT B
5% of Beneficial Ownership
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF CLASS OF PERCENT OF
OF HOLDER FUND OWNERSHIP SHARES OWNERSHIP
- --------------------------------- --------------------- ------------ -------- ------------
<S> <C> <C> <C> <C>
PFS Investments, Inc. Growth II 1,394,154 A 56.5%
3100 Breckinridge Blvd. Growth II 2,341,401 B 58.6%
Bldg. 200 Growth and Income II 814,679 A 52.3%
Duluth, Georgia Growth and Income II 1,445,501 B 54.2%
30199-0001 Government II 285,732 A 34.4%
Government II 458,243 B 42.7%
</TABLE>
B-1
<PAGE> 45
EXHIBIT C
MANAGEMENT'S DISCUSSION OF COMMON SENSE FUNDS
AS OF OCTOBER 31, 1995
GROWTH AND GROWTH AND INCOME
The stock market as a whole benefited from continuing economic growth that
generated strong corporate profits without increased inflation. Growth and
Growth and Income, in particular, benefited from being heavily invested in
technology and finance stocks, which were two of the best performing sectors of
the market during the past year.
One of the most positive aspects of the performance of technology stocks is
that the rally has been driven by strong fundamentals -- not speculation. There
is tremendous demand for real products that likely will be with us for some time
to come. It's not just Microsoft's Windows 95, which is positively impacting a
variety of industries from hardware to software to retail. There's also the
Internet, which practically no one had heard of only a year ago but is now
changing the direction of telecommunications.
During the latter part of the reporting period, Growth and Growth and Income
shifted their emphasis within technology from hardware to software companies,
which we believe offer more growth potential.
The Adviser believes the technology sector has produced the biggest earnings
gains, product demand continues to be strong, and stock prices are not high
compared to the underlying value of the companies. Still, while the Adviser is
very optimistic about technology stocks, each Fund remains diversified in line
with the Adviser's equity investment philosophy.
Throughout the year, both Growth and the Growth and Income gradually reduced
their holdings of stocks that are most affected by changing economic conditions,
often called cyclical stocks. As a result, the Adviser reduced the percentage of
the Funds' assets invested in the stocks of raw materials and manufacturing
companies.
These Funds were invested instead in a broader range of stocks, including
those of health care and retail companies. The Adviser expects the retail
industry to be one of the next sectors to benefit from continued economic
growth.
The Class 1 shares of Growth achieved a total return at net asset value
(without a sales charge) of 24.01 percent, including reinvestment of dividends
totaling $0.155 per share and capital gains distribution of $1.035 per share.
The Class 1 shares of Growth and Income achieved a total return at net asset
value of 22.45 percent for the same period, including reinvestment of dividends
totaling $0.30 per share and a capital gains distribution of $1.595 per share.
C-1
<PAGE> 46
By comparison, the Standard & Poor's 500-Stock Index, a broad-based, unmanaged
index that reflects general stock market performance, achieved a total return of
26.36 percent for the period. The Index does not reflect any commissions or fees
that would be paid by an investor purchasing the securities it represents.
COMPARISON OF $10,000 INVESTMENT IN
COMMON SENSE GROWTH FUND VS. S&P 500
<TABLE>
<CAPTION>
COMMON SENSE
GROWTH FUND COMMON SENSE
AT MAXIMUM STANDARD & GROWTH FUND
MEASUREMENT PERIOD OFFERING POOR'S 500- AT NET ASSET
(FISCAL YEAR COVERED) PRICE STOCK IN DEX* VALUE
<S> <C> <C> <C>
4/14/87 9226 10000 10000
1987 7851 8510 8669
1988 8787 9252 10999
1989 11243 12187 13290
1990 10860 11771 12867
1991 15050 16313 16782
1992 16124 17477 18059
1993 17634 19114 19871
1994 17230 18676 20140
10/31/95 21939 23780 25985
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
1 YEAR 5 YEARS (4/14/87)
------- -------- ---------
<S> <C> <C> <C>
Average Annual Total Return
At Net Asset Value.................................................. 24.01% 17.31% 10.66%
----- ----- -----
With Maximum 8.50% Sales Charge..................................... 13.48% 15.24% 9.52%
----- ----- -----
</TABLE>
COMPARISON OF $10,000 INVESTMENT IN
COMMON SENSE GROWTH & INCOME FUND VS. S&P 500
<TABLE>
<CAPTION>
COMMON SENSE
GROWTH & COMMON SENSE
INCOME FUND GROWTH &
AT MAXIMUM STANDARD & INCOME FUND
MEASUREMENT PERIOD OFFERING POOR'S 500 - AT NET ASSET
(FISCAL YEAR COVERED) PRICE STOCK INDEX* VALUE
<S> <C> <C> <C>
4/14/87 9226 10000 10000
1987 8008 8680 8691
1988 8817 9557 10099
1989 11218 12159 13290
1990 10870 11782 12876
1991 14272 15470 16782
1992 15318 16603 18059
1993 16758 18164 19851
1994 16227 17589 20140
10/31/95 20558 22283 25985
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
1 YEAR 5 YEARS (4/14/87)
------- -------- ---------
<S> <C> <C> <C>
Average Annual Total Return
At Net Asset Value.................................................. 22.45% 15.33% 9.83%
----- ----- -----
With Maximum 8.50% Sales Charge..................................... 12.07% 13.29% 8.69%
----- ----- -----
</TABLE>
C-2
<PAGE> 47
GOVERNMENT
The past year was characterized, almost entirely, by falling interest rates
and lower inflation. The period started with 10-year U.S. Treasury note yields
near 8 percent and ended with yields near 6 percent. As a consequence, most
fixed-income market indices experienced double-digit total rates of return (the
combined value of dividends received on a fixed-income security and any increase
in the value of the security itself).
The rally occurred as it became clear that the Federal Reserve Board's efforts
to slow both economic growth and inflation rates were working. Most measures of
inflation showed an annualized rate below 3 percent.
As a result of slower economic growth and inflation rates the Government
responded early in the reporting period by increasing the Fund's sensitivity to
changes in interest rates, as it became more apparent that the fundamental
background was becoming more positive for bonds. The sensitivity, called
duration, was set so that the Fund's net asset value moved about the same as
that of a seven-year Treasury note, a level that is somewhat above its long-term
average.
In addition, the Government increased its holdings in federally sponsored
mortgage-backed securities, such as Government National Mortgage Association
notes and bonds, during the fourth quarter of 1994 and first quarter of 1995.
The Adviser purchased 30-year securities which it believed had minimal risk of
being prepaid by homeowners as interest rates fell.
The Class 1 shares of Government achieved a total return at net asset value of
14.27 percent for the 12 months ended October 31, 1995, including reinvestment
of dividends totaling $0.6979 per share. By comparison, the Lehman Brothers
General U.S. Government Index achieved a total return of 15.40 percent. This
unmanaged index is used as a benchmark for many government funds, but it does
not reflect any commissions or fees that would be paid by an investor purchasing
the securities it represents.
COMPARISON OF $10,000 INVESTMENT IN COMMON SENSE GOVERNMENT FUND VS.
LEHMAN BROTHERS MUTUAL FUND GENERAL U.S. GOVERNMENT INDEX
<TABLE>
<CAPTION>
COMMON SENSE LEHMAN
GOVERNMENT BROTHERS MU-
FUND AT COMMON SENSE TUAL FUND
MAXIMUM GOVERNMENT FU GENERAL U.S.
MEASUREMENT PERIOD OFFERING ND AT NET AS- GOVERNMENT
(FISCAL YEAR COVERED) PRICE SET VALUE INDEX*
<S> <C> <C> <C>
4/14/87 9328 10000 10000
1987 9371 10046 10600
1988 9992 10712 11224
1989 11422 12245 12483
1990 12346 13235 13915
1991 14253 15279 15630
1992 15220 16316 17388
1993 16465 17652 18974
1994 15718 16850 18542
10/31/95 17859 19145 20912
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
1 YEAR 5 YEARS (4/14/87)
------- -------- ---------
<S> <C> <C> <C>
Average Annual Total Return
At Net Asset Value.................................................. 14.27% 8.50% 7.89%
----- ----- ---- -
With Maximum 6.75% Sales Charge..................................... 6.59% 7.00% 7.02%
----- ----- ---- -
</TABLE>
C-3
<PAGE> 48
COMMON SENSE TRUST
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 544-5445
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 20, 1996
This Statement of Additional Information provides information about the
Common Sense Growth Fund, the Common Sense Growth and Income Fund and the Common
Sense Government Fund, each of which is a separate series of Common Sense Trust
(the "Trust"), (individually the "Common Sense Fund" or collectively the "Common
Sense Funds"), each an open-end management investment company, in addition to
information contained in the Prospectus/Proxy Statement of each Common Sense
Fund, dated May 20, 1996, which also serves as the Proxy Statement of the Common
Sense II Growth Fund, Common Sense II Growth and Income Fund and Common Sense II
Government Fund, each of which is a separate series of the Trust (individually
the "Common Sense II Fund" or collectively the "Common Sense II Fund") in
connection with the issuance of Class A and Class B shares of each Common Sense
Fund series to shareholders of each Common Sense II Fund. This Statement of
Additional Information is not a prospectus. It should be read in conjunction
with the Prospectus/Proxy Statement, into which it has been incorporated by
reference and which may be obtained by contacting the Trust located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, telephone no. (800) 544-5445.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of each Common Sense II Fund.................................. 1
Additional Information About each Common Sense Fund................................... 1
Additional Information About each Common Sense II Fund................................ 2
Financial Statements.................................................................. 2
</TABLE>
Each Common Sense Fund will provide, without charge, upon the written or
oral request of any person to whom this Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Statement of Additional
Information is a part.
PROPOSED REORGANIZATION OF EACH COMMON SENSE II FUND.
The shareholders of each Common Sense II Fund are being asked to approve
the acquisition by each respective Common Sense Fund of all of the assets and
liabilities of each Common Sense II Fund in exchange for Class A and B shares of
the respective Common Sense Fund (the "Reorganization").
For detailed information about the Reorganization, shareholders should
refer to the Prospectus/Proxy Statement.
ADDITIONAL INFORMATION ABOUT THE COMMON SENSE FUNDS
Incorporated herein by reference to the Statement of Additional Information
of the Common Sense Funds, dated May 20, 1996, attached as Appendix A to this
Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE COMMON SENSE II FUNDS
Incorporated herein by reference to the Statement of Additional Information
of the Common Sense II Funds, dated February 8, 1996, as supplemented February
22, 1996 and April 3, 1996, attached as Appendix B to this Statement of
Additional Information.
B-1
<PAGE> 49
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of each Common Sense Fund for the fiscal year ended
October 31, 1995, attached as Appendix A to this Statement of Additional
Information and (ii) the audited financial statements of each Common Sense II
Fund for the fiscal year ended October 31, 1995, attached as Appendix B to this
Statement of Additional Information.
B-2
<PAGE> 50
Appendix A
STATEMENT OF ADDITIONAL INFORMATION
COMMON SENSE TRUST
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, IL 60181
MAY 20, 1996
Common Sense Trust (the "Trust") is a diversified, open-end management
investment company with a number of separate Funds, seven of which are discussed
herein: the Common Sense Emerging Growth Fund (the "Emerging Growth Fund"), the
Common Sense International Equity Fund (the "International Equity Fund"), Common
Sense Growth Fund (the "Growth Fund"), the Common Sense Growth and Income Fund
(the "Growth and Income Fund"), the Common Sense Government Fund (the
"Government Fund"), the Common Sense Municipal Bond Fund (the "Municipal Bond
Fund") and the Common Sense Money Market Fund (the "Money Market Fund"). Each
Fund is in effect a separate fund issuing its own shares.
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus bearing the same date and should be read in conjunction with the
Prospectus. A Prospectus may be obtained without charge by writing PFS
Distributors, Inc. at 3100 Breckinridge Boulevard, Bldg. 200, Duluth, Georgia
30199-0001.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................................ 2
GOALS AND INVESTMENT POLICIES.............................................................. 3
INVESTMENT RESTRICTIONS.................................................................... 18
TRUSTEES AND EXECUTIVE OFFICERS............................................................ 23
INVESTMENT ADVISORY AGREEMENTS............................................................. 29
DISTRIBUTOR................................................................................ 32
PORTFOLIO TURNOVER......................................................................... 32
DISTRIBUTION PLANS......................................................................... 33
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................................... 34
DETERMINATION OF NET ASSET VALUE........................................................... 38
PURCHASE AND REDEMPTION OF SHARES.......................................................... 40
EXCHANGE PRIVILEGE......................................................................... 42
DIVIDENDS, DISTRIBUTIONS AND TAXES......................................................... 43
OTHER INFORMATION.......................................................................... 46
FINANCIAL STATEMENTS....................................................................... 50
APPENDIX 1................................................................................. 52
APPENDIX 2................................................................................. 54
</TABLE>
<PAGE> 51
GENERAL INFORMATION
Van Kampen American Capital Asset Management, Inc. (the "Adviser") is a
subsidiary of Van Kampen American Capital, Inc. ("VKAC") which is a wholly-owned
subsidiary of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is
controlled, through the ownership of a substantial majority of its common stock,
by the Clayton & Dubilier Private Equity Fund IV Limited Partnership (the "C&D
L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York private investment firm. The general partner
of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel,
Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than seven
percent of the common stock of VK/AC Holding and have the right to acquire, upon
the exercise of options, approximately an additional 13% of the common stock of
VK/AC Holding. The Adviser, together with its predecessors, has been in the
investment advisory business since 1926.
Smith Barney Mutual Funds Management Inc. (the "Subadviser") provides
investment advisory services to the Adviser in connection with the International
Equity Fund. The Subadviser was incorporated on March 12, 1968 and renders
investment management advice to investment companies with aggregate assets under
management in excess of $65 billion as of December 31, 1995. The Subadviser is
an affiliate of Smith Barney Inc. and a wholly-owned subsidiary of Smith Barney
Holdings Inc. which in turn is a wholly-owned subsidiary of Travelers Group Inc.
("Travelers"). Travelers is engaged primarily in investment services, consumer
finance services and insurance services.
PFS Distributors, Inc. (the "Distributor") is an indirect wholly-owned
subsidiary of Travelers. PFS Shareholder Services (the "Transfer Agent"), is a
subsidiary of PFS Services, Inc., an affiliate of Primerica Financial Services,
Inc. ("Primerica Financial"). PFS Investments, Inc. ("PFS Investments") is an
indirect wholly-owned subsidiary of Travelers.
As of February 29, 1996, no person was known to own beneficially or of
record as much as five percent of the outstanding shares of any Fund of the
Trust except as discussed herein. PFS Investments holds of record as Custodian
for certain employee benefit plans and individual retirement accounts the
following percentages of the outstanding shares of the listed portfolios:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF CLASS OF PERCENTAGE
OF HOLDER FUND OWNERSHIP SHARES OWNERSHIP
- ----------------------------------- --------------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
PFS Investments Emerging Growth 955,158 A 60.5%
3100 Breckinridge Blvd. Emerging Growth 768,861 B 62.5%
Bldg. 200 International Equity 241,488 A 59.3%
Duluth, Georgia 30199-0001 International Equity 188,448 B 60.4%
Growth 1,120,036 A 55.0%
Growth 116,669,959 1 67.6%
Growth 1,921,713 B 57.6%
Growth & Income 31,308,125 1 58.2%
Growth & Income 654,898 A 51.1%
Growth & Income 1,171,740 B 52.5%
Government 13,660,731 1 45.2%
Government 256,547 A 36.3%
Government 440,688 B 43.3%
Money Market 11,433,320 1 18.5%
</TABLE>
2
<PAGE> 52
GOALS AND INVESTMENT POLICIES
The following disclosures supplement disclosures set forth under an
identical caption in the Prospectus and do not, standing alone, present a
complete and accurate explanation of the matters disclosed. Readers must refer
also to this caption in the Prospectus for a complete presentation of the
matters disclosed below.
EMERGING GROWTH FUND
The Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks of small and medium sized
companies considered by the Adviser to be emerging growth companies.
INTERNATIONAL EQUITY FUND
The Fund seeks total return on its assets from growth of capital and
income. The Fund seeks to achieve its goal by investing at least 65% of its
assets in a diversified portfolio of equity securities of established non-United
States issuers.
GROWTH FUND
The Fund seeks capital appreciation through investments in common stocks
and options on common stocks. The Fund may also engage in transactions involving
stock index futures contracts and options on such contracts. Any income realized
on its investments will be purely incidental to the goal of capital
appreciation.
GROWTH AND INCOME FUND
The Fund seeks reasonable growth and income through investments in equity
securities that provide dividend and interest income, including common and
preferred stocks and securities convertible into common and preferred stocks.
In general, the Fund intends to invest in securities that have yielded a
dividend or interest return to security holders within the past twelve months,
however, it may invest in non-income producing investments held for anticipated
increase in value. The Fund may also engage in transactions in options, futures
contracts, and options on futures.
GOVERNMENT FUND
The Fund seeks high current return consistent with preservation of capital
by investing in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Fund may also purchase and sell options and
engage in transactions in interest rate futures contracts and options on such
contracts in order to hedge against changes in interest rates.
The Fund seeks high current return consistent with preservation of capital.
The Fund intends to invest at least 80% of its assets in debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
Repurchase agreements may be entered into with domestic banks or broker-dealers
deemed creditworthy by the Adviser solely for purposes of investing the Fund's
cash reserves or when the Fund is in a temporary defensive posture. The Fund may
write covered or fully collateralized call options on U.S. Government securities
and enter into closing or offsetting purchase transactions with respect to
certain of such options. The Fund may also write secured put options and enter
into closing or offsetting purchase transactions with respect to such options.
The Fund may write both listed and over-the-counter options as described in the
Prospectus.
The Fund seeks to obtain a high current return from the following sources:
- interest paid on the Fund's portfolio securities;
- premiums earned upon the expiration of options written;
- net profits from closing transactions; and
- net gains from the sale of portfolio securities on the exercise of
options or otherwise.
3
<PAGE> 53
The Fund is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect the
value of and yields on U.S. Government securities. Accordingly, there is no
assurance that the Fund's investment objective will be achieved.
MORTGAGE RELATED SECURITIES. The Government Fund may invest in
mortgage-related securities, including those representing an undivided ownership
interest in a pool of mortgage loans, e.g., GNMA, FNMA, FHLMC Certificates.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National Mortgage
Association ("GNMA") is a wholly owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities backed
by pools of mortgages.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid and owned on the mortgage pool net of fees paid to the
"issuer" and GNMA, regardless of whether or not the mortgagor actually makes the
payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FMHA"), or guaranteed by the Veterans Administration
("VA"). Once a pool of such mortgages is assembled and approved by GNMA, the
GNMA guarantee is backed by the full faith and credit of the U.S. Government.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before maturity of the mortgages in the pool. The Fund normally
will not distribute principal payments (whether regular or prepaid) to its
shareholders. Rather, it will invest such payments in additional mortgage-
related securities of the types described above or other U.S. Government
securities. Interest received by the Fund will, however, be distributed to
shareholders. Foreclosures impose no risk to principal investment because of the
GNMA guarantee.
As prepayment rates of the individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of single-family dwelling mortgages with 25- to 30-year maturities, the
type of mortgages backing the vast majority of GNMA Certificates, is
approximately 12 years. Therefore, it is customary to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather
than at par.
2. After issuance, Certificates usually trade in the secondary market
at a premium or discount.
4
<PAGE> 54
3. Interest is paid monthly rather than semi-annually as is the case
for traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12 year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of one percent more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a twelve-year life.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC") was
created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. FHLMC issues two types of mortgage
pass-through securities, mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. Like GNMA Certificates, PCs are assumed to
be prepaid fully in their twelfth year. FHLMC guarantees timely monthly payment
of interest of PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately 10 years.
FNMA SECURITIES. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages insured by the
FHA. FNMA issues guarantee mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and the full return of principal. Like GNMA Certificates,
FNMA Certificates are assumed to be prepaid fully in their twelfth year.
Risk of foreclosure of the underlying mortgages is greater with FHLMC and
FNMA securities because, unlike GNMA securities, FHLMC and FNMA securities are
not guaranteed by the full faith and credit of the U.S. Government.
MUNICIPAL BOND FUND
The Fund seeks as high a level of current interest income exempt from
federal income tax as is consistent with the preservation of capital.
MUNICIPAL BONDS. "Municipal Bonds" include debt obligations issued to
obtain funds for various public purposes, including construction of a wide range
of public facilities, refunding of outstanding obligations and obtaining funds
for general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development obligations are
issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Bonds if the interest paid thereon is exempt from federal income tax.
Municipal Bonds also include short-term tax-exempt municipal obligations such as
tax anticipation notes, bond anticipation notes, revenue anticipation notes, and
variable rate demand notes.
5
<PAGE> 55
The two principal classifications of Municipal Bonds are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of full faith, credit, and taxing power for
the payment of principal and interest. Revenue or special obligations are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or from
other specific revenue sources such as the user of the facility being financed.
Industrial development bonds, including pollution control bonds, are revenue
bonds and do not constitute the pledge of the credit or taxing power of the
issuer of such bonds. The payment of the principal and interest on such
industrial revenue bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. The Fund's portfolio may also include "moral obligation" bonds which
are normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality which is the issuer of the bonds.
When the Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the trade.
Failure of the buyer or seller to do so may result in the Fund missing the
opportunity of obtaining a price considered to be advantageous.
On a temporary basis, due to market conditions, the Fund may invest in
Municipal Notes which include demand notes and short-term municipal obligations
(such as tax anticipation notes, revenue anticipation notes, construction loan
notes and short-term discount notes) and tax-exempt commercial paper, provided
that such obligations have the ratings described in the Prospectus. Demand notes
are obligations which normally have a stated maturity in excess of one year, but
permit any holder to demand payment of principal plus accrued interest upon a
specified number of days' notice. Frequently, such obligations are secured by
letters of credit or other credit support arrangement provided by banks. The
issuer of such notes normally has a corresponding right, after a given period,
to prepay at its discretion the outstanding principal of the note plus accrued
interest upon a specified number of days' notice to the noteholders. The
interest rate on a demand note may be based on a known lending rate, such as a
bank's prime rate, and may be adjusted when such rate changes, or the interest
rate on a demand note may be a market rate that is adjusted at specified
intervals. Participation interests in variable rate demand notes will be
purchased only if, in the opinion of counsel, interest income on such interest
will be tax-exempt when distributed as dividends to shareholders.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the maturity of the obligation, and the rating of
the issue. The ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of the Municipal Bonds in
which the Fund invests to meet their obligations for the payment of interest and
principal when due. There are variations in the risks involved in holding
Municipal Bonds, both within a particular classification and among
classifications, depending on numerous factors. Furthermore, the rights of
holders of Municipal Bonds and the obligations of the issuers of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally, and such laws, if
any, which may be enacted by Congress or state legislatures imposing a
moratorium on the payment of principal and interest or imposing other
constraints or conditions on the payments of principal and interest on Municipal
Bonds.
TEMPORARY INVESTMENTS. The taxable securities in which the Municipal Bond
Fund may invest as temporary investments include U.S. Government securities,
domestic bank certificates of deposit and repurchase agreements.
U.S. Government securities include obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line or credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality, or (d)
the credit of the instrumentality. Such agencies or instrumentalities include,
but are not limited to, the Federal National Mortgage Association, the
Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration. The Fund may not invest in a certificate of
6
<PAGE> 56
deposit issued by a commercial bank unless the bank is organized and operating
in the United States and has total assets of at least $500 million and is a
member of the Federal Deposit Insurance Corporation.
MONEY MARKET FUND
The Fund seeks protection of capital and a high level of current income
through investments in money market securities.
The Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing the Fund's securities pursuant to Rule 2a-7 under the Investment Company
Act of 1940 (the "1940 Act"), certain requirements of which are summarized
below.
In accordance with Rule 2a-7, the Fund is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Trustees to present minimal credit risks and which are rated
in one of the two highest rating categories for debt obligations by at least two
nationally recognized statistical rating organizations (or one rating
organization if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Trustees. The nationally recognized statistical rating
organizations currently rating instruments of the type the Fund may purchase are
Moody's Investors Service, Standard & Poor's Corporation, Fitch Investors
Services, Inc., Duff and Phelps, Inc. and IBCA Limited and IBCA Inc. See
Appendix hereto.
In addition, the Fund will not invest more than 5% of its total assets in
the securities (including the securities collateralizing a repurchase agreement)
of, or subject to puts issued by, a single issuer, except that (i) the Fund may
invest more than 5% of its total assets in a single issuer for a period of up to
three business days in certain limited circumstances, (ii) the Fund may invest
in obligations issued or guaranteed by the U.S. Government without any such
limitation, and (iii) the limitation with respect to puts does not apply to
unconditional puts if no more than 10% of the Fund's total assets is invested in
securities issued or guaranteed by the issuer of the unconditional put.
Investments in rated securities not rated in the highest category by at least
two rating organizations (or one rating organization if the instrument was rated
by only one such organization), and unrated securities not determined by the
Trustees to be comparable to those rated in the highest category, will be
limited to 5% of the Fund's total assets, with the investment in any one such
issuer being limited to no more than the greater of 1% of the Fund's total
assets or $1,000,000. As to each security, these percentages are measured at the
time the Fund purchases the security. There can be no assurance that the Fund
will be able to maintain a stable net asset value of $1.00 per share.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with broker-dealers or
domestic banks. The Trustees will review on a continuing basis those
institutions which enter into a repurchase agreement with the Fund. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, usually not more than seven days from
the date of purchase, thereby determining the yield during the purchaser's
holding period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered to be loans under the 1940 Act. The Fund will
make payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement is required to maintain the value of the underlying
securities marked to market daily at not less than the repurchase price. The
underlying securities (normally securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights.
7
<PAGE> 57
REVERSE REPURCHASE AGREEMENTS
The International Equity Fund may invest in reverse repurchase agreements.
The International Equity Fund does not currently intend to commit more than 5%
of its net assets to reverse repurchase agreements. The Fund may enter into
reverse repurchase agreements with broker/dealers and other financial
institutions. Such agreements involve the sale of portfolio securities with an
agreement to repurchase the securities at an agreed-upon price, date and
interest payment and are considered to be borrowings by the International Equity
Fund and are subject to the borrowing limitations set forth under "Investment
Restrictions." Since the proceeds of reverse repurchase agreements are invested,
this would introduce the speculative factor known as "leverage." The securities
purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally, the effect of such a transaction is that the
International Equity Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only advantageous
if the Fund has an opportunity to earn a greater rate of interest on the cash
derived from the transaction than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available, and
the Fund intends to use the reverse repurchase technique only when the
Subadviser believes it will be advantageous to the International Equity Fund.
The use of reverse repurchase agreements may exaggerate any interim increase or
decrease in the value of the Fund's assets. The Fund's custodian bank will
maintain a separate account for the Fund with securities having a value equal to
or greater than such commitments.
COMMERCIAL BANK OBLIGATIONS
For the purposes of the International Equity Fund's investment policies
with respect to bank obligations, obligations of foreign branches of U.S. banks
and of foreign banks may be general obligations of the parent bank in addition
to the issuing bank, or may be limited by the terms of a specific obligation and
by government regulation. As with investment in foreign securities in general,
investments in the obligations of foreign branches of U.S. banks and of foreign
banks may subject the International Equity Fund to investment risks that are
different in some respects from those of investments in obligations of domestic
issuers. Although the Fund will typically acquire obligations issued and
supported by the credit of U.S. or foreign banks having total assets at the time
of purchase in excess of U.S. $1 billion (or the equivalent thereof), this U.S.
$1 billion figure is not a fundamental investment policy or restriction of the
International Equity Fund. For calculation purposes with respect to the U.S. $1
billion figure, the assets of a bank will be deemed to include the assets of its
U.S. and non-U.S. branches.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. A variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving periodically
fluctuating rates of interest under a letter agreement between a commercial
paper issuer and an institutional lender, such as one of the Funds pursuant to
which the lender may determine to invest varying amounts. Transfer of such notes
is usually restricted by the issuer, and there is no secondary trading market
for such notes. Each Fund therefore, may not invest in a master demand note, if
as a result more than 5% (15% in the case of the Emerging Growth Fund and the
International Equity Fund) of the value of the Fund's total assets would be
invested in such notes and other illiquid securities.
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OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS (ALL FUNDS EXCEPT MONEY MARKET
FUND)
SELLING CALL AND PUT OPTIONS (EMERGING GROWTH FUND, INTERNATIONAL EQUITY FUND,
GROWTH AND INCOME FUND, GROWTH FUND AND GOVERNMENT FUND)
PURPOSE. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund's current return can be expected to
fluctuate because premiums earned from writing options and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities also results in a higher
portfolio turnover.
SELLING OPTIONS. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Emerging Growth Fund,
International Equity Fund, Growth and Income Fund and the Growth Fund sell call
options only on a covered basis. The Government Fund sells call options either
on a covered basis, or for cross-hedging purposes. A call option is covered if
the Fund owns or has the right to acquire the underlying securities subject to
the call option at all times during the option period. Thus, the Government Fund
may sell options on U.S. Government securities or forward commitments of such
securities. An option is for cross-hedging purposes (relative to Government Fund
only) to hedge against a security which the Fund owns or has the right to
acquire. In such circumstances, the Government Fund maintains in a segregated
account with the Fund's Custodian, cash or U.S. Government securities in an
amount not less than the market value of the underlying security, marked to
market daily, while the option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. A Fund sells put options only on a
secured basis, which means that, at all times during the option period, the Fund
would maintain in a segregated account with its Custodian cash, cash equivalents
or U.S. Government securities in an amount of not less than the exercise price
of the option, or will hold a put on the same underlying security at an equal or
greater exercise price. A Fund generally sells put options when the Adviser
wishes to purchase the underlying security for the Fund's portfolio at a price
lower than the current market price of the security.
CLOSING PURCHASE TRANSACTIONS AND OFFSETTING TRANSACTIONS. In order to
terminate its position as writer of a call or put option, a Fund may enter into
a "closing purchase transaction," which is the purchase of a call (put) on the
same underlying security and having the same exercise price and expiration date
as the call (put) previously sold by the Fund. The Fund will realize a gain
(loss) if the premium plus commission paid in the closing purchase transaction
is less (greater) than the premium it received on the sale of the option. A Fund
would also realize a gain if an option it has sold lapses unexercised.
A Fund may sell options that are listed on an exchange as well as options
that are traded over-the-counter. A Fund may close out its position as writer of
an option only if a liquid secondary market exists for options of that series,
but there is no assurance that such a market will exist, particularly in the
case of over-the-counter options, since they can be closed out only with the
other party to the transaction. Alternatively, a Fund may purchase an offsetting
option, which does not close out its position as a writer, but provides an asset
of equal value to its obligation under the option sold. If a Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
RISKS OF SELLING OPTIONS. By selling a call option, a Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the United States exchanges has established limitations governing
the maximum number of call or put options on the same underlying security
(whether or not covered) that may be written by a single investor, whether
acting alone or in concert with others, regardless of whether such options are
written on one or more accounts or through one or more brokers. An exchange may
order the liquidation of positions found to
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be in violation of those limits, and it may impose other sanctions or
restrictions. These position limits may restrict the number of options the Fund
may be able to write.
PURCHASING CALL AND PUT OPTIONS (EMERGING GROWTH FUND, INTERNATIONAL EQUITY
FUND, GROWTH AND INCOME FUND, GROWTH FUND AND GOVERNMENT FUND)
A Fund may purchase call options to protect (e.g., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options may be purchased for their leverage potential. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, a Fund can benefit from any significant
increase in the price of the underlying security to a greater extent than had it
invested the same amount in the security directly. However, because of the very
high volatility of option premiums, a Fund could bear a significant risk of
losing the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Conversely, put options may be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of a Fund's assets generally. Alternatively, put options may be purchased for
capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options. In any case, the purchase of
options for capital appreciation would increase the Fund's volatility by
increasing the impact of changes in the market price of the underlying
securities on the Fund's net asset value.
The Funds may purchase either listed or over-the-counter options.
OPTIONS ON STOCK INDEXES (EMERGING GROWTH FUND, INTERNATIONAL EQUITY FUND,
GROWTH AND INCOME FUND AND GROWTH FUND)
Options on stock indices are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. Options are currently traded on The Chicago Board
Options Exchange, the New York Stock Exchange, the American Stock Exchange and
other exchanges.
Gain or loss to a Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an Exchange, or it
may let the option expire unexercised.
FOREIGN CURRENCY OPTIONS (INTERNATIONAL EQUITY FUND)
The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than 5% of the Fund's net assets at any given
time. Options on foreign currencies operate similarly to options on securities,
and are traded primarily in the over-the-counter market, although options on
foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the Fund
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from time to time and over-the-counter options may also be purchased, but only
when the Subadviser believes that a liquid secondary market exists for such
options, although there can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investment generally. See "Investment Practices and Risks -- Options,
Futures Contracts and Related Options" in the Prospectus.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
FUTURES CONTRACTS (ALL FUNDS EXCEPT MONEY MARKET FUND)
The Trust may engage in transactions involving futures contracts and
related options in accordance with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Trust and its Funds is
exempt from registration as a "commodity pool".
TYPES OF CONTRACTS. An interest rate futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of a
specific type of debt security at a specified future time and at a specified
price. Although interest rate futures contracts call for delivery of specified
securities, in most cases the contracts are closed out (by an offsetting
purchase or sale) prior to actual delivery, with the difference between the
contract price and the offsetting price paid in cash.
A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index value at the close of the last trading day of the contract and the
price at which the futures contract is originally struck.
A stock index futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of cash equal to a specified dollar
amount times the difference between the stock index value at a specified time
and the price at which the futures contract is originally struck. A stock index
fluctuates with changes in the market values of the stocks included. No physical
delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in differences in
correlation of the futures contracts with movements in the value of the
securities being hedged.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney,
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Melbourne Exchanges, Hang Seng Index of 33 stocks on the Hong Kong Stock
Exchange, Barclays Share Price Index of 40 stocks on the New Zealand Stock
Exchange and Toronto Index of 35 stocks on the Toronto Stock Exchange. Futures
and futures options on the Nikkei Index are traded on the CME and United States
commodity exchanges may develop futures and futures options on other indices of
foreign securities. Futures and options on United States devised index of
foreign stocks are also being developed. 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.
The International Equity Fund may enter into futures contracts for
non-hedging purposes, subject to applicable law.
INITIAL AND VARIATION MARGIN. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, a Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when a Fund purchases a futures contract and the price of the
underlying security or index rises, that position increases in value, and the
Fund receives from the broker a variation margin payment equal to that increase
in value. Conversely, where the Fund purchases a futures contract and the value
of the underlying security or index declines, the position is less valuable, and
the Fund is required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
FUTURES STRATEGIES. When a Fund anticipates a significant market or market
sector advance, the purchase of a futures contract affords a hedge against not
participating in the advance at a time when the Fund is not fully invested
("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. A Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
For example, if the Government Fund holds long-term U.S. Government
securities, and a rise in long-term interest rates is anticipated, it could, in
lieu of selling its portfolio securities, sell futures contracts for similar
long-term securities. If interest rates increased and the value of the Fund's
securities declined during the period the contracts were outstanding, the value
of the Fund's futures contracts should increase, thereby protecting the Fund by
preventing net asset value from declining as much as it otherwise would have.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker.
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Similarly, in the event of the bankruptcy of the writer of an over-the-counter
option purchased by the Government Fund, the Fund could experience a loss of all
or part of the value of the option. Transactions are entered into by a Fund only
with brokers or financial institutions deemed creditworthy by the Adviser.
Persons who trade in futures contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, whose business activity involves
investment or other commitment in securities or other obligations, use the
futures market to offset unfavorable changes in value that may occur because of
fluctuations in the value of the securities and obligations held or committed to
be acquired by them or fluctuations in the value of the currency in which the
securities or obligations are denominated. Debtors and other obligors may also
hedge the interest cost of their obligations. The speculator, like the hedger,
generally expects neither to deliver nor to receive the financial instrument
underlying the futures contract, but, unlike the hedger, hopes to profit from
fluctuations in prevailing interest rates or currency exchange rates.
Each Fund's futures transactions will be entered into for traditional
hedging purposes; that is, futures contracts will be sold to protect against a
decline in the price of securities or currencies that the Fund owns, or futures
contracts will be purchased to protect a Fund against an increase in the price
of securities of currencies it has committed to purchase or expects to purchase.
The International Equity Fund may also enter into futures transactions for
non-hedging purposes, subject to applicable law.
SPECIAL RISKS ASSOCIATED WITH FUTURES TRANSACTIONS. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the portfolio of
securities being hedged diverges from the securities upon which the futures
contract is based. If the price of the futures contract moves less than the
price of the securities being hedged, the hedge will not be fully effective, but
if the price of the securities being hedged moves in an unfavorable direction,
the Fund would be in a better position than if it had not tried to hedge.
However, if the price of the security being hedged moves in a favorable
direction, the hedge will partially offset this advantage. To compensate for the
imperfect correlation of movements of prices of a futures contract and the
securities being hedged, a Fund may buy or sell futures contracts in a greater
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the securities being hedged has been greater than the
historical volatility of the securities underlying the futures contract, or may
buy or sell fewer futures contracts if the historical volatility of the
securities being hedged is less than the historical volatility of the securities
underlying the futures contract. Nevertheless, the price of the futures contract
may move less than the price of the securities which are the subject of the
hedge (or the value of futures contracts and securities held by a Fund may
decline simultaneously), resulting in the hedge not being fully effective.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to initial margin depository and maintenance
requirements. Rather than meet additional margin deposit requirements, investors
may close futures contracts through offsetting transactions, which could distort
the normal relationship between the futures market and the securities underlying
the futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an Exchange or Board of Trade that
provides a market for such futures contracts. Although a Fund intends to
purchase or sell futures only on Exchanges and Boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular
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contract or at any particular time. In the event of such illiquidity, it might
not be possible to close a futures position and, in the event of adverse price
movement, a Fund would continue to be required to make daily payments of
variation margin. Since the securities being hedged will not be sold until the
related futures contract is sold, an increase, if any, in the price of the
securities may to some extent offset losses on the related futures contract. In
such event, the Fund would lose the benefit of the appreciation in value of the
securities.
Successful use of futures is also subject to the Adviser's ability
correctly to predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in futures
contracts. In such cases, if the Fund has insufficient cash, it may have to sell
portfolio securities at a time when it is disadvantageous to do so in order to
meet the daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that a Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed 5% of the fair market value of a Fund's assets. The International Equity
Fund may enter into transactions in futures contracts and options on futures
contracts only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes provided the aggregate initial
margin and premiums on such non-hedging positions does not exceed 5% of the
liquidation value of the Fund's assets. Relative to the purchase or sale of
futures contracts by a Fund, an amount of cash, cash equivalents or U.S.
Government securities equal to the market value of the obligation under the
futures contracts (less any related margin deposits) will be maintained in a
segregated account with the Custodian.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS. Each of the Exchanges
has established limitations governing the maximum number of call or put options
on the same underlying security or futures contract (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more accounts or through
one or more brokers). Option positions of all investment companies advised by
the Adviser are combined for purposes of these limits. An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Fund may sell.
Although a Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, there is no guarantee that the price of the
securities being hedged will, in fact, correlate with the price movements in a
futures contract and thus provide an offset to losses on the futures contract.
A Fund pays commissions on futures contracts and options transactions.
OPTIONS ON FUTURES CONTRACTS (ALL FUNDS EXCEPT MONEY MARKET FUND)
A Fund may also purchase and sell options on futures contracts which are
traded on an Exchange. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. As a seller of an option on a futures contract, a Fund is subject to
initial margin and maintenance requirements similar to those applicable to
futures contracts. In addition, net option premiums received by a Fund are
required to be included as initial margin
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deposits. When an option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the difference between the
current market price of the futures contract and the exercise price of the
option. A Fund may purchase put options on futures contracts in lieu of, and for
the same purposes as, the sale of a futures contract. The purchase of call
options on futures contracts in intended to serve the same purpose as the actual
purchase of the futures contract.
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on stock index futures. The Advisers will not
purchase options on stock index futures on any Exchange unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risks in connection with options on futures transactions are no greater than
the risks in connection with stock index futures transactions. Compared to the
use of stock index futures, the purchase of options on stock index futures
involves less potential risk to the Growth Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However there
may be circumstances, such as when there is no movement in the level of the
index, when the use of an option on a stock index future would result in a loss
to the Fund when the use of a stock index future would not.
FORWARD COMMITMENTS (GOVERNMENT FUND ONLY)
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase continues. Since the
market value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of the Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to sell continues. By entering into
a Forward Commitment sale transaction, the Fund forgoes or reduces the potential
for both gain and loss in the security which is being hedged by the Forward
Commitment sale.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY (INTERNATIONAL EQUITY FUND)
A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. The Fund may either accept or make delivery of the currency at the
maturity of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale or an offsetting contract. The Fund
engages in forward currency transactions in anticipation of, or to protect
itself against fluctuations in exchange rates. The Fund might sell a particular
foreign currency forward, for example, when it holds bonds denominated in that
currency but anticipates, and seeks to be protected against, decline in the
currency against the U.S. dollar. Similarly, the Fund might sell the U.S. dollar
forward when it holds bonds denominated in U.S. dollars but anticipates, and
seeks to be protected against, a decline in the U.S. dollar relative to other
currencies. Further, the Fund might purchase a currency forward to "lock in" the
price of securities denominated in that currency which it anticipates
purchasing.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset,
that is the subject of the hedge, generally will not be precise. In addition,
the Fund may not always be able to enter into foreign currency forward contracts
at attractive prices and this will limit the Fund's ability to use such contract
to hedge or cross-hedge its assets. Also, with
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regard to the Fund's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying the Fund's cross-hedges and the movements in the exchange rates of
foreign currencies in which the Fund's assets that are the subject of such
cross-hedges are denominated.
Forward contracts are traded in an interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement and is consummated without
payment of any commission. The Fund, however, may enter into forward contracts
with deposit requirements or commissions.
A put option on currency gives the Fund, as purchaser, the right (but not
the obligation) to sell a specified amount of currency at the exercise price
until the expiration of the option. A call option gives the Fund, as purchaser,
the right (but not the obligation) to purchase a specified amount of currency at
the exercise price until its expiration. The Fund might purchase a currency put
option, for example, to protect itself during the contract period against a
decline in the value of a currency in which it holds or anticipates holding
securities. If the currency's value should decline, the loss in currency value
should be offset, in whole or in part, by an increase in the value of the put.
If the value of the currency instead should rise, any gain to the Fund would be
reduced by the premium it had paid for the put option. A currency call option
might be purchased, for example, in anticipation of, or to protect against, a
rise in the value of a currency in which the Fund anticipates purchasing
securities.
The Fund's ability to establish and close out positions in foreign currency
options is subject to the existence of a liquid market. There can be no
assurance that a liquid market will exist for a particular option at any
specific time. In addition, options on foreign currencies are affected by all of
those factors that influence foreign exchange rates and investment generally.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Exchange
markets for options on foreign currencies exist but are relatively new, and the
ability to establish and close out positions on the exchanges is subject to
maintenance of a liquid secondary market. Closing transactions may be effected
with respect to options traded in the over-the-counter ("OTC") markets
(currently the primary markets for options on foreign currencies) only by
negotiating directly with the other party to the option contract or in a
secondary market for the option if such market exists. Although the Fund intends
to purchase only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. In such event, it may not be possible to
effect closing transactions with respect to certain options, with the result
that the Fund would have to exercise those options which it has purchased in
order to realize any profit. The staff of the Securities and Exchange Commission
("SEC") has taken the position that, in general, purchased OTC options and the
underlying securities used to cover written OTC options are illiquid securities.
However, the Fund may treat as liquid the underlying securities used to cover
written OTC options, provided it has arrangements with certain qualified dealers
who agree that the Portfolio may repurchase any option it writes for a maximum
price to be calculated by a predetermined formula. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
INTEREST RATE TRANSACTIONS (INTERNATIONAL EQUITY FUND)
Among the hedging transactions into which the Fund may enter are interest
rate swaps and the purchase or sale of interest rate caps and floors. The Fund
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as a hedge and not
as a speculative investment. The Fund will not sell interest rate caps or floors
that it does not own. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments. The purchase of
an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a
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predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted but, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as these hedging transactions are entered into for good faith hedging purposes,
the investment adviser and the Fund believe such obligations do not constitute
senior securities and, accordingly will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by a custodian that satisfies the
requirements of the 1940 Act. The Fund will not enter into any interest rate
swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the highest rating
category of at least one nationally recognized rating organization at the time
of entering into such transaction. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing swap documentation. As a result, the
swap market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
New options and futures contracts and various combinations thereof continue
to be developed and the Fund may invest in any such options and contracts as may
be developed to the extent consistent with its investment objective and
regulatory requirements applicable to investment companies.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS (INTERNATIONAL EQUITY FUND)
Use of many hedging and other strategic transactions including currency and
market index transactions by the Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with its
Custodian, or a designated sub-custodian, to the extent the Fund's obligations
are not otherwise "covered" through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by the Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade debt obligations at least equal to the current amount of the obligation
must be segregated with the custodian or sub-custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. A call option on
securities written by the Fund, for example, will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by the
Fund will require the Fund to segregate liquid high grade debt obligations equal
to the exercise price. Except when the Fund enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the Fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency, liquid securities
denominated in that currency equal to the Fund's obligations or to segregate
liquid high grade debt obligations equal to the amount of the Fund's
obligations.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Fund will
not be required to do so. As a result, when the Fund sells these instruments it
will
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segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt or equity securities or other acceptable
assets. The Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap on
a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Hedging and other strategic transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. The
Fund may also enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding obligation in
related options and hedging and other strategic transactions. The Fund could
purchase a put option, for example, if the strike price of that option is the
same or higher than the strike price of a put option sold by the Fund. Moreover,
instead of segregating assets if it holds a futures contract or forward
contract, the Fund could purchase a put option on the same futures contract or
forward contract with a strike price as high or higher than the price of the
contract held. Other hedging and other strategic transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it terminates
prior to that time, assets equal to any remaining obligation would need to be
segregated.
LOANS OF PORTFOLIO SECURITIES
Each of the Funds may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that cash equal to 100% of the
market value of the securities loaned is deposited by the borrower with the
particular Fund and is marked to market daily. While such securities are on
loan, the borrower is required to pay the Fund any income accruing thereon.
Furthermore, the Fund may invest the cash collateral in portfolio securities
thereby increasing the return to the Fund as well as increasing the market risk
to the Fund. A Fund will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its shares are
qualified for sale. However, should the Fund believe that lending securities is
in the best interests of the Fund's shareholders, it would consider withdrawing
its shares from sale in any such state.
Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. Each Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions which, may not be changed
with respect to any Fund without the approval of the holders of a majority of
the outstanding shares of such Fund. Such majority (as defined by the 1940 Act)
is the lesser of (i) 67% or more of the voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding voting securities. The percentage limitations need only be met at
the time the investment is made or after relevant action is taken.
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THE FOLLOWING RESTRICTIONS APPLY TO ALL FUNDS:
A Fund shall not:
1. Lend money except by the purchase of bonds or other debt
obligations of types commonly offered publicly or privately and purchased
by financial institutions, including investments in repurchase agreements.
A Fund will not invest in repurchase agreements maturing in more than seven
days (unless subject to a demand feature) if any such investment, together
with any illiquid securities (including securities which are subject to
legal or contractual restrictions on resale) held by the Fund, exceeds 10%
of the market or other fair value of its total net assets (15% in the case
of the Emerging Growth Fund and the International Equity Fund); provided,
however, that with respect to the Emerging Growth Fund, the International
Equity Fund, the Growth Fund and the Growth and Income Fund, illiquid
securities shall exclude shares of other open-end investment companies
owned by the Fund but include the Fund's pro rata portion of the securities
and other assets owned by any such company. See "Repurchase Agreements";
2. Underwrite securities of other companies, except insofar as a Fund
might be deemed to be an underwriter for purposes of the Securities Act of
1933 in the resale of any securities owned by the Fund;
3. Lend its portfolio securities in excess of 10% (15% in the case of
the Emerging Growth Fund and the International Equity Fund) of its total
assets, both taken at market value, provided that any loans shall be in
accordance with the guidelines established for such loans by the Trustees
as described under "Loans of Portfolio Securities," including the
maintenance of collateral from the borrower equal at all times to the
current market value of the securities loaned;
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. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies by the
Emerging Growth Fund, the International Equity Fund, the Growth Fund and
the Growth and Income Fund, to the extent permitted by rule or order of the
SEC exempting them from the limitations imposed by Section 12(d)(1) of the
1940 Act;
5. Invest more than 25% of the value of its total assets in securities
of issuers in any particular industry; provided, however, that with respect
to the Emerging Growth Fund, the International Equity Fund, the Growth Fund
and the Growth and Income Fund, this limitation shall exclude shares of
other open-end investment companies owned by the Fund but include the
Fund's pro rata portion of the securities and other assets owned by any
such company. (This does not restrict any of the Funds from investing in
obligations of the U.S. Government and repurchase agreements secured
thereby); and
6. With respect to all Funds other than the Emerging Growth Fund and
the International Equity Fund, borrow in excess of 10% of the market or
other fair value of its total assets, or pledge its assets to an extent
greater than 5% of the market or other fair value of its total assets,
provided that so long as any borrowing exceeds 5% of the value of the
Fund's total assets, the Fund shall not purchase portfolio securities. Any
such borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. With respect to
the Emerging Growth Fund, borrow money except temporarily from banks to
facilitate payment of redemption requests and then only in amounts not
exceeding 33 1/3% of its net assets, or pledge more than 10% of its net
assets in connection with permissible borrowings or purchase additional
securities when money borrowed exceeds 5% of its net assets. With respects
to the International Equity Fund, borrow money from banks on a secured or
unsecured basis, in excess of 25% of the value of its total assets.
Deposits in escrow in connection with the writing of covered call or
secured put options, or in connection with the purchase or sale of forward
contracts, futures contracts, foreign currency futures and related options,
are not deemed to be a pledge or other encumbrance. This restriction shall
not prevent the International Equity Fund from entering into reverse
repurchase agreements, provided that reverse repurchase agreements and any
transactions constituting
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borrowing by the Fund may not exceed 33 1/3% of the Fund's net assets. The
International Equity Fund may not mortgage or pledge its assets except to
secure borrowings permitted under this restriction; and
THE FOLLOWING RESTRICTIONS APPLY TO THE GROWTH FUND, THE GROWTH AND INCOME FUND,
THE GOVERNMENT FUND, THE MONEY MARKET FUND AND THE MUNICIPAL BOND FUND:
A Fund shall not:
1. Make any investment in real estate, commodities or commodities
contracts, or warrants except that the Growth and Income Fund, the Growth
Fund, the Government Fund and the Municipal Bond Fund may engage in
transactions in futures and related options, the Government Fund may
purchase or sell securities which are secured by real estate, and the
Growth Fund may acquire warrants or other rights to subscribe to securities
of companies issuing such warrants or rights, or of parents or subsidiaries
of such companies, although the Growth Fund may not invest more than 5% of
its net assets in such securities valued at the lower of cost or market,
nor more than 2% of its net assets in such securities (valued on such
basis) which are not listed on the New York or American Stock Exchanges
(warrants and rights represent options, usually for a specified period of
time, to purchase a particular security at a specified price from the
issuer). Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitations;
2. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by a Fund of an initial or
variation margin in connection with futures contracts or related option
transactions is not considered the purchase of a security on margin;
3. 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;
4. Invest in oil or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Growth Fund, and
the Growth and Income Fund, may invest in the securities of companies which
invest in or sponsor such programs;
5. Invest in companies for the purpose of acquiring control or
management thereof;
6. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except through
purchase in the open market in a transaction involving no commission or
profit to a sponsor or dealer (other than the customary brokers commission)
or as part of a merger, consolidation or other acquisition, except that the
Growth Fund and the Growth and Income Fund may acquire shares of other
open-end investment companies to the extent permitted by rule or order of
the SEC exempting them from the limitations imposed by Section 12(d)(1) of
the 1940 Act;
7. Purchase a restricted security or a security for which market
quotations are not readily available if as a result of such purchase more
than 5% of the Fund's assets would be invested in such securities;
provided, however, that with respect to the Growth Fund and the Growth and
Income Fund, this limitation shall exclude shares of other open-end
investment companies owned by the Fund but include the Fund's pro rata
portion of the securities and other assets owned by any such company.
Illiquid securities include securities subject to legal or contractual
restrictions on resale, which include repurchase agreements which have a
maturity of longer than seven days. This policy does not apply to
restricted securities eligible for resale pursuant to Rule 144A under the
1933 Act which the Trustees or the Adviser under Board approved guidelines
may determine are liquid nor does it apply to other securities for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists;
8. Invest more than 5% of its assets in companies having a record
together with predecessors, of less than three years' continuous operation,
except that the Growth Fund and the Growth and Income Fund, may acquire
shares of other open-end investment companies to the extent permitted by
rule or order of the SEC exempting them from the limitations imposed by
Section 12(d)(1) of the 1940 Act;
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9. Engage in option writing for speculative purposes or purchase call
or put options on securities if, as a result, more than 5% of its net
assets of the Fund would be invested in premiums on such options; and
10. Purchase any security issued by any company deriving more than 25%
of its gross revenues from the manufacture of alcohol or tobacco.
In addition to the fundamental policies which may only be changed by
shareholders, the Trust has made an undertaking with one state that the Growth
Fund shall not invest more than 5% of its total assets in special situations.
For purposes of this limitation, the Trust will consider a "special situation"
to include companies coming out of bankruptcy, companies in the process of
merger or reorganization or companies which in the opinion of management for
other reasons are in a severe state of flux. The Trust has made an undertaking
with another state that a Fund shall not acquire the securities of a closed-end
investment company if immediately following such acquisition the aggregate value
of all securities issued by closed-end investment companies owned by all Funds
shall exceed 10% of the value of the total assets of the acquiring Fund. When a
Fund invests in other investment companies, such investments may result in a
duplication of management and distribution fees and other operating expenses.
The Trust has also made an undertaking with that state that the Growth Fund,
Growth and Income Fund and Government Fund shall not invest in real estate
partnerships. The Trust has made an undertaking with certain states that at
least 30 days prior to any change by a Fund in its investment objective the Fund
will provide written notice to shareholders of such change and will waive any
fee if the shareholder redeems or exchanges the account. The Trust has
undertaken with a certain state that the Growth Fund and the Growth and Income
Fund limit its investments in restricted securities, unseasoned issuers and not
readily marketable securities to 15% of its total assets, provided, however,
that its investment in restricted securities will be limited to a maximum of 10%
of total assets.
THE TRUST HAS ADOPTED ADDITIONAL INVESTMENT RESTRICTIONS, WITH RESPECT TO
THE ABOVE REFERENCED FUNDS, WHICH MAY BE CHANGED BY THE TRUSTEES WITHOUT A VOTE
OF SHAREHOLDERS, AS FOLLOWS:
The Trust shall not make short sales of securities unless at the time of
sale a Fund owns or has the right to acquire at no additional cost securities
identical to those sold short; provided that this prohibition does not apply to
the writing of options or the sale of forward contracts, futures, foreign
currency futures or related options.
FOREIGN INVESTMENTS. The Growth Fund and the Growth and Income Fund may not
invest in the securities of a foreign issuer if, at the time of acquisition,
more than 20% of the value of the Fund's total assets would be invested in such
securities.
FUTURES CONTRACTS AND OPTIONS. In addition, the Growth Fund and the Growth
and Income Fund may not write, purchase or sell puts, calls or combinations
thereof, except that each Fund may (a) write covered call options with respect
to any part or all of its portfolio securities, write secured put options, or
enter into closing purchase transactions with respect to such options, (b)
purchase and sell put options to the extent that the premiums paid for all such
options do not exceed 10% of its total assets and only if the Fund owns the
securities covered by the put option at the time of purchase, and (c) engage in
futures contracts and related options transactions as described herein. The
Growth Fund and the Growth and Income Fund may purchase put and call options
which are purchased on an exchange in other markets, or currencies and, as
developed from time to time, various futures contracts on market indices and
other instruments. Purchasing options may increase investment flexibility and
improve total return, but also risks loss of the option premium if an asset the
Fund has the option to buy declines in value.
The Government Fund may not write, purchase or sell puts, calls or
combinations thereof, except that the Fund may (a) write covered or fully
collateralized call options, write secured put options, and enter into closing
or offsetting purchase transactions with respect to such options, (b) purchase
and sell options to the extent that the premiums paid for all such options owned
at any time do not exceed 10% of its total assets, and (c) engage in futures
contracts and related options transactions as described herein.
The Municipal Bond Fund may engage in futures contracts and related options
as described herein.
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THE FOLLOWING RESTRICTIONS APPLY TO THE EMERGING GROWTH FUND AND THE
INTERNATIONAL EQUITY FUND:
A Fund shall not:
1. Make any investment in real estate, commodities or commodities
contracts, except that each Fund may engage in transactions in forward
commitments, futures contracts, foreign currency futures and related
options and may purchase or sell securities which are secured by real
estate or interests therein; or issued by companies; including real estate
investment trusts, which invest in real estate or interests therein; and
the International Equity II Fund may engage in currency transactions; and
2. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit a Fund from (i) making and
collateralizing any permitted borrowings, (ii) making any permitted loans
of its portfolio securities, or (iii) entering into repurchase agreements,
utilizing options, futures contracts and foreign currency futures and
options thereon, forward contracts, forward commitments and other
investment strategies and instruments that would be considered "senior
securities" but for the maintenance by the Fund of a segregated account
with its custodian or some other form of "cover."
THE TRUST HAS ADOPTED ADDITIONAL INVESTMENT RESTRICTIONS WITH RESPECT TO
THE EMERGING GROWTH FUND AND THE INTERNATIONAL EQUITY FUND, WHICH MAY BE CHANGED
BY THE TRUSTEES WITHOUT A VOTE OF SHAREHOLDERS. THESE RESTRICTIONS PROVIDE THAT
A FUND SHALL NOT:
1. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by a Fund of an initial or
variation margin in connection with forward contracts, futures contracts,
foreign currency futures or related option transactions is not considered
the purchase of a security on margin;
2. Invest in securities of any company if any officer or trustee of
the Trust or of the Adviser owns more than 1/2 of 1% of the outstanding
securities of such company, and such officers and trustees own more than 5%
of the outstanding securities of such issuer;
3. Invest in oil or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the International
Equity Fund and the Emerging Growth Fund may invest in the securities of
companies which invest in or sponsor such programs;
4. Invest in companies for the purpose of acquiring control or
management thereof;
5. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except through
purchase in the open market in a transaction involving no commission or
profit to a sponsor or dealer (other than the customary brokers commission)
or as part of a merger, consolidation or other acquisition, except that the
International Equity Fund and the Emerging Growth Fund, may acquire shares
of other open-end investment companies to the extent permitted by rule or
order of the SEC exempting them from the limitations imposed by Section
12(d)(1) of the 1940 Act;
6. Purchase an illiquid security if, as a result of such purchase,
more than 15% of the Fund's net assets would be invested in such
securities; provided, however, that with respect to the International
Equity Fund and the Emerging Growth Fund, this limitation shall exclude
shares of other open-end investment companies owned by the Fund but include
the Fund's pro rata portion of the securities and other assets owned by any
such company. Illiquid securities include securities subject to legal or
contractual restrictions on resale, which include repurchase agreements
which have a maturity of longer than seven days. This policy does not apply
to restricted securities eligible for resale pursuant to Rule 144A under
the 1933 Act which the Trustees or the Adviser under Board-approved
guidelines, may determine are liquid nor does it apply to other securities
for which, notwithstanding legal or contractual restrictions on resale, a
liquid market exists;
7. Invest more than 5% of its assets in companies having a record
together with predecessors, of less than three years' continuous operation,
except that the International Equity Fund and the Emerging
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Growth Fund, may acquire shares of other open-end investment companies to
the extent permitted by rule or order of the SEC exempting them from the
limitations imposed by Section 12(d)(1) of the 1940 Act;
8. Except for the International Equity Fund, purchase any security
issued by any company deriving more than 25% of its gross revenues from the
manufacture of alcohol or tobacco;
9. Make short sales of securities, unless at the time of sale a Fund
owns or has the right to acquire at no additional cost securities identical
to those sold short; provided that this prohibition does not apply to the
writing of options or the sale of forward contracts, futures, foreign
currency futures or related options; and
10. Invest more than 5% of its net assets in warrants or rights valued
at the lower of cost or market, nor more than 2% of its net assets in
warrants or rights (valued on such basis) which are not listed on the New
York or American Stock Exchanges. Warrants or rights acquired in units or
attached to other securities are not subject to the foregoing limitations.
FOREIGN INVESTMENTS FOR FUNDS OTHER THAN THE INTERNATIONAL EQUITY FUND. The
Emerging Growth Fund may not invest in the securities of a foreign issuer if, at
the time of acquisition, more than 20% of the value of the Fund's total assets
would be invested in such securities.
FUTURES CONTRACTS AND OPTIONS. In addition, the Emerging Growth Fund and
the International Equity Fund may purchase put and call options which are
purchased on an exchange in other markets, or currencies and, as developed from
time to time, various futures contracts on market indices and other instruments.
Purchasing options may increase investment flexibility and improve total return,
but also risks loss of the option premium if an asset the Fund has the option to
buy declines in value.
The Trust has made an undertaking with certain states that at least 30 days
prior to any change by a Fund in its goal, the Fund will provide written notice
to shareholders of such change and will waive any fee if the shareholder redeems
or exchanges the account. The Trust has made an undertaking with a certain state
that with respect to each Fund, Rule 144A securities will be included as an
illiquid security to meet the 10% limitation on investing in illiquid
securities. The Trust has undertaken with a certain state that each Fund limit
its investments in restricted securities, unseasoned issuers and not readily
marketable securities to 15% of its total assets; provided, however that its
investments in restricted securities will be limited to a maximum of 10% of
total assets. Each Fund 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.
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees and executive officers and their principal occupations for the
past five years are listed below.
For purposes hereof, the "Van Kampen American Capital Funds" refer to each
of the open-end investment companies advised by the Adviser, excluding the Trust
and Van Kampen American Capital Exchange Fund, and each of the investment
companies advised by Van Kampen American Capital Investment Advisory Corp. (the
"VK Adviser"), excluding the Explorer Institutional Trust.
23
<PAGE> 73
TRUSTEES
DONALD M. CARLTON, Trustee. Radian International L.L.C., 8501 N. Mopac
Blvd., Building No. 6, Austin, Texas 78759. President and Chief Executive of
Radian International L.L.C. (chemical engineering). Director of National
Instruments Corp. and Central and Southwest Corporation. Formerly Director of
The Hartford Steam Boiler Inspection and Insurance Company
(insurance/engineering services).(1)(2)
Age: 58
A. BENTON COCANOUGHER, Trustee. Texas A & M University, 601 Blocker Bldg.,
College Station, Texas 77843-4113. Dean of College of Business Administration
and Graduate School of Business of Texas A & M University; Director of Randall's
Food Markets, Inc.; Director of First American Bank; and Director of First
American Savings Bank.(1)
Age: 57
STEPHEN RANDOLPH GROSS, Trustee. 2625 Cumberland Parkway, Suite 400,
Atlanta, Georgia 30339. Managing Partner of Gross, Collins & Cress, P.C.
(accounting firm); Director of Charter Bank & Trust.(1)(2)
Age: 48
JEFFREY B. LANE,* Trustee. 1345 Avenue of the Americas, New York, New York
10105. Vice Chairman of Travelers Group; Chairman and Director of The Travelers
Investment Management Company; Director of the Long Island Jewish Medical
Center, ICI Mutual Insurance Group and Woodmere Academy; formerly, President and
Director of Primerica Holdings, Inc.; formerly, Director of Smith Barney Inc.;
formerly President, Director and Member of the Executive Committee of Smith
Barney International Inc.
Age: 53
ALAN G. MERTEN, Trustee. Johnson Graduate School of Management, 303 Malott
Hall, Cornell University, Ithaca, New York 14853. The Anne and Elmer Lindseth
Dean of Johnson Graduate School of Management of Cornell University; Director of
Comshare, Inc. (information technology), and Tompkins County Trust Company,
Ithaca, New York.(1)
Age: 54
STEVEN MULLER,* Trustee. 1619 Massachusetts Avenue, N.W., Suite 711,
Washington, DC 20036. Chairman of The 21st Century Foundation (public affairs);
President Emeritus of The Johns Hopkins University; Director of Alex. Brown &
Sons, Inc., Beneficial Corp. (bank holding company), and Millipore Corp.
(bio-technology)(1)
Age: 68
F. ROBERT PAULSEN, Trustee. 2801 N. Indian Ruins, Tucson, Arizona 85715.
Dean Emeritus and Professor Emeritus of Higher Education of The University of
Arizona, Tucson, Arizona; Director of American General Series Portfolio Co.
(mutual fund). (1)(2)
Age: 73
R. RICHARDSON PETTIT, Trustee. Department of Finance, College of Business,
University of Houston, 4800 Calhoun, Houston, Texas 77204-6283. Duncan Professor
of Finance of the University of Houston; formerly Hanson Distinguished Professor
of Business of the University of Washington.(1)
Age: 53
DON G. POWELL,* Chairman of the Board, Trustee and President. 2800 Post Oak
Blvd., Houston, Texas 77056. President, Chief Executive Officer and a Director
of VK/AC Holding, Inc. and VKAC. Chairman, Chief Executive Officer and a
Director of Van Kampen American Capital Distributors, Inc., the Adviser, the VK
Adviser, Van Kampen American Capital Management, Inc. and Van Kampen American
Capital Advisors, Inc. Chairman, President and a Director of Van Kampen American
Capital Exchange Corporation, American Capital Contractual Services, Inc. and
American Capital Shareholders Corporation. Chairman and a Director of ACCESS
Investor Services, Inc., Van Kampen Merritt Equity Advisors Corp., Van Kampen
Merritt Equity Holdings Corp., and VCJ Inc., McCarthy, Crisanti & Maffei, Inc.,
McCarthy, Crisanti & Maffei Acquisition, and Van Kampen American Capital Trust
Company. Chairman, President and
24
<PAGE> 74
a Director of Van Kampen American Capital Services, Inc. President, Chief
Executive Officer and a Trustee of each of the Van Kampen American Capital Funds
advised by the Adviser and the VK Adviser. Director, Trustee or Managing General
Partner of other open-end investment companies and closed-end investment
companies advised by the Adviser. Chairman of the Board of the closed-end
investment companies advised by the VK Adviser.(1)(2)(3)
Age: 56
ALAN B. SHEPARD, JR., Trustee. 1512 Bonifacio Road, P.O. Box 63, Pebble
Beach, California 93953-0063. President of Seven Fourteen Enterprises, Inc.
(investments); Partner of Houston Partners (venture capital); Director and Vice
Chairman of Kwik-Kopy Corporation (printing); Director of Allied Waste
Industries (waste treatment).(1)(2)
Age: 72
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section
2(a)(19) of the Investment Company Act of 1940). Mr. Powell is an
interested person of the Adviser and the Trust by reason of his position
with the Adviser. Mr. Lane is an interested person of the Distributor, the
Subadviser and the Trust by reason of his position with broker/dealer
affiliates of Travelers. Mr. Muller is an interested person of the Trust by
reason of his position as director of Alex Brown & Sons, Inc., a registered
broker/dealer.
(1) A director of Van Kampen American Capital Bond Fund, Inc., Van Kampen
American Capital Convertible Securities, Inc. and Van Kampen American
Capital Income Trust, closed-end investment companies advised by the
Adviser.
(2) Managing General Partner of Van Kampen American Capital Exchange Fund, an
open-end investment company advised by the Adviser.
(3) An officer and/or director/trustee of other investment companies advised by
the Adviser.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Gerald Baxter............ Vice President Vice President, Associate General Counsel
3100 Breckenridge Blvd. and Secretary of Primerica Financial
Bldg. 200 Services. Formerly, partner with Trotter,
Duluth, Georgia Smith & Jacobs.
30199-0062
Age: 44
William N. Brown......... Vice President Executive Vice President of the Adviser,
2800 Post Oak Blvd. VK/AC Holding, Inc., VKAC, Van Kampen
Houston, TX 77056 American Capital Advisors, Inc., American
Age: 42 Capital Contractual Services, Inc., Van
Kampen American Capital Exchange
Corporation, ACCESS Investor Services, Inc.
("ACCESS"), and Van Kampen American Capital
Trust Company. Director of American Capital
Shareholders Corporation. Vice President of
each of the Van Kampen American Capital
Funds.
</TABLE>
25
<PAGE> 75
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Huey P. Falgout, Jr...... Assistant Secretary Assistant Vice President and Senior
2800 Post Oak Blvd. Attorney of VKAC. Assistant Vice President
Houston, TX 77056 and Assistant Secretary of the Distributor,
Age: 32 the Adviser, the VK Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, ACCESS, and American Capital
Shareholders Corporation. Assistant
Secretary of each of the Van Kampen
American Capital Funds.
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
2800 Post Oak Blvd. Secretary and Assistant Secretary of VKAC, the VK
Houston, TX 77056 Adviser and the Distributor. Vice President
Age: 42 and Secretary of closed-end funds advised
by the Adviser.
Steven M. Hill........... Assistant Treasurer Assistant Vice President of the Adviser and
One Parkview Plaza VK Adviser. Assistant Treasurer of each of
Oakbrook Terrace, IL the Van Kampen American Capital Funds.
60181 Assistant Treasurer of the closed-end funds
Age: 31 advised by the VK Adviser.
Tanya M. Loden........... Controller Controller of most of the investment
2800 Post Oak Blvd. companies advised by the Adviser, formerly
Houston, TX 77056 Tax Manager/Assistant Controller.
Age: 36
Dennis J. McDonnell...... Executive Vice President President, Chief Operating Officer and a
One Parkview Plaza Director of the Adviser, the VK Adviser and
Oakbrook Terrace, IL Van Kampen American Capital Management,
60181 Inc. Executive Vice President and a
Age: 53 Director of VK/AC Holding, Inc. and VKAC.
Chief Executive Officer of McCarthy,
Crisanti & Maffei, Inc. Chairman and a
Director of MCM Asia Pacific Company, Ltd.
Executive Vice President and a Trustee of
each of the Van Kampen American Capital
Funds. President of the closed-end
investment companies advised by the VK
Adviser. Prior to December, 1991, Senior
Vice President of Van Kampen Merritt Inc.
Curtis W. Morell......... Vice President and Chief Vice President and Chief Accounting Officer
2800 Post Oak Blvd. Accounting Officer of most of the investment companies advised
Houston, TX 77056 by the Adviser.
Age: 49
</TABLE>
26
<PAGE> 76
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg......... Vice President and Executive Vice President, General Counsel
One Parkview Plaza Secretary and Secretary of Van Kampen American
Oakbrook Terrace, IL Capital and VK/AC Holding, Inc. Executive
60181 Vice President, General Counsel and a
Age: 42 Director of the Distributor. Executive Vice
President and General Counsel of the
Adviser and the Van Kampen American Capital
Investment Advisory Corp. ("VK Adviser"),
Van Kampen American Capital Management,
Inc., VSU Inc. VCJ, Inc., Van Kampen
Merritt Equity Advisors Corp., and Van
Kampen Merritt Equity Holdings Corp.
Executive Vice President, General Counsel
and Assistant Secretary of Van Kampen
American Capital Advisors, Inc., American
Capital Contractual Services, Inc., Van
Kampen American Capital Exchange
Corporation, ACCESS, American Capital
Shareholders Corporation, and Van Kampen
American Capital Trust Company. General
Counsel of McCarthy, Crisanti & Maffei,
Inc. and McCarthy, Crisanti & Maffei
Acquisition Corp. Vice President and
Secretary of each of the Van Kampen
American Capital Funds. Secretary of the
closed-end funds advised by the VK Adviser.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute.
Robert C. Peck, Jr....... Vice President Executive Vice President and Director of
2800 Post Oak Blvd. the Adviser. Executive Vice President of
Houston, TX 77056 the VK Adviser. Vice President of each of
Age: 49 the Van Kampen American Capital Funds.
Gregory Pitts............ Vice President Senior Vice President of PFS Shareholder
3100 Breckenridge Blvd. Services.
Bldg. 200
Duluth, Georgia
30190-0062
Age: 33
Alan T. Sachtleben....... Vice President Executive Vice President and a Director of
2800 Post Oak Blvd. the Adviser. Executive Vice President of
Houston, TX 77056 the VK Adviser. Vice President of each of
Age: 53 the Van Kampen American Capital Funds.
John L. Sullivan......... Treasurer First Vice President of the Adviser and VK
One Parkview Plaza Adviser. Treasurer of each of the Van
Oakbrook Terrace, IL Kampen American Capital Funds. Controller
60181 of the closed- end funds advised by the VK
Age: 40 Adviser. Formerly Controller of open-end
funds advised by VK Adviser.
Robert Sullivan.......... Assistant Controller Assistant Controller of each of the Van
2800 Post Oak Blvd. Kampen American Capital Funds.
Houston, TX 77056
Age: 62
</TABLE>
27
<PAGE> 77
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
D. Richard Williams...... Vice President Chief Executive Officer and General Manager
3120 Breckenridge Blvd. and Executive Committee member of the
Duluth, Georgia Distributor; President, General Manager,
30199-0001 and Executive Committee member and Chief
Age: 39 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.
Paul R. Wolkenberg....... Vice President Executive Vice President of the Adviser.
2800 Post Oak Blvd. President, Chief Executive Officer and a
Houston, TX 77056 Director of Van Kampen American Capital
Age: 51 Trust Company and ACCESS. Vice President of
each of the Van Kampen American Capital
Funds.
Edward C. Wood III....... Vice President and Chief Senior Vice President of VK Adviser. Vice
One Parkview Plaza Financial Officer President and Chief Financial Officer of
Oakbrook Terrace, IL each of the Van Kampen American Capital
60181 Funds. Vice President, Treasurer and Chief
Age: 40 Financial Officer of the closed-end funds
advised by VK Adviser.
</TABLE>
The Trustees and officers of the Trust as a group own less than one percent
of the outstanding shares of the Trust. The Trustees who are not affiliated with
the Adviser or Distributor initially will be compensated by the Trust at the
annual rate of $19,240 plus a fee of $1,285 per day for each Board meeting
attended. During the fiscal period ended October 31, 1995, the Trustees who were
not affiliated with the Adviser received as a group $150,855, $60,707, $43,787,
$24,604, $22,723, $6,800 and $6,460 in Trustees' fees from Growth Fund, Growth
and Income Fund, Government Fund, Municipal Bond Fund, Money Market Fund,
Emerging Growth Fund and International Equity Fund, respectively, in addition to
certain out-of-pocket expenses.
28
<PAGE> 78
Additional information regarding compensation paid by the Funds and the
related mutual funds for which the Trustees serve as directors or trustees noted
above is set forth below. The compensation shown for the Funds is for the fiscal
year ended October 31, 1995, while the total compensation shown for the Funds
and other related mutual funds is for the calendar year ended December 31, 1995.
Messrs. Lane and Powell are not compensated for their service as Trustees,
because of their affiliation with the Distributor and the Adviser, respectively.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL(1)
RETIREMENT COMPENSATION
AGGREGATE COMPENSATION BENEFITS FROM REGISTRANT
FROM REGISTRANT(3) ACCRUED AS AND FUND
---------------------------------------------------- PART OF FUND COMPLEX PAID
NAME OF PERSON EM INT G G/I GVT MB MM EXPENSES TO DIRECTORS
- --------------------------- ---- ---- ------ ----- ----- ----- ------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Donald M. Carlton...... $300 $280 11,565 4,689 3,104 1,963 1,798 N/A 36,000
Dr. A. Benton
Cocanougher.............. 440 420 12,415 5,069 3,754 2,133 1,968 N/A 39,500
Stephen Randolph Gross..... 460 440 13,500 5,464 3,604 2,278 2,078 N/A 42,000
Dr. Norman Hackerman(2).... 440 420 12,415 5,069 3,754 2,133 1,968 N/A 40,000
Robert D. H. Harvey(2)..... 460 440 13,500 5,464 3,604 2,278 2,078 N/A 42,000
Dr. Alan G. Merten......... 380 360 12,215 4,949 3,264 2,063 1,888 N/A 38,000
Dr. Steven Muller.......... 440 420 12,415 5,069 3,754 2,133 1,968 N/A 40,000
Dr. F. Robert Paulsen...... 520 500 13,861 5,651 4,138 2,376 2,183 N/A 45,000
Dr. R. Richardson Pettit... 380 360 12,215 4,949 3,264 2,063 1,888 N/A 38,000
Alan B. Shepard, Jr........ 460 440 13,820 5,595 3,693 2,335 2,128 N/A 41,500
Miller Upton(2)............ 440 420 12,415 5,069 3,754 2,133 1,968 N/A 39,500
Benjamin N. Woodson(2)..... 380 360 10,945 4,439 2,904 1,833 1,688 N/A 34,000
</TABLE>
- ---------------
(1) Reflects thirteen investment companies in the fund complex. Amounts
reflected are for the calendar year ended December 31, 1995.
(2) Messrs. Hackerman, Harvey, Upton and Woodson retired as Trustees on March
31, 1996.
(3) The Trustees of the Trust instituted a Retirement Plan effective April 1,
1996. For the current Trustees not affiliated with the Adviser, the annual
retirement benefit payable per year for a ten year period is based upon the
highest total annual compensation received in any of the three calendar
years preceding retirement. Trustees with more than five but less than ten
years of service at retirement will receive a prorated reduced benefit.
Under the Plan, for the retiring Trustees, the annual retirement benefit
payable per year for a ten year period is equal to 75% of the total
compensation received from the Trust during the 1995 calendar year;
accordingly, Dr. Hackerman, Mr. Harvey, Mr. Upton, and Mr. Woodson will
receive $24,845, $26,074, $24,533, and $21,120 per year.
Legend:
<TABLE>
<S> <C>
EM = Emerging Growth Fund
G = Growth Fund
G/I = Growth and Income Fund
GVT = Government Fund
INT = International Equity Fund
MB = Municipal Bond Fund
MM = Money Market Fund
</TABLE>
INVESTMENT ADVISORY AGREEMENTS
The Trust and the Adviser are parties to a separate Investment Advisory
Agreement for each Fund (each, an "Advisory Agreement" and together, the
"Advisory Agreements"). Under the Advisory Agreements, the Trust retains the
Adviser to manage the investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic,
29
<PAGE> 79
statistical, and financial data and for formulating and implementing investment
programs in furtherance of each Fund's investment objectives. The Adviser also
furnishes at no cost to the Trust (except as noted herein) the services of
sufficient executive and clerical personnel for the Trust as are necessary to
prepare registration statements, prospectuses, shareholder reports, and notices
and proxy solicitation materials. In addition, the Adviser furnishes at no cost
to the Trust the services of a President of the Trust, one or more Vice
Presidents as needed, and a Secretary.
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Fund. The costs of such accounting
services include the salaries and overhead expenses of a Treasurer or other
principal financial officer and the personnel operating under his direction. The
services are provided at cost which is allocated among all investment companies
advised or subadvised by the Adviser. The Trust also pays transfer agency fees,
custodian fees, legal fees, the costs of reports to shareholders and all other
ordinary expenses not specifically assumed by the Adviser.
The Trust retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under the
relevant Advisory Agreement, the Trust pays the Adviser an annual fee for the
Emerging Growth Fund, the Growth and Income Fund and the Growth Fund calculated
separately for each Fund, at the rate of 0.65% of the first $1 billion of the
Fund's average daily net assets; 0.60% of the next $1 billion of the Fund's
average daily net assets; 0.55% of the next $1 billion of the Fund's average
daily net assets; 0.50% of the next $1 billion of the Fund's average daily net
assets; and 0.45% of the Fund's average daily net assets in excess of $4
billion. The Trust pays the Adviser an annual fee for the Government Fund at the
rate of 0.60% of the first $1 billion of the Fund's average daily net assets;
0.55% of the next $1 billion of the Fund's average daily net assets; 0.50% of
the next $1 billion of the Fund's average daily net assets; 0.45% of the next $1
billion of the Fund's average daily net assets; 0.40% of the next $1 billion of
the Fund's average daily net assets; and 0.35% of the Fund's average daily net
assets in excess of $5 billion. The Trust pays the Adviser an annual fee for the
Money Market Fund at the rate of 0.50% of the first $2 billion of the Fund's
average daily net assets; 0.475% of the next $2 billion of the Fund's average
daily net assets; and 0.45% of the Fund's average daily net assets in excess of
$4 billion. The Trust pays the Adviser an annual fee for the Municipal Bond Fund
at the rate of 0.60% of the first $1 billion of the Fund's average daily net
assets; 0.55% of the next $1 billion of the Fund's average daily net assets;
0.50% of the next $1 billion of the Fund's average daily net assets; and 0.45%
of the Fund's average daily net assets in excess of $3 billion. The Trust pays
the Adviser an annual fee for the International Equity Fund at the rate of 1.00%
of the Fund's average daily net assets. This fee is higher than that charged by
most other mutual funds but the Trust believes it is justified by the special
international nature of the Fund and is not necessarily higher than the fees
charged by certain mutual funds with investment goals and policies similar to
those of the Fund. The Adviser has entered into a subadvisory agreement (the
"Subadvisory Agreement") with the Subadviser to assist it in performing its
investment advisory functions. Pursuant to the Subadvisory Agreement, the
Subadviser receives on an annual basis 50% of the compensation received by the
Adviser from the International Equity Fund.
The average daily net assets of each Fund are determined by taking the
average of all of the determinations of net asset value of such Fund for each
business day during a given calendar month. Such fee is payable for each
calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any direct
or indirect majority owned subsidiary of VKAC in connection with the purchase
and sale of portfolio investments of the Trust, less any direct expenses
incurred by such person in connection with the purchase and sale of portfolio
investments of the Trust, less any direct expense incurred by the Adviser or
such person under common control with the Adviser in connection with obtaining
such payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Trust's benefit, and to advise
the Trustees of any other commissions, fees, brokerage or similar payments which
may be possible under applicable laws for the Adviser or any direct or indirect
majority owned subsidiary of VKAC to receive in connection with the Trust's
portfolio transactions or other arrangements which may benefit the Trust.
30
<PAGE> 80
The following table shows expenses paid under the relevant investment
advisory agreement during the periods ended October 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
OCTOBER 31, 1993
Accounting Services................... $ 245,804 $ 127,908 $ 93,300 $ 87,585 $ 61,162
Gross Advisory Fees................... 11,859,114 4,286,890 1,980,457 462,361 329,080
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- (66,000) (486,724)
OCTOBER 31, 1994
Accounting Services................... $ 257,665 $ 122,188 $ 98,937 $ 95,639 $ 59,296
Gross Advisory Fees................... 13,176,814 4,599,033 2,122,662 639,343 282,897
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- -- (475,398)
OCTOBER 31, 1995
Accounting Services................... 277,991 123,458 92,277 90,522 57,991
Gross Advisory Fees................... 14,436,748 4,937,121 1,979,623 678,530 281,553
Contractual Expense Reimbursement..... -- -- -- -- --
Voluntary Expense Reimbursement....... -- -- -- -- (400,167)
</TABLE>
The following table shows expenses paid under the relevant investment
advisory agreement during the periods noted below:
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING
EQUITY GROWTH
------- -------
<S> <C> <C>
February 21, 1995 through October 31, 1995........................ $35,227 $47,662
</TABLE>
The Advisory Agreements also provide that, in the event the ordinary
business expenses of the Trust, calculated separately for each Fund, for any
fiscal year should exceed the most restrictive expense limitation applicable in
the states where the Trust's shares are qualified for sale, unless waived, the
compensation due the Adviser will be reduced by the amount of such excess and
that, if a reduction in and refund of the advisory fee is insufficient, the
Adviser will pay the Trust monthly an amount sufficient to make up the
deficiency, subject to readjustment during the year. Ordinary business expenses
do not include (1) interest and taxes, (2) brokerage commissions, (3) certain
litigation and indemnification expenses as described in the Advisory Agreements
and (4) payments made by a Fund pursuant to the Distribution Plans. Each Fund's
Advisory Agreement also provides that the Adviser shall not be liable to the
Trust for any actions or omissions if it acted in good faith without negligence
or misconduct. The Advisory Agreements also provide that the Adviser shall not
be liable to the Trust for any actions or omissions if it acted in good faith
without negligence or misconduct.
Each Advisory Agreement has an initial term of two years and thereafter
with respect to each Fund may be continued from year to year if specifically
approved at least annually (a)(i) by the Trustees or (ii) by vote of a majority
of the Fund's outstanding voting securities, and (b) by the affirmative vote of
a majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreements provide that they shall terminate automatically
if assigned and that they may be terminated without penalty by either party on
60 days written notice.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets. The Trust has received from California (the state with the
most restrictive expense limitation) a waiver, effective retroactive to the
inception of the Trust, which allows each Fund to exclude shareholder service
costs from the calculation of the expense limitation.
31
<PAGE> 81
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to a written agreement for the Funds ("Underwriting Agreement").
The Distributor has entered into a selling agreement with PFS Investments giving
PFS Investments the exclusive right to sell shares of each Fund of the Trust on
behalf of the Distributor. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay
only for such shares of each Fund as may be sold to the public. The Distributor
is not obligated to sell any stated number of shares. The Underwriting Agreement
is renewable from year to year if approved (a) by the Trustees or by a vote of a
majority of the Trust's outstanding voting securities, and (b) by the
affirmative vote of a majority of Trustees who are not parties to the Agreement
or interested persons of any party by votes cast in person at a meeting called
for such purpose. The Underwriting Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
The following table shows commissions paid, amounts retained by the
Distributor and amounts received by PFS Investments during the periods ended
October 31, 1993, 1994 and 1995, and during the period from inception of the
Emerging Growth Fund and International Equity Fund (February 21, 1995) through
the end of the Trust's fiscal year (October 31, 1995).
<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
----------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
OCTOBER 31, 1993
Total Underwriting Commissions....... $31,727,768 $8,782,190 $5,678,658 $1,573,390 *
Amount Retained By Distributor....... 5,573,955 1,521,976 839,178 178,528 *
Amount Received By PFS Investments... 26,153,813 7,260,214 4,839,480 1,394,862 *
OCTOBER 31, 1994
Total Underwriting Commissions....... $27,792,315 $7,234,018 $3,530,139 $1,718,186 *
Amount Retained By Distributor....... 4,911,391 1,262,647 516,793 197,479 *
Amount Received By PFS Investments... 22,880,924 5,971,371 3,013,346 1,520,707 *
OCTOBER 31, 1995
Total Underwriting Commissions....... $21,001,021 $5,352,114 $1,871,172 $1,033,937 *
Amount Retained By Distributor....... 3,711,115 929,500 378,331 118,219 *
Amount Received By PFS Investments... 17,289,906 4,422,614 1,492,841 915,718 *
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING
EQUITY GROWTH
------------- --------
<S> <C> <C>
Total Underwriting Commissions......................................... $ 147,459 $569,333
Amount Retained by Distributor......................................... 11,149 47,949
Amount Received by PFS Investments..................................... 136,310 521,384
</TABLE>
- ---------------
* Not Applicable.
The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising. The Trust pays all
expenses attributable to the registrations of its shares under federal and state
blue sky laws, including registration and filing fees, the cost of preparation
of the prospectuses, related legal and auditing expenses, and the cost of
printing prospectuses for current shareholders.
PORTFOLIO TURNOVER
The portfolio turnover rate may vary greatly from year to year as well as
within a year. Each Fund's portfolio turnover rate for prior years is shown
under the "Financial Highlights" in the Prospectus.
32
<PAGE> 82
DISTRIBUTION PLANS
The Trust has adopted a Class A distribution plan and a Class B
distribution plan (the "Class A Plan" and "Class B Plan," respectively) to
permit each Fund directly or indirectly to pay expenses associated with
servicing shareholders and in the case of the Class B Plan the distribution of
its shares (the Class A Plan and the Class B Plan are sometimes referred to
herein collectively as "Plans" and individually as a "Plan").
With respect to the Class A Plan, each Fund is authorized to pay the
Distributor, as compensation for the Distributor's services, a service fee at an
annual rate of 0.25% of the average daily net assets (0.10% for Money Market
Fund) of the Fund's Class A shares. Such fee shall be calculated and accrued
daily and paid monthly. With respect to the Class A Plan, the Distributor
intends to make payments thereunder only to compensate PFS Investments for
personal service and/or the maintenance of shareholder accounts. With respect to
the Class B Plan, authorized payments by each Fund (other than Money Market
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 each 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, if any, 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 were approved by the Trustees, including a majority of the
Trustees who are not interested persons (as defined in the 1940 Act) of the
Trust and who have no direct or indirect financial interest in the operation of
any of the Plans or in any agreements related to each Plan ("Independent
Trustees"). In approving each Plan in accordance with the requirements of Rule
12b-1, the Trustees determined that there is a reasonable likelihood that each
Plan will benefit the Trust and its shareholders.
Each Plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting shares of the
respective class. Any change in any of the Plans that would materially increase
the distribution or service expenses borne by the Trust requires shareholder
approval, voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as the Plan is in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
With respect to each Plan, the Trustees considered all compensation that
the Distributor would receive under the Plan and the Underwriting Agreement,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The Trustees also considered the
benefits that would accrue to the Distributor under each Plan in that the
Distributor would receive service fees and distribution fees and the Adviser
would receive advisory fees which are calculated based upon a percentage of the
average net assets of each Fund, which fees would increase if the Plans were
successful and each Fund attained and maintained significant asset levels.
For the Plan year ended October 31, 1995, the aggregate expenses for Growth
Fund under the Class A Plan were $28,641 or .25%, 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
33
<PAGE> 83
administering the Class A Plan. For the Plan year ended October 31, 1995, the
Fund's aggregate expenses under the Class B Plan were $176,297 or 1.00% of the
Class B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $132,223 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 $44,074 for fees paid to Service Organizations
for servicing Class B shareholders and administering the Class B Plan.
For the Plan year ended October 31, 1995, the aggregate expenses for Growth
and Income Fund under the Fund's Class A Plan were $18,742 or 0.25%,
respectively, of the Class A shares' average net assets. Such expenses were paid
to reimburse the Distributor for payments made to Service Organizations for
servicing Fund shareholders and for administering the Class A Plan. For the Plan
year ended October 31, 1995, the Fund's aggregate expenses under the Class B
Plan were $102,215 or 1.00% of the Class B shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$76,661 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
$25,554 for fees paid to Service Organizations for servicing Class B
shareholders and administering the Class B Plan.
For the Plan year ended October 31, 1995, the aggregate expenses for
Government Fund under the Fund's Class A Plan were $16,075 or 0.25%,
respectively, of the Class A shares' average net assets. Such expenses were paid
to reimburse the Distributor for payments made to Service Organizations for
servicing Fund shareholders and for administering the Class A Plan. For the Plan
year ended October 31, 1995, the Fund's aggregate expenses under the Class B
Plan were $55,032 or 1.00% of the Class B shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$41,274 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
$13,758 for fees paid to Service Organizations for servicing Class B
shareholders and administering the Class B Plan.
For the Plan period February 21, 1995 through October 31, 1995, the
aggregate expenses for Emerging Growth Fund under the Fund's Class A Plan were
$11,480 or 0.19%, (not annualized) respectively, of the Class A shares' average
net assets. Such expenses were paid to reimburse the Distributor for payments
made to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. For the Plan period February 21, 1995 through
October 31, 1995, the Fund's aggregate expenses under the Class B Plan were
$27,405 or 0.75% (not annualized) of the Class B shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$20,554 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
$6,851 for fees paid to Service Organizations for servicing Class B shareholders
and administering the Class B Plan.
For the Plan period February 21, 1995 through October 31, 1995, the
aggregate expenses for International Equity Fund under the Fund's Class A Plan
were $6,920 or 0.17%, (not annualized) respectively, of the Class A shares'
average net assets. Such expenses were paid to reimburse the Distributor for
payments made to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. For the Plan period February 21, 1995 through
October 31, 1995, the Fund's aggregate expenses under the Class B Plan were
$7,546 or 0.75% (not annualized) of the Class B shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$5,660 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
$1,886 for fees paid to Service Organizations for servicing Class B shareholders
and administering the Class B Plan.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser (and, in the case of the International Equity Fund, the Adviser
and the Subadviser) are responsible for decisions to buy and sell securities for
the Trust and for the placement of its portfolio business and the negotiation of
any commissions paid on such transactions. It is the policy of the Advisers to
seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Trust may pay higher
brokerage commissions for
34
<PAGE> 84
brokerage and research services (as described below) on a portion of its
transactions executed on securities exchanges, the Adviser (and, in the case of
the International Equity Fund, the Adviser and the Subadviser) seek the best
security price at the most favorable commission rate. From time to time, the
Fund may place brokerage transactions with affiliated persons of the Adviser
and/or the Subadviser. In selecting broker/dealers and in negotiating
commissions, the Adviser (and, in the case of the International Equity Fund, the
Adviser and the Subadviser) considers the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. When more
than one firm is believed to meet these criteria, preference may be given to
firms which also provide research services to the Trust or the Adviser or
Subadviser.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody), and (d)
furnishing other products or services that assist the Adviser or the Subadviser
in fulfilling their investment-decision making responsibilities.
Pursuant to provisions of the relevant Advisory Agreement, the Trustees
have authorized the Adviser and, with respect to the International Equity Fund,
the Subadviser, to cause the Trust to incur brokerage commissions in an amount
higher than the lowest available rate in return for research services provided
to the Adviser and the Subadviser. The Adviser and the Subadviser are of the
opinion that the continued receipt of supplemental investment research services
from dealers is essential to its provision of high quality portfolio management
services to the Trust. The Adviser and the Subadviser undertake that such higher
commissions will not be paid by the Trust unless (a) the Adviser (or, with
respect to the International Equity Fund, the Subadviser) determines in good
faith that the amount is reasonable in relation to the services in terms of the
particular transaction or in terms of the Adviser's (or the Subadviser's)
overall responsibilities with respect to the accounts as to which it exercises
investment discretion, (b) such payment is made in compliance with the
provisions of Section 28(e) and other applicable state and federal laws, and (c)
in the opinion of the Adviser (or, with respect to the International Equity
Fund, the Subadviser), the total commissions paid by the Trust are reasonable in
relation to the expected benefits to the Trust over the long term. The
investment advisory fees paid by the Trust under the Advisory Agreements are not
reduced as a result of the Adviser's (or the Subadviser'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 and, with respect to the International Equity Fund, the
Subadviser, 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 and the
Subadviser in servicing all of its accounts; not all of such services may be
used by the Advisers in connection with the Trust. In the opinion of the Adviser
and the Subadviser, the benefits from research services to the Funds of the
Trust and to the accounts managed by the Adviser or the Subadviser cannot be
measured separately. Because the volume and nature of the trading activities of
the accounts are not uniform, the amount of commissions in excess of the lowest
available rate paid by each account for brokerage and research services will
vary. However, in the opinion of the Adviser or the Subadviser, such costs to
the Trust will not be disproportionate to the benefits received by the Trust on
a continuing basis.
The Adviser and the Subadviser will seek to allocate portfolio transactions
equitably whenever concurrent decisions are made to purchase or sell securities
by the Trust and other accounts that the Adviser or the
35
<PAGE> 85
Subadviser may establish in the future. In some cases, this procedure could have
an adverse effect on the price or the amount of securities available to the
Trust. In making such allocations among the Trust and other advisory accounts,
the main factors considered by the Adviser (or, with respect to the
International Equity Fund, the Subadviser) are the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held, and opinions of the persons responsible for
recommending the investment.
The following table summarizes for each Fund the total brokerage
commissions paid, the amount of commissions paid to brokers selected primarily
on the basis of research services provided to the Adviser and the value of these
specific transactions.
<TABLE>
<CAPTION>
GROWTH/ MONEY
GROWTH INCOME GOVERNMENT MUNICIPAL MARKET
-------------- ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
1993
Total Brokerage Commissions........ $ 8,686,133 $ 930,176 $117,279 $ -- $ --
Commissions for Research
Services......................... 2,438,199 394,229 -- -- --
Value of Research Transactions..... 3,176,926,784 500,523,383 -- -- --
1994
Total Brokerage Commissions........ 8,521,566 1,845,028 94,887 -- --
Commissions for Research
Services......................... 2,509,260 539,629 -- -- --
Value of Research Transactions..... 1,715,386,926 350,246,609 -- -- --
1995
Total Brokerage Commissions........ 11,276,872 2,443,026 125,499 -- --
Commissions for Research
Services......................... 2,878,071 880,873 -- -- --
Value of Research Transactions..... 1,995,983,303 524,158,962 -- -- --
</TABLE>
<TABLE>
<CAPTION>
INCEPTION (FEBRUARY 21, 1995) INTERNATIONAL EMERGING
THROUGH OCTOBER 31, 1995 EQUITY GROWTH
- ------------------------------------------------------------------ ------------- -----------
<S> <C> <C>
Total Broker Commissions.......................................... $51,642 $ 33,144
Commissions for Research Services................................. -- 27,920
Value of Research Transactions.................................... -- 24,893,286
</TABLE>
The Funds may from time to time place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser, the Subadviser or the
Distributor. The negotiated commission paid to an affiliated broker on any
transaction would be comparable to that payable to a non-affiliated broker in a
similar transaction.
The Funds paid the following commissions to these brokers during the
periods shown:
Commissions Paid:
<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1993 COMMISSIONS HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Growth................................................................. $ 4,354 $163,304
Growth & Income........................................................ 2,023 96,883
Government............................................................. -- 21,696
Municipal Bond......................................................... -- --
Money Market........................................................... -- --
</TABLE>
36
<PAGE> 86
<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1993 PERCENTAGES HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Growth................................................................. .05% 1.88%
Growth & Income........................................................ .22% 10.42%
Government............................................................. -- 18.50%
Municipal Bond......................................................... -- --
Money Market........................................................... -- --
</TABLE>
<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH ROBINSON SMITH
AFFILIATES TO TOTAL TRANSACTIONS HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Growth................................................................. .05% 6.61%
Growth & Income........................................................ .25% 20.87%
Government............................................................. -- 17.37%
Municipal Bond......................................................... -- --
Money Market........................................................... -- --
</TABLE>
<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1994 COMMISSIONS HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Growth................................................................. $17,369 $259,504
Growth & Income........................................................ 1,673 102,408
Government............................................................. -- 14,718
Municipal Bond......................................................... -- --
Money Market........................................................... -- --
</TABLE>
<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1994 PERCENTAGES HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Commissions with affiliates to total commissions
Growth............................................................... .20% 3.05%
Growth & Income...................................................... .09% 5.55%
Government........................................................... -- 15.51%
Municipal Bond....................................................... -- --
</TABLE>
<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH ROBINSON SMITH
AFFILIATES TO TOTAL TRANSACTIONS HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Growth................................................................. .13% 10.14%
Growth & Income........................................................ .06% 13.44%
Government............................................................. -- 16.67%
Municipal Bond......................................................... -- --
Money Market........................................................... -- --
</TABLE>
<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1995 COMMISSIONS HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Growth................................................................. $ 5,250 $253,827
Growth & Income........................................................ 189 118,952
Government............................................................. -- 20,942
Municipal Bond......................................................... -- --
Money Market........................................................... -- --
</TABLE>
<TABLE>
<CAPTION>
ROBINSON SMITH
FISCAL 1995 PERCENTAGES HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Commissions with affiliates to total commissions
Growth............................................................... .05% 2.25%
Growth & Income...................................................... .01% 4.87%
Government........................................................... -- 16.69%
Municipal Bond....................................................... -- --
</TABLE>
37
<PAGE> 87
<TABLE>
<CAPTION>
VALUE OF TRANSACTIONS WITH ROBINSON SMITH
AFFILIATES TO TOTAL TRANSACTIONS HUMPHREY BARNEY
- ----------------------------------------------------------------------- -------- --------
<S> <C> <C>
Growth................................................................. .03% 7.40%
Growth & Income........................................................ -- 10.52%
Government............................................................. -- 15.55%
Municipal Bond......................................................... -- --
Money Market........................................................... -- --
</TABLE>
For Emerging Growth Fund and International Equity Fund, the Funds paid the
following commissions during the period February 21, 1995 (inception) through
October 31, 1995:
<TABLE>
<CAPTION>
SMITH BARNEY
------------
<S> <C>
COMMISSIONS PAID
Emerging Growth II Fund............................................... $ 310
International Equity II Fund.......................................... 1,077
COMMISSIONS WITH AFFILIATES TO TOTAL COMMISSIONS
Emerging Growth II Fund............................................... .94%
International Equity II Fund.......................................... 2.1%
VALUE OF TRANSACTIONS WITH AFFILIATES TO TOTAL TRANSACTIONS
Emerging Growth II Fund............................................... .35%
International Equity II Fund.......................................... 1.23%
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined each day the
New York Stock Exchange (the "Exchange") is open. The Exchange is currently
closed on weekends and on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
EMERGING GROWTH FUND, INTERNATIONAL EQUITY FUND, GROWTH FUND AND GROWTH AND
INCOME FUND NET ASSET VALUATION
The net asset value of each Fund is computed by (i) valuing securities
listed or traded on a national securities exchange at the last reported sales
price, or if there has been no sale that day at the last reported bid price,
using prices as of the close of trading on the Exchange, (ii) valuing unlisted
securities for which over-the-counter market quotations are readily available at
the most recent bid price as supplied by the National Association of Securities
Dealers Automated Quotations (NASDAQ) or by broker-dealers, and (iii) valuing
any securities for which market quotations are not readily available, and any
other assets at fair value as determined in good faith by the Trustees. Options
on stocks, options on stock indexes and stock index futures contracts and
options thereon, which are traded on exchanges, are valued at their last sales
or settlement price as of the close of such exchanges, or, if no sales are
reported, at the mean between the last reported bid and asked prices. Debt
securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value.
Foreign securities trading may not take place on all days on which the New
York Stock Exchange ("NYSE") is open. Further, trading takes place in various
foreign markets on days on which the NYSE is not open. Accordingly, the
determination of the net asset value of a Fund may not take place
contemporaneously with the determination of the prices of investments held by
such Fund. Events affecting the values of investments that occur between the
time their prices are determined and 4:00 p.m. on each day that the NYSE is open
will not be reflected in a Fund's net asset value unless the Adviser or
Subadviser, under the supervision of the Trustees, determines that the
particular event would materially affect net asset value. As a result, a Fund's
net asset value may be significantly affected by such trading on days when a
shareholder has no access to the Funds.
38
<PAGE> 88
GOVERNMENT FUND NET ASSET VALUATION
U.S. Government securities are traded in the over-the-counter market and
are valued at the last available bid price. Such valuations are based on
quotations of one of more dealers that make markets in the securities as
obtained from such dealers or from a pricing service. Options and interest rate
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sales or settlement price as of the close of such exchanges, or,
if no sales are reported, at the mean between the last reported bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees. Such
valuations and procedures will be reviewed periodically by the Trustees.
MUNICIPAL BOND FUND NET ASSET VALUATION
Municipal Bonds owned by the Fund are valued by an independent pricing
service ("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at such quoted bid prices (as obtained by
the Service from dealers in such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. Any assets which are not valued
by the Service would be valued at fair value using methods determined in good
faith by the Trustees.
MONEY MARKET FUND NET ASSET VALUATION
The valuation of the Fund's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at its
cost and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price that the Fund would receive if
it sold the instrument.
The Fund's use of the amortized cost method of valuing its portfolio
securities is permitted by a rule adopted by the SEC. Under this rule, the Fund
must maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of thirteen months or less
and invest only in securities determined by the Adviser to be of eligible
quality with minimal credit risks.
The Trustees have established procedures reasonably designed, taking into
account current market conditions and the Fund's investment objective, to
stabilize the net asset value per share for purposes of sales and redemptions at
$1.00. These procedures include review by the Trustees, at such intervals as it
deems appropriate, to determine the extent, if any, to which the net asset value
per share calculated by using available market quotations deviates from $1.00
per share based on amortized cost. In the event such deviation should exceed
four tenths of one percent, the Trustees are required to promptly consider what
action, if any, should be initiated. If the Trustees believe that the extent of
any deviation from a $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing shareholders, it will take
such steps as it considers appropriate to eliminate or reduce these consequences
to the extent reasonably practicable. Such steps may include selling portfolio
securities prior to maturity; shortening the average maturity of the portfolio;
withholding or reducing dividends; suspending sales of new shares; or utilizing
a net asset value per share determined by using available market quotations.
GENERAL
The assets belonging to the Class A, Class B and Class 1 shares of each
Fund will be invested together in a single portfolio. The net asset value of
each class will be determined separately by subtracting the expenses
39
<PAGE> 89
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the SEC.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Funds'
Prospectus under the heading "Purchase of Shares" and "Redemption of Shares."
PURCHASE OF SHARES
Shares of each Fund are sold in a continuous offering and may be purchased
on any business day through PFS Investments.
ALTERNATIVE SALES ARRANGEMENT
Each Fund other than the Money Market 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 Money Market Fund issues Class A shares at net asset value without a sales
charge. Class B shares of the Money Market Fund are issued for exchanges only.
Each Fund offers Class 1 shares only to accounts of previously established
shareholders or members of a family unit comprising husband, wife and minor
children, and Class 1 shareholders of other Common Share Funds exchanging their
Class 1 shares for Class 1 shares of the Fund. The 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 the distribution fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times PFS Investments may be deemed to be an
underwriter for purposes of the 1933 Act.
INVESTMENTS BY MAIL
A Shareholder Investment Account may be opened by completing the
application included in the Prospectus and forwarding the application, through
PFS Investments to the Transfer Agent at 3100 Breckinridge Boulevard, Bldg. 200,
Duluth, Georgia 30199-0062. The account is opened only upon acceptance of the
application by the Transfer Agent. The minimum initial investment of $250 or
more in the form of a check payable to the Trust, must accompany the
application. This minimum may be waived by the Distributor for plans involving
continuing investments. Subsequent investments of $25 or more may be mailed
directly to the Transfer Agent. All such investments (except purchase of shares
of the Money Market Fund) are made at the public offering price of the Fund's
shares next computed following receipt of payment by the Transfer Agent.
Confirmations of the opening of an account and of all subsequent transactions in
the account are forwarded by the Transfer Agent to the shareholder.
In processing applications and investments, the Transfer Agent acts as
agent for the investor and for PFS Investments and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If the Transfer
Agent ceases to act as such, a successor company named by the Trust will act in
the same capacity so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales load reflected in the sales charge table as shown in the
Prospectus applies to purchases of Class A and Class 1 shares of Emerging Growth
Fund, International Equity Fund, Growth Fund, Growth and Income Fund, Government
Fund and Municipal Bond Fund. An aggregate investment includes all shares of all
of the above Funds and shares of other Common Sense Funds (except the Money
Market Fund) previously purchased and still owned, plus the shares being
purchased. The current offering price is used to determine the value of all such
shares. The same reduction is applicable to purchases under a Letter of Intent
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as described in the next paragraph. PFS Investments must notify the Distributor
at the time an order is placed for a purchase which would qualify for the
reduced charge on the basis of previous purchases. Similar notification must be
given in writing when such an order is placed by mail. The reduced sales charge
will not be applied if such notification is not furnished at the time of the
order. The reduced sales charge will also not be applied unless the records of
the Distributor or the Transfer Agent confirm the investor's representations
concerning his holdings.
LETTER OF INTENT
A Letter of Intent applies to purchases of Class A and Class 1 shares of
all Funds except the Money Market Fund. When an investor submits a Letter of
Intent to attain an investment goal within a 13-month period, the Transfer Agent
escrows shares totaling five percent of the dollar amount of the Letter of
Intent in the name of the investor. The Letter of Intent does not obligate the
investor to purchase the indicated amount. In the event the Letter of Intent
goal is not achieved within the 13-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and the sales charge actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrow shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
at the end of the 13-month period by refunding to the investor the amount of
excess sales commissions, if any, paid during the 13-month period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE ("CDSC")
The CDSC is waived on redemptions of Class A and 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).
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The Trust does not intend to waive the CDSC for any distributions from IRAs
or other Retirement Plans not specifically described above.
(c) Redemption Pursuant to the Trust's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in a Fund. Under the Plan,
a dollar amount of a participating shareholder's investment in the Fund will be
redeemed systematically by the Fund on a periodic basis, and the proceeds mailed
to the shareholder. The amount to be redeemed and frequency of the systematic
withdrawals will be specified by the shareholder upon his or her election to
participate in the Plan. The CDSC may be waived on redemptions made under the
Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC may not
exceed a maximum of 12% annually of the shareholder's initial account balance.
The Trust reserves the right to change the terms and conditions of the Plan and
the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Trust reserves the right to redeem shareholder accounts with balances
of less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Trust may waive the CDSC upon such involuntary
redemption.
(e) Redemption by Adviser
The Trust may waive the CDSC when a total or partial redemption is made by
the Adviser with respect to its investments in a Fund.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Trust
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Trust to fairly determine the value of its net assets; or
(d) the SEC, by order, so permits.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Exchange Privilege" in the
Prospectus:
By use of the exchange privilege, the investor authorizes the Transfer
Agent to act on written exchange instructions from any person representing
himself to be the investor or the agent of the investor and believed by the
Transfer Agent to be genuine. The Transfer Agent's records of such instructions
are binding.
For purposes of determining the sales charge rate previously paid on Class
A and Class 1 shares of a Fund, all sales charges paid on the exchanged security
and on any security previously exchanged for such security or for any of its
predecessors shall be included. If the exchanged security was acquired through
reinvestment, that security is deemed to have been sold with a sales charge rate
equal to the rate previously paid on the security on which the dividend or
distribution was paid. If a shareholder exchanges less than all of his
securities, the security upon which the highest sales charge rate was previously
paid is deemed exchanged first.
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Exchange requests received on a business day prior to the time shares of a
Fund involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in a fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the Funds involved in the request are priced will be processed on the
next business day in the manner described above.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Growth Fund, the International Equity Fund and the Emerging Growth Fund
distribute dividends and capital gains annually; the Growth and Income Fund
declares and pays dividends quarterly. The Government Fund, the Money Market
Fund and the Municipal Bond Fund declare dividends each business day and
distributes monthly substantially all of its net investment income to
shareholders. The daily dividends of the Government Fund are a fixed amount
determined for each class at least monthly. The per share dividends on Class A
and Class B shares of each Fund will be lower than the per share dividends on
Class 1 shares as a result of the distribution fees and incremental transfer
agency fees, if any, applicable to the Class B shares. Each Fund intends
similarly to distribute to shareholders any taxable net realized capital gains.
Taxable net realized capital gains are the excess, if any, of the Fund's total
profits on the sale of securities during the year over its total losses on the
sale of securities, including capital losses carried forward from prior years in
accordance with the tax laws. Such capital gains, if any, are distributed at
least once a year. All income dividends and capital gains distributions are
reinvested in shares of a Fund at net asset value without sales charge on the
record date, except that any shareholder may otherwise instruct the shareholder
service agent in writing and receive cash. Shareholders are informed as to the
sources of distributions at the time of payment.
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code. By so qualifying, a Fund will not be subject to
federal income taxes on amounts paid by it as dividends and distributions to
shareholders. If any Fund were to fail to qualify as a regulated investment
company under the Code, all of its income (without deduction for income
dividends or capital gain distributions paid to shareholders) would be subject
to tax at corporate rates. Each Fund expects to be treated as a separate entity
for purposes of determining federal tax treatment.
The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Bonds to pass through to its investors,
tax-exempt, net Municipal Bond interest income. In order for the Municipal Bond
Fund to be eligible to pay exempt-interest dividends during any taxable year, at
the close of each fiscal quarter, at least 50% of the aggregate value of the
Fund's assets must consist of exempt-interest obligations. In addition, the Fund
must distribute at least (i) 90% of the excess of its exempt-interest income
over certain disallowed deductions, and (ii) 90% of its "investment company
taxable net income" (i.e., its ordinary taxable income and the excess, if any,
of its net short-term capital gains over any net long-term capital losses)
recognized by the Fund during the taxable year (the "Distribution
Requirements").
Not later than 60 days after the close of its taxable year, the Municipal
Bond Fund will notify its shareholders of the portion of the dividends paid by
the Fund to the shareholders for the taxable year which constitutes exempt
interest dividends. The aggregate amount of dividends so designated cannot
exceed, however, the excess of the amount of interest exempt from tax under
Section 103 of the Code received by the Fund during the year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the Code. Since the
percentage of dividends which are "exempt-interest" dividends is determined on
an average annual method for the fiscal year, the percentage of income
designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax-exempt during
the period covered by the dividend.
Although exempt-interest dividends generally may be treated by the
Municipal Bond Fund's shareholders as items of interest excluded from their
gross income, each shareholder is advised to consult his or her tax adviser with
respect to whether exempt-interest dividends retain this exclusion if the
shareholder should be
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treated as a "substantial user" or a "related person" with respect to any of the
tax-exempt obligations held by the Fund. "Substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person who regularly uses in
his trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed five
percent of the total revenues derived from the facilities by all users, or who
occupies more than five percent of the usable area of the facilities or for whom
the facilities or a part thereof were specifically constructed, reconstructed or
acquired. Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Municipal Bond Fund is not deductible for federal income tax
purposes if the Fund distributes exempt-interest dividends during the
shareholder's taxable year. If a shareholder receives an exempt-interest
dividend with respect to any shares and such shares are held for six months or
less, any short-term capital loss on the sale or exchange of the shares will be
disallowed to the extent of the amount of such exempt-interest dividend.
If, during any taxable year, the Municipal Bond Fund realizes net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) from the sale or other disposition of Municipal Bonds or other assets,
the Fund will have no tax liability with respect to such gains if they are
distributed to shareholders. Distributions designated as capital gains dividends
are taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held his or her shares. Not later than 60 days after the close
of the Fund's taxable year, the Fund will send to its shareholders a written
notice designating the amount of any distributions made during the year which
constitute capital gain.
While the Municipal Bond Fund expects that a major portion of its
investment income will constitute tax-exempt interest, a portion may consist of
"investment company taxable income" and "net capital gains". As pointed out
above, the Fund will be subject to tax for any year on its undistributed
investment company taxable income and net capital gains.
A capital gain dividend received after the purchase of the shares of any
one of the Funds in the Trust reduces the net asset value of the shares by the
amount of the distribution and will be subject to income taxes. A loss on the
sale of shares held for less than six months (to the extent not disallowed on
account of the receipt of exempt-interest dividends) attributable to a capital
gain dividend is treated as a long-term capital loss for Federal income tax
purposes.
Each Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least (1) 98% of its
ordinary taxable income for the twelve months ended December 31, plus (2) 98% of
its capital gain net income for the twelve months ended October 31 of such year.
Each Fund intends to distribute sufficient amounts to avoid liability for the
excise tax.
The Tax Reform Act added a provision that, for years beginning after
December 31, 1989, 75% of the excess of a corporation's adjusted current
earnings (generally, earning and profits, with adjustments) over its other
alternative minimum taxable income is an item of tax preference for
corporations. All tax-exempt interest is included in the definition of "adjusted
current earnings" so a portion of such interest is included in computing the
alternative minimum tax on corporations. For shareholders that are financial
institutions, the Tax Reform Act eliminates their ability to deduct interest
payments to the extent allocated on a pro rata basis to the purchase of Fund
shares.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income paid by the Emerging Growth Fund, the
International Equity Fund, Growth Fund and the Growth and Income Fund qualify
for the 70% dividends received deduction for corporations. To qualify for the
dividends received deduction, a corporate shareholder must hold the shares on
which the dividend is paid for more than 45 days.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year
are considered taxable income to shareholders on December 31 even though paid in
the next year.
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Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such dividends and distributions from short-term capital gains are not
eligible for the dividends received deduction referred to above. Any loss on the
sale of Fund shares held for less than six months is treated as a long-term
capital loss to the extent of any long-term capital gain distribution paid on
such shares, subject to any exception that may be provided by IRS regulations
for losses incurred under certain systematic withdrawal plans. All dividends and
distributions are taxable to the shareholder whether or not reinvested in
shares. Shareholders are notified annually by the Fund as to the federal tax
status of dividends and distributions paid by the Fund.
If shares of each Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under 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 Emerging Growth Fund, the International
Equity Fund, the Growth Fund, the Growth and Income Fund, the Government Fund
and the Municipal Bond Fund may write, purchase or sell. Such options and
contracts are classified as Section 1256 contracts under the Code. The character
of gain or loss resulting from the sale, disposition, closing out, expiration or
other termination of Section 1256 contracts is generally treated as long-term
capital gain or loss to the extent of 60 percent thereof and short-term capital
gain or loss to the extent of 40 percent thereof ("60/40 gain or loss"). Such
contracts, when held by the Fund at the end of a fiscal year, generally are
required to be treated as sold at market value on the last day of such fiscal
year for federal income tax purposes ("marked-to-market"). Over-the-counter
options are not classified as Section 1256 contracts and are not subject to the
marked-to-market rule or to 60/40 gain or loss treatment. Any gains or losses
recognized by the Government Fund from transactions in over-the-counter options
generally constitute short-term capital gains or losses. If over-the-counter
call options written, or over-the-counter put options purchased, by the
Government Fund are exercised, the gain or loss realized on the sale of the
underlying securities may be either short-term or long-term, depending on the
holding period of the securities. In determining the amount of gain or loss, the
sales proceeds are reduced by the premium paid for over-the-counter puts or
increased by the premium received for over-the-counter calls.
Certain of the Emerging Growth Fund's, the International Equity Fund's, the
Growth Fund's, the Growth and Income Fund's, the Government Fund's and the
Municipal Bond Fund's transactions in options, futures contracts, or 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
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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 Municipal Bond Fund may acquire an option to "put" specified portfolio
securities to banks or municipal bond dealers from whom the securities are
purchased. See "Stand-By Commitments," in the Prospectus. The Fund has been
advised by its legal counsel that it will be treated for federal income tax
purposes as the owner of the Municipal Securities acquired subject to the put;
and the interest on the Municipal Securities will be tax-exempt to the Fund.
Counsel has pointed out that although the Internal Revenue Service has issued a
favorable published ruling on a similar but not identical situation, it could
reach a different conclusion from that of counsel. Counsel has also advised the
Fund that the Internal Revenue Service presently will not ordinarily issue
private letter rulings regarding the ownership of securities subject to stand-by
commitments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
OTHER INFORMATION
PERFORMANCE INFORMATION
The Growth Fund's, the Growth and Income Fund's and the Government Fund's
average annual total return for Class 1 shares (computed in the manner described
in the Prospectus) for the one-year and five-year periods ended October 31, 1995
and since inception (April 14, 1987) through October 31, 1995 was 13.48%, 12.07%
and 6.59%; 15.24%, 13.29% and 7.00%; and 9.52%, 8.69%, and 7.02%, respectively.
The Municipal Bond Fund's average annual total return for Class 1 shares
(computed in the manner described in the Prospectus) for approximately the
one-year and five-year periods ended October 31, 1995 and since inception (July
13, 1988) through October 31, 1995 was 7.39%, 7.26% and 7.24%. The Money Market
Fund's average annual total return for Class 1 shares (computed in the manner
described in the Prospectus) for approximately the one-year and five-year
periods ended October 31, 1995 and since inception (December 15, 1987) through
October 31, 1995 was 5.01%, 3.83% and 5.23%, respectively. These results are
based on historical earnings and asset value fluctuations and are not intended
to indicate future performance. Such information should be considered in light
of the Fund's investment objectives and policies as well as the risks incurred
in the Fund's investment practices.
The Government Fund's and the Municipal Bond Fund's annualized current
yield for Class 1 shares for the 30-day period ending October 31, 1995 was 5.55%
and 4.73%, respectively. The Municipal Bond Fund's tax equivalent yield for
Class 1 shares for the 30-day period ending October 31, 1995 was 7.39%. The
Fund's yield is not fixed and will fluctuate in response to prevailing interest
rates and the market value of portfolio securities, and as a function of the
type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
The Money Market Fund's annualized current yield for Class 1 shares, on a
subsidized basis, for the seven-day period ending October 31, 1995 was 4.79%.
The Fund's compound effective yield for Class 1 shares
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for the same period was 4.91%. On a non-subsidized basis, the annualized current
yield for the same period was 4.50% with a compound effective yield of 4.60%.
The overall total return for the Growth II Fund, the Growth and Income II
Fund and the Government II Fund (computed in the manner described in the
Prospectus) for Class A shares for the one-year period ended October 31, 1995
and since inception (May 3, 1994) through October 31, 1995 was 15.73%, 13.60%
and 5.97%; and 10.76%, 8.55% and 2.87%, respectively. The overall total return
for the Growth II Fund, the Growth and Income II Fund and the Government II Fund
(computed in the manner described in the Prospectus) for Class B shares for the
one-year period ended October 31, 1995 and since inception (May 3, 1994) through
October 31, 1995 was 16.50%, 14.19% and 6.42%; and 11.68%, 9.37% and 2.91%,
respectively. The overall total return for Emerging Growth II Fund and
International Equity II Fund (computed in the manner described in the
Prospectus) for Class A shares for the period from inception (March 17, 1995 for
International Equity II Fund and February 21, 1995 for Emerging Growth II Fund)
through October 31, 1995 was 22.02% and 10.79%, respectively. The overall total
return for Emerging Growth II Fund and International Equity II Fund (computed in
the manner described in the Prospectus) for Class B shares for the period from
inception (March 17, 1995 for International Equity II Fund and February 21, 1995
for Emerging Growth II Fund) through October 31, 1995 was 21.37% and 10.23%,
respectively. These results are based on historical earnings and asset value
fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objectives
and policies as well as the risks incurred in the Fund's investment practices.
The Government Fund's annualized current yield (non-subsidized) for Class A
shares and Class B shares for the 30 day period ending October 31, 1995 was
3.48% and 2.88%, respectively. The yield for Class A and Class B shares is not
fixed and will fluctuate in response to prevailing interest rates and the market
value of portfolio securities, and as a function of the type of securities owned
by the Fund, portfolio maturity and the Fund's expenses.
Yield and total return for the Government Fund, the Municipal Bond Fund and
the Money Market Fund are computed separately for each class of shares.
To increase the Fund's yield the Adviser, for an indefinite period has
agreed to absorb a certain amount of the future ordinary business expenses of
the Money Market Fund. The Adviser may stop absorbing these expenses at any time
without prior notice.
The yield of the Fund is its net income expressed in annualized terms. The
SEC requires by rule that a yield quotation set forth in an advertisement for a
"money market" fund be computed by a standardized method based on a historical
seven calendar day period. The standardized yield is computed by determining the
net change (exclusive of realized gains and losses and unrealized appreciation
and depreciation) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by 365/7.
The determination of net change in account value reflects the value of
additional shares purchased with dividends from the original share, dividends
declared on both the original share and such additional shares, and all fees
that are charged to all shareholder accounts, in proportion to the length of the
base period and the Fund's average account size. The Fund may also calculate its
effective yield by compounding the unannualized base period return (calculated
as described above) by adding 1 to the base period return, raising the sum to a
power equal to 365 divided by 7, and subtracting 1.
The yield quoted at any time represents the amount being earned on a
current basis for the indicated period and is a function of the types of
instruments in the Fund, their quality and length of maturity, and the Fund's
operating expenses. The length of maturity for the Fund is the average dollar
weighted maturity of the Fund. This means that the Fund has an average maturity
of a stated number of days for all of its issues. The calculation is weighted by
the relative value of the investment.
The yield fluctuates daily as the income earned on the investments of the
Fund fluctuates. Accordingly, there is no assurance that the yield quoted on any
given occasion will remain in effect for any period of time. It
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should also be emphasized that the Fund is an open-end investment company and
that there is no guarantee that the net asset value will remain constant. A
shareholder's investment in the Fund is not insured. Investors comparing results
of the Fund with investment results and yields from other sources such as banks
or savings and loan associations should understand this distinction.
Other funds of the money market type as well as banks and savings and loan
associations may calculate their yield on a different basis, and the yield
quoted by the Fund could vary upwards or downwards if another method of
calculation or base period were used.
The Funds may illustrate in advertising materials the use of a Payroll
Deduction Plan as a convenient way for business owners to help their employees
set up either IRA or voluntary mutual fund accounts. The Funds may illustrate in
advertising materials retirement planning through employee contributions and/or
salary reductions. Such advertising material will illustrate that employees may
have the opportunity to save for retirement and reduce taxes by electing to
defer a portion of their salary into a special mutual fund IRA account. The
Funds may illustrate in advertising materials that Uniform Gift to Minors Act
accounts may be used as a vehicle for saving for a child's financial future.
Such illustrations will include statements to the effect that upon reaching the
age of majority, such custodial accounts become the child's property.
SHAREHOLDER SERVICES
UNIFORM GIFTS TO MINORS ACT. The Trust recognizes the importance to a child
of establishing a savings and investment plan early in life for education and
other purposes when the child becomes older. The advantages of regular
investment with interest or earnings compounding over a number of years are
great. In addition, taxes on these earnings are assessed against the income of
the child rather than the donor, usually at a lower bracket.
Investors wishing to establish a UGMA account should call the Trust for an
application. Individuals desiring to open an account under UGMA are also advised
to consult with a tax adviser before establishing the account.
INDIVIDUAL RETIREMENT ACCOUNT. Any individual who has compensation or
earned income from employment or self-employment and who is under age 70 1/2 may
establish an IRA. The limitation on the maximum annual contribution to an IRA is
the lesser of 100% of compensation or $2,000. An IRA may also be established for
a spouse who has no compensation (or who elects to be treated as having no
compensation), and the limitation on the maximum annual contributions to the two
IRAs is the lesser of 100% of compensation or $2,250.
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
48
<PAGE> 98
employees, without the complicated reporting and record keeping involved in a
qualified plan. Employees covered by a SEP/SARSEP can use the same IRA to
receive their own allowable IRA contribution.
SECTION 403(B)(7) PLAN. Employees of certain exempt organizations and
schools can have a portion of their compensation set aside, and income taxes
attributable to such portion deferred, in a Section 403(b)(7) plan. Teachers,
school administrators, ministers, employees of hospitals, libraries, community
chests, funds, foundations, and many others may be eligible. The employer must
be an organization described in Section 501(c)(3) of the Internal Revenue Code
and must be exempt from tax under Section 501(a) of the Code. In addition, any
employee of most public educational institutions is eligible if his employer is
a state or a political subdivision of a state, or any agency or instrumentality
of either. The employee is not taxed on the amount set aside or the earnings
thereon until the funds are withdrawn, normally at retirement.
CUSTODY OF ASSETS
All securities owned by the Trust and all cash, including proceeds from the
sale of shares of the Trust and of securities in the Trust's investment
portfolio, are held by State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, as Custodian.
SHAREHOLDER REPORTS
Semi-annual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants whose selection is
ratified annually by shareholders or the Trustees.
INDEPENDENT AUDITORS
Ernst & Young LLP, 1221 McKinney, Suite 2400, Houston, Texas 77010, the
independent auditors for the Trust, perform annual examinations of the Trust's
financial statements.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY
Under the laws of certain states, including Massachusetts, where the Trust
was organized, and Texas, where the Trust's principal office is located,
shareholders of a Massachusetts business trust may, under certain circumstances,
be held personally liable as partners for the obligations of the Trust. However,
the risk of a shareholder incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. The Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Trust or Trustees. The
Declaration of Trust provides for indemnification out of Trust property to any
shareholder held personally liable for the obligations of the Trust and also
provides for the Trust to reimburse such shareholder for all legal and other
expenses reasonably incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees or Officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust will
provide indemnification to its Trustees and Officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
49
<PAGE> 99
FINANCIAL STATEMENTS
The attached financial statements in the form of the Annual Report to
Shareholders including the related report of Independent Auditors on such
financial statements are hereby included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
OCTOBER 31,
1995
------
<S> <C>
GROWTH FUND
Net Asset Value and redemption price per Class 1 share
(Net assets divided by shares outstanding)................................. $17.46
Offering price per share (100/91.5 of per share net asset value)............. $19.08
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)................................. $14.57
Offering price per share (100/94.5 of per share net asset value)............. $15.42
GROWTH AND INCOME FUND
Net Asset Value and redemption price per Class 1 share
(Net assets divided by shares outstanding)................................. $16.95
Offering price per share (100/91.5 of per share net asset value.............. $18.52
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)................................. $13.92
Offering price per share (100/94.5 of per share net asset value)............. $14.73
GOVERNMENT FUND
Net Asset Value and redemption price per Class 1 share
(Net assets divided by shares outstanding)................................. $10.67
Offering price per share (100/93.25 of per share
(Net asset value).......................................................... $11.44
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)................................. $12.14
Offering price per share (100/95.25 of per share)
(Net asset value).......................................................... $12.75
MUNICIPAL BOND FUND
Net Asset Value and redemption price per Class 1 share
(Net assets divided by shares outstanding)................................. $13.77
Offering price per share (100/95.25 of per share
(Net asset value).......................................................... $14.46
MONEY MARKET FUND
Net Asset Value, redemption price and offering price per Class 1 share
(Net assets divided by shares outstanding)................................. $ 1.00
</TABLE>
50
<PAGE> 100
<TABLE>
<CAPTION>
OCTOBER 31,
1995
------
<S> <C>
EMERGING GROWTH FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)............................... $15.12
Offering price per share (100/94.5 of per share net asset value)........... $16.00
INTERNATIONAL EQUITY FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)............................... $13.86
Offering price per share (100/94.5 of per share)
(Net asset value)........................................................ $14.67
</TABLE>
51
<PAGE> 101
APPENDIX 1
(Commercial Paper, Bond and Other Short- and Long-Term Ratings)
Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's"), Fitch Investors Service, Inc. ("Fitch"),
Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc. ("IBCA");
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily will established industries,
high rates of return of funds employed, conservative well established
industries, high rates of return of funds employed, conservative capitalization
structures with moderate reliance on debt and ample asset protection, broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a strong
capacity for repayment of short-term promissory obligations. This ordinarily
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff,
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest and, in the majority of instances, differ only in small
degrees from issues rated AAA.
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds are rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2
and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in
52
<PAGE> 102
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.
53
<PAGE> 103
APPENDIX 2
MUNICIPAL BOND RATINGS
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE ("MOODY'S") MUNICIPAL BOND RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a midrange ranking;
and a modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk but having protection . . . and not
distinctly or predominantly speculative."
Beginning on February 5, 1985, Moody's started new rating categories for
variable rate demand obligations ("VRDO's"). VRDO's receive two ratings. The
first rating, depending on the maturity of the VRDO, is assigned either a bond
or MIG rating which represents an evaluation of the risk associated with
scheduled principal and interest payments. The second rating, designated as
"VMIG," represents an
54
<PAGE> 104
evaluation of the degree of risk associated with the demand feature. The new
VRDO's demand feature ratings and symbols are:
VMIG 1: strong protection by established cash flows, superior liquidity
support, demonstrated access to the market for refinancing.
VMIG 2: ample margins of protection, high quality.
VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well
established.
VMIG 4: adequate quality, not predominantly speculative but there is
risk.
DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers.
The first two are described below:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("S&P") MUNICIPAL DEBT RATINGS
A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources S&P considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
55
<PAGE> 105
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
BB,B Debt rated "BB" and "B" is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that S&P
does not rate a particular type of obligation as a matter of policy.
A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. The
highest category is "A" which is further defined with the designation of 1, 2
and 3 to indicate the relative degree of safety. The first two categories are
described below:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer and obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given
a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
S&P may continue to rate note issues with a maturity greater than three
years in accordance with the same rating scale currently employed for municipal
bond ratings.
S&P assigns dual ratings to all long-term debt issues that have a demand or
put feature. The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses the demand feature alone.
Long-term debt rating symbols are used for the long-term maturity and commercial
paper rating symbols are used for the put option (for example, AAA/A-1+). For
demand notes, S&P's note rating symbols are used with the commercial paper
symbols (for example, SP-1+/a-1+).
56
<PAGE> 106
Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split rated
securities (i.e., different ratings by Moody's and S&P) and dual rated
securities as described above.
Subsequent to its purchase by the Fund, an issue of Municipal Bonds or a
Temporary Investment may cease to be rated or its rating may be reduced, causing
more than 20% of the Fund's assets invested in Municipal Bonds to be invested in
low or non-rated bonds. This would not require the elimination of such
obligation from the Fund's portfolio, but the Adviser will consider such an
event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by S&P or
Moody's for Municipal Bonds or Temporary Investment may change as a result of
changes in such organizations, or changes in their rating systems, the Fund will
attempt to use comparable ratings as standards for its investments in Municipal
Bonds or Temporary Investments in accordance with the investment policies
contained herein.
57
<PAGE> 107
GROWTH FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------------
<S> <C> <C>
Common Stock 91.2%
CONSUMER DISTRIBUTION 5.5%
100,000 Dayton Hudson Corp................................ $ 6,875,000
*500,000 Eckerd Corp....................................... 19,812,500
375,000 Gap, Inc.......................................... 14,765,625
*173,200 Kohl's Corp....................................... 7,858,950
*800,000 Kroger Co......................................... 26,700,000
400,000 May Department Stores Co.......................... 15,700,000
325,000 Nordstrom, Inc.................................... 12,045,313
*550,000 OfficeMax, Inc.................................... 13,612,500
750,000 Sears, Roebuck & Co............................... 25,500,000
-----------
142,869,888
-----------
CONSUMER DURABLES 1.5%
150,000 Chrysler Corp..................................... 7,743,750
400,000 Echlin, Inc....................................... 14,300,000
400,000 General Motors Corp............................... 17,500,000
-----------
39,543,750
-----------
CONSUMER NON-DURABLES 9.2%
525,000 ConAgra, Inc...................................... 20,278,125
200,000 CPC International, Inc............................ 13,275,000
250,000 Duracell International, Inc....................... 13,093,750
300,000 General Mills, Inc................................ 17,212,500
300,000 Gillette Co....................................... 14,512,500
300,000 Heinz (H.J.) Co................................... 13,950,000
950,000 Nabisco Holdings Corp., Class A................... 25,531,250
750,000 PepsiCo, Inc...................................... 39,562,500
450,000 Procter & Gamble Co............................... 36,450,000
450,000 Ralston Purina Group.............................. 26,718,750
700,000 Sara Lee Corp..................................... 20,562,500
-----------
241,146,875
-----------
CONSUMER SERVICES 4.6%
125,000 Capital Cities ABC, Inc........................... 14,828,125
*500,000 Cox Communications, Inc........................... 9,375,000
263,000 Disney (Walt) Co.................................. 15,155,375
375,000 Marriott International, Inc....................... 13,828,125
600,000 Service Corp. International....................... 24,075,000
*510,000 Tele-Communications International, Class A........ 11,538,750
350,000 Time Warner, Inc.................................. 12,775,000
150,000 Tribune Co........................................ 9,468,750
*200,000 ViaCom, Inc., Class B............................. 10,000,000
-----------
121,044,125
-----------
ENERGY 6.9%
641,300 Coastal Corp...................................... 20,762,088
400,000 Exxon Corp........................................ 30,550,000
300,000 Mobil Corp........................................ 30,225,000
800,000 Panhandle Eastern Corp............................ 20,200,000
</TABLE>
F-1
<PAGE> 108
GROWTH FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY--continued
300,000 Repsol SA, ADR....................................................... $ 8,887,500
200,000 Schlumberger, Ltd.................................................... 12,450,000
325,000 Texaco, Inc.......................................................... 22,140,625
600,000 USX-Marathon Group................................................... 10,650,000
626,500 Williams Companies................................................... 24,198,563
------------
180,063,776
------------
FINANCE 16.4%
300,000 Ahmanson (H.F.) & Co................................................. 7,500,000
350,000 American Express Co.................................................. 14,218,750
190,000 American International Group, Inc.................................... 16,031,250
800,000 Bank of Boston Corp.................................................. 35,600,000
300,000 Bank of New York, Inc................................................ 12,600,000
200,000 BankAmerica Corp..................................................... 11,500,000
430,000 Bankers Trust New York Corp.......................................... 27,412,500
400,000 BayBanks, Inc........................................................ 32,400,000
150,000 Chase Manhattan Corp................................................. 8,550,000
150,000 Chemical Banking Corp................................................ 8,531,250
400,000 CoreStates Financial Corp............................................ 14,550,000
*46,400 Donaldson, Lufkin & Jenrette, Inc.................................... 1,380,400
400,000 Federal National Mortgage Association................................ 41,950,000
750,000 Greenpoint Financial Corp............................................ 20,250,000
900,000 Green Tree Financial Corp............................................ 23,962,500
300,000 Merrill Lynch & Co., Inc............................................. 16,650,000
125,000 Morgan Stanley Group, Inc............................................ 10,875,000
275,000 Morgan (J.P.) & Co., Inc............................................. 21,209,375
8,397,720 Van Kampen American Capital Small Capitalization Fund (see Note 2)... 102,200,258
------------
427,371,283
------------
HEALTH CARE 11.8%
160,000 American Home Products Corp.......................................... 14,180,000
*250,000 Amgen, Inc........................................................... 12,000,000
300,000 Astra, AB, Series A, ADR............................................. 11,025,000
250,000 Baxter International, Inc............................................ 9,656,250
150,000 Becton Dickinson & Co................................................ 9,750,000
850,000 Caremark International, Inc.......................................... 17,531,250
*85,000 Cordis Corp.......................................................... 9,392,500
*500,000 Genzyme Corp......................................................... 29,125,000
210,000 Lilly (Eli) & Co..................................................... 20,291,250
300,000 Mallinckrodt Group, Inc.............................................. 10,425,000
310,000 Medtronic, Inc....................................................... 17,902,500
195,000 Merck & Co., Inc..................................................... 11,212,500
*175,000 Nellcor, Inc......................................................... 10,062,500
425,000 Pfizer, Inc.......................................................... 24,384,375
500,000 Schering-Plough Corp................................................. 26,812,500
625,000 SmithKline Beecham, ADR.............................................. 32,421,875
80,000 St. Jude Medical, Inc................................................ 4,260,000
500,000 U.S. Healthcare, Inc................................................. 19,250,000
225,000 Warner Lambert Co.................................................... 19,153,125
------------
308,835,625
------------
</TABLE>
F-2
<PAGE> 109
GROWTH FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING 6.6%
150,000 Fluor Corp. ..................................... $ 8,475,000
330,000 General Electric Co. ............................ 20,872,500
450,000 Honeywell, Inc. ................................. 18,900,000
175,000 Illinois Tool Works, Inc. ....................... 10,171,875
300,000 ITT Corp. ....................................... 36,750,000
200,000 Rockwell International Corp. .................... 8,900,000
*675,045 Thermo Fibertek, Inc. ........................... 10,631,959
100,000 TRW, Inc. ....................................... 6,575,000
425,000 United Technologies Corp. ....................... 37,718,750
430,000 WMX Technologies, Inc. .......................... 12,093,750
------------
171,088,834
------------
RAW MATERIALS/PROCESSING INDUSTRIES 3.2%
225,000 Champion International Corp. .................... 12,037,500
315,000 Freeport-McMoRan, Copper Gold, Series B.......... 7,166,250
200,000 Grace (W.R.) & Co. .............................. 11,150,000
825,000 James River Corp. ............................... 26,503,125
250,000 Monsanto Co. .................................... 26,187,500
------------
83,044,375
------------
TECHNOLOGY 18.2%
140,000 Adobe Systems, Inc. ............................. 7,980,000
*300,000 Bay Networks, Inc. .............................. 19,875,000
250,000 Boeing Co. ...................................... 16,406,250
*400,000 Cisco Systems, Inc. ............................. 31,000,000
*550,000 Compaq Computer Corp. ........................... 30,662,500
650,000 Computer Associates International, Inc. ......... 35,750,000
*630,000 Dell Computer Corp. ............................. 29,373,750
*580,000 Digital Equipment Corp. ......................... 31,392,500
125,700 DST Systems, Inc. ............................... 2,639,700
350,000 General Motors Corp., Class H.................... 14,700,000
300,000 Hewlett-Packard Co. ............................. 27,787,500
500,000 Intel Corp. ..................................... 34,937,500
320,000 International Business Machines Corp. ........... 31,120,000
500,000 Loral Corp. ..................................... 14,812,500
*300,000 LSI Logic Corp. ................................. 14,137,500
175,000 McDonnell Douglas Corp. ......................... 14,306,250
*250,000 Microsoft Corp. ................................. 25,000,000
160,000 Motorola, Inc. .................................. 10,500,000
*200,000 National Semiconductor Corp. .................... 4,875,000
150,000 Northrop Grumman Corp. .......................... 8,587,500
*155,700 Oracle System Corp. ............................. 6,792,413
*58,200 Parametric Technology Corp. ..................... 3,899,400
*500,000 Symantec Corp. .................................. 12,156,250
200,000 Texas Instruments, Inc. ......................... 13,650,000
*550,000 3Com Corp. ...................................... 25,850,000
160,000 Varian Associates, Inc. ......................... 8,220,000
------------
476,411,513
------------
</TABLE>
F-3
<PAGE> 110
GROWTH FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION 1.5%
150,000 Burlington Northern, Inc............................................................................ $ 12,581,250
400,000 Conrail, Inc........................................................................................ 27,500,000
--------------
40,081,250
--------------
UTILITIES 5.8%
160,000 Ameritech Corp. .................................................................................... 8,640,000
500,000 AT&T Corp. ......................................................................................... 32,000,000
*150,000 Cellular Communications, Inc., Class A.............................................................. 8,043,750
800,000 Frontier Corp. ..................................................................................... 21,600,000
1,425,000 MCI Communications Corp. ........................................................................... 35,535,936
160,000 SBC Communications, Inc. ........................................................................... 8,940,000
*1,100,000 WorldCom, Inc. ..................................................................................... 35,887,500
--------------
150,647,186
--------------
TOTAL COMMON STOCK (Cost $2,121,303,425).......................................................... 2,382,148,480
--------------
Preferred Stock 0.5%
*244,130 Cellular Communications, Inc., Class A (Cost $7,632,548)............................................ 13,091,471
--------------
Principal
Amount Short-Term Investments 8.3%
----------
REPURCHASE AGREEMENTS+ 5.7%
$**46,740,000 Lehman Government Securities, 5.90%, repurchase proceeds $46,747,660................................ 46,740,000
15,415,000 SBC Capital Markets, Inc., 5.87%, repurchase proceeds $15,417,514................................... 15,415,000
85,455,000 State Street Bank & Trust Co., 5.88%, repurchase proceeds $85,468,958............................... 85,455,000
--------------
147,610,000
--------------
UNITED STATES AGENCIES & GOVERNMENT OBLIGATIONS 2.6%
**13,000,000 Federal Farm Credit Banks, 5.63%, 1/16/96........................................................... 12,845,170
**7,500,000 Federal Home Loan Banks, 5.61%, 4/12/96............................................................. 7,313,775
**42,000,000 Federal National Mtg. Association, 5.58% to 5.62%, 12/22/95 to 2/12/96.............................. 41,528,369
**6,500,000 Treasury Bills, 5.45%, 3/7/96....................................................................... 6,377,280
--------------
68,064,594
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $215,677,899).................................................. 215,674,594
--------------
TOTAL INVESTMENTS (Cost $2,344,613,872) 100.0%..................................................... 2,610,914,545
Other assets and liabilities, net 0.0%.............................................................. 590,364
--------------
NET ASSETS, equivalent to $17.46 per share 100%..................................................... $2,611,504,909
==============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited shares authorized;
149,533,377 shares outstanding................................................................................... $ 1,495,334
Capital surplus.................................................................................................... 1,970,060,661
Undistributed net realized gain on securities...................................................................... 352,658,120
Net unrealized appreciation of securities
Investments....................................................................................................... 266,300,673
Futures contracts ................................................................................................ 39,318
Undistributed net investment income ............................................................................... 20,950,803
--------------
NET ASSETS ........................................................................................................ $2,611,504,909
==============
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $99.6 million were placed as
collateral for futures contracts (see Note 1B).
+ Dated 10/31/95, due 11/1/95, collateralized by U.S. Government obligations in
a pooled cash account.
See Notes to Financial Statements.
F-4
<PAGE> 111
GROWTH FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations
Year Ended
October 31, 1995
----------------
<S> <C>
Investment Income
Dividends...................................................................................... $ 35,447,186
Interest....................................................................................... 12,456,275
--------------
Investment income............................................................................ 47,903,461
--------------
Expenses
Advisory fees.................................................................................. 14,436,748
Shareholder service agent's fees and expenses.................................................. 7,777,431
Accounting services............................................................................ 277,991
Trustees' fees and expenses.................................................................... 164,063
Audit fees..................................................................................... 27,534
Custodian fees................................................................................. 98,812
Legal fees..................................................................................... 14,778
Reports to shareholders........................................................................ 549,716
Registration and filing fees................................................................... 95,114
Miscellaneous.................................................................................. 74,558
--------------
Total expenses............................................................................... 23,516,745
--------------
Net investment income........................................................................ 24,386,716
--------------
Realized and Unrealized Gain (Loss) on Securities
Net unrealized gain on securities
Investments.................................................................................. 348,559,285
Futures contracts............................................................................ 9,631,709
Net unrealized appreciation (depreciation) of securities during the period
Investments.................................................................................. 132,789,518
Futures contracts............................................................................ (2,562,118)
--------------
Net realized and unrealized gain on securities............................................... 488,418,394
--------------
Increase in net assets resulting from operations............................................. $ 512,805,110
==============
</TABLE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year Ended October 31
--------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
NET ASSETS, beginning of period.............................................. $2,169,907,302 $2,065,704,741
-------------- --------------
Operations
Net investment income....................................................... 24,386,716 18,949,920
Net realized gain on securities............................................. 358,190,994 150,460,394
Net unrealized appreciation (depreciation) of securities during the period.. 130,227,400 (125,267,340)
-------------- --------------
Increase in net assets resulting from operations........................... 512,805,110 44,142,974
-------------- --------------
Distributions to shareholders from
Net investment income....................................................... (22,053,177) (14,476,435)
Net realized gain on securities............................................. (147,259,430) (151,147,388)
-------------- --------------
Total distributions........................................................ (169,312,607) (165,623,823)
-------------- --------------
Capital transactions
Proceeds from shares sold................................................... 294,906,458 394,956,323
Proceeds from shares issued for distributions reinvested.................... 168,462,102 164,787,271
Cost of shares redeemed..................................................... (365,263,456) (334,060,184)
-------------- --------------
Increase in net assets resulting from capital transactions................. 98,105,104 225,683,410
-------------- --------------
Increase in Net Assets....................................................... 441,597,607 104,202,561
-------------- --------------
NET ASSETS, end of period.................................................... $2,611,504,909 $2,169,907,302
============== ==============
CAPITAL TRANSACTIONS
Shares sold................................................................. 19,019,524 25,712,863
Shares issued for distributions reinvested.................................. 12,278,591 10,798,656
Shares redeemed............................................................. (23,505,333) (21,793,543)
-------------- --------------
Increase in shares outstanding............................................. 7,792,782 14,717,976
============== ==============
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 112
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------
<S> <C> <C>
Common Stock 81.5%
CONSUMER DISTRIBUTION 4.7%
*92,000 Ann Taylor Stores, Inc.............. $ 1,012,000
45,000 Dayton Hudson Corp.................. 3,093,750
*260,000 Federated Department Stores, Inc.... 6,597,500
90,100 Fleming Companies, Inc.............. 2,038,513
86,000 Gap, Inc............................ 3,386,250
23,500 Interstate Bakeries Co.............. 502,312
260,000 May Department Stores Co............ 10,205,000
*77,000 Nine West Group, Inc................ 3,426,500
101,000 Nordstrom, Inc...................... 3,743,313
145,000 Sears, Roebuck & Co................. 4,930,000
-----------
38,935,138
-----------
CONSUMER DURABLES 1.4%
58,000 Eastman Kodak Co.................... 3,632,250
121,000 General Motors Corp................. 5,293,750
160,000 Sunbeam-Oster, Inc.................. 2,400,000
-----------
11,326,000
-----------
CONSUMER NON-DURABLES 7.5%
119,000 Coca-Cola Co........................ 8,553,125
80,000 CPC International, Inc.............. 5,310,000
64,000 General Mills, Inc.................. 3,672,000
114,000 Gillette Co......................... 5,514,750
400,000 Nabisco Holdings Corp., Class A..... 10,750,000
64,000 Nike, Inc., Class B................. 3,632,000
135,000 Procter & Gamble Co................. 10,935,000
151,600 Quaker Oats Co...................... 5,173,350
151,000 Ralston Purina Group................ 8,965,625
-----------
62,505,850
-----------
CONSUMER SERVICES 4.3%
38,000 Capital Cities ABC, Inc............. 4,507,750
113,000 Disney (Walt) Co.................... 6,511,625
191,000 McDonald's Corp..................... 7,831,000
79,571 Omnicom Group, Inc.................. 5,082,598
*129,000 Viacom, Inc., Class B............... 6,450,000
267,000 Wendy's International, Inc.......... 5,306,625
-----------
35,689,598
-----------
ENERGY 9.0%
103,000 British Petroleum Co., PLC, ADR..... 9,089,750
203,000 Exxon Corp.......................... 15,504,125
108,000 Mobil Corp.......................... 10,881,000
410,000 Pacific Enterprises................. 10,147,500
126,000 Panhandle Eastern Corp.............. 3,181,500
131,000 Royal Dutch Petroleum Co., ADR...... 16,096,625
135,000 Texaco, Inc......................... 9,196,875
-----------
74,097,375
-----------
</TABLE>
F-6
<PAGE> 113
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------------
<S> <C> <C>
FINANCE 14.1%
65,000 Ahmanson (H. F.) & Co................... $ 1,625,000
79,500 American International Group, Inc....... 6,707,812
151,000 Banc One Corp........................... 5,096,250
117,000 Bank Of Boston Corp..................... 5,206,500
193,000 Bankers Trust New York Corp............. 12,303,750
60,000 BayBanks, Inc........................... 4,860,000
62,000 Beacon Property Corp.................... 1,348,500
114,000 Chemical Banking Corp................... 6,483,750
60,000 Chubb Corp.............................. 5,392,500
234,000 CoreStates Financial Corp............... 8,511,750
136,000 Debartolo Realty Corp................... 1,768,000
43,000 Duke Realty Investments, Inc............ 1,316,875
171,000 Federal National Mortgage Association... 17,933,625
48,000 Health Care Property Investors, Inc..... 1,626,000
191,000 Horace Mann Educators Corp.............. 5,085,375
143,000 Morgan (J.P.) & Co., Inc................ 11,028,875
306,000 Prudential Reinsurance Holdings......... 6,234,750
97,000 St. Paul Companies, Inc................. 4,922,750
198,000 State Street Boston Corp................ 7,697,250
11,100 Vornado Realty Trust.................... 398,212
38,000 Weingarten Realty Investors............. 1,311,000
-----------
116,858,524
-----------
HEALTH CARE 10.7%
124,000 Abbott Laboratories, Inc................ 4,929,000
99,000 American Home Products Corp............. 8,773,875
*190,000 Amgen, Inc.............................. 9,120,000
95,000 Astra, A B, Series A, ADR............... 3,491,250
138,000 Baxter International, Inc............... 5,330,250
*145,000 Charter Medical Corp.................... 2,610,000
111,000 Mallinckrodt Group, Inc................. 3,857,250
217,000 Merck & Co., Inc........................ 12,477,500
150,000 Pfizer, Inc............................. 8,606,250
186,000 Pharmacia Aktiebolag, ADR............... 6,510,000
171,000 Schering-Plough Corp.................... 9,169,875
205,000 Tenet Healthcare Corp................... 3,664,375
77,000 Teva Pharmaceutical, Ltd., ADR.......... 3,022,250
*116,000 Vencor, Inc............................. 3,219,000
64,000 Zeneca Group PLC, ADR................... 3,608,000
-----------
88,388,875
-----------
PRODUCER MANUFACTURING 5.1%
101,000 Allied-Signal, Inc...................... 4,292,500
143,000 Fluor Corp.............................. 8,079,500
109,000 General Electric Co..................... 6,894,250
203,000 Honeywell, Inc.......................... 8,526,000
109,000 Illinois Tool Works, Inc................ 6,335,625
125,000 Stewart & Stevenson Services, Inc....... 2,843,750
188,000 WMX Technologies, Inc................... 5,287,500
-----------
42,259,125
-----------
</TABLE>
F-7
<PAGE> 114
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES 5.5%
88,000 Air Products & Chemicals, Inc.................. $ 4,543,000
75,000 Aluminum Co. of America........................ 3,825,000
148,000 Bemis, Inc..................................... 3,848,000
98,000 Champion International Corp.................... 5,243,000
104,900 Grace (W.R.) & Co.............................. 5,848,175
120,000 James River Corp............................... 3,855,000
87,000 Monsanto Co.................................... 9,113,250
95,000 Scott Paper Co................................. 5,058,750
81,000 Sigma-Aldrich Corp............................. 3,847,500
-----------
45,181,675
-----------
TECHNOLOGY 9.2%
95,000 Adobe Systems, Inc............................. 5,415,000
105,000 Alcatel Alsthom, ADR........................... 1,771,875
100,000 Boeing Co...................................... 6,562,500
*120,000 Compaq Computer Corp........................... 6,690,000
164,000 Computer Associates International, Inc......... 9,020,000
*115,000 Digital Equipment Corp......................... 6,224,375
61,000 Hewlett-Packard Co............................. 5,650,125
33,000 International Business Machines Corp........... 3,209,250
210,000 Loral Corp..................................... 6,221,250
*57,000 Microsoft Corp................................. 5,700,000
26,000 Motorola, Inc.................................. 1,706,250
45,000 Nokia Corp., ADS............................... 2,508,750
67,000 Northrop Grumman Corp.......................... 3,835,750
*100,000 Symantec Corp.................................. 2,431,250
74,000 Xerox Corp..................................... 9,601,500
-----------
76,547,875
-----------
TRANSPORTATION 0.6%
78,000 Union Pacific Corp............................. 5,099,250
-----------
UTILITIES 9.4%
110,000 Ameritech Corp................................. 5,940,000
199,000 AT&T Corp...................................... 12,736,000
149,000 Cincinnati Bell, Inc........................... 4,376,875
200,000 Frontier Corp.................................. 5,400,000
220,000 General Public Utilities Corp.................. 6,875,000
362,000 MCI Communications Corp........................ 9,027,375
211,000 National Power, ADR............................ 2,637,500
330,000 PacifiCorp..................................... 6,228,750
248,000 Peco Energy Co................................. 7,254,000
245,000 PowerGen, PLC, ADR............................. 4,073,125
91,000 Southern New England Telecommunications Corp... 3,287,375
231,000 Telefonos de Mexico, S.A., ADR................. 6,352,500
83,000 U. S. West, Inc................................ 3,952,875
-----------
78,141,375
-----------
TOTAL COMMON STOCK (Cost $567,170,224)....... 675,030,660
-----------
</TABLE>
F-8
<PAGE> 115
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Convertible Corporate Obligations 7.1%
CONSUMER DISTRIBUTION 0.7%
$ 4,000,000 Federated Department Stores, Inc., 5.00%, 10/01/03........... $ 3,880,000
4,500,000 Rite Aid Corp., LYON, Zero Coupon, 7/24/06................... 2,238,750
-----------
6,118,750
-----------
CONSUMER SERVICES 2.6%
22,000,000 ADT Operations, Inc., LYON, Zero Coupon, 7/06/10............. 9,900,000
12,000,000 News America Holdings, Inc., LYON, Zero Coupon, 3/11/13...... 5,340,000
2,193,250 Time Warner, Inc., 8.75%, 1/10/15............................ 2,283,722
9,000,000 Time Warner, Inc., LYON, Zero Coupon, 6/22/13................ 3,600,000
-----------
21,123,722
-----------
HEALTH CARE 2.8%
4,200,000 Ciba-Geigy Corp., 6.25%, 3/15/16............................. 4,200,000
23,000,000 Roche Holdings, Inc., LYON, 4/20/10.......................... 9,487,500
2,510,000 Sandoz, Ltd., 2.00%, 10/06/02................................ 2,202,525
6,000,000 United Technologies Corp., PEN, Zero Coupon, 9/08/97......... 7,140,000
-----------
23,030,025
-----------
UTILITIES 1.0%
115,000 Sprint Corp., DECS, 8.25%, 3/30/00........................... 4,171,745
12,500,000 U.S. Cellular Corp., LYON, Zero Coupon, 6/15/15.............. 4,250,000
-----------
8,421,745
-----------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS (Cost $53,792,467). 58,694,242
-----------
Number
of Shares Convertible Preferred Stock 4.1%
- -----------
165,000 Browning-Ferris Industries, Inc., ACES, $7.25................ 5,424,375
130,000 Corning Glassworks, MIPS, 6.00%.............................. 5,850,000
190,000 James River Corp., DECS, $1.55............................... 5,795,000
66,000 SCI Finance, LLC, NV, 6.25%.................................. 4,653,000
136,000 Time Warner, Inc., PERCS, $1.24.............................. 4,352,000
115,000 Williams Companies, Inc., $3.50.............................. 7,820,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $30,242,889)....... 33,894,375
-----------
</TABLE>
F-9
<PAGE> 116
GROWTH AND INCOME FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Investments 6.5%
REPURCHASE AGREEMENT 5.3%
**$44,120,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%
due 11/01/95 (collateralized by U.S. Government
obligations in a pooled cash account)
repurchase proceeds $44,127,194.................... $ 44,120,000
------------
UNITED STATES GOVERNMENT OBLIGATIONS 1.2%
**10,000,000 United States Treasury Bills, 5.33% to 5.44%,
12/14/95 to 02/08/96............................... 9,893,739
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $54,014,989). 54,013,739
------------
TOTAL INVESTMENTS (Cost $705,220,569) 99.2%....... 821,633,016
Other assets and liabilities, net 0.8%............ 6,685,784
------------
NET ASSETS equivalent to $16.95 per share 100%.... $828,318,800
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited
shares authorized; 48,862,007 shares outstanding................ $ 488,620
Capital surplus................................................... 620,858,953
Undistributed net realized gain on securities..................... 84,630,671
Net unrealized appreciation of securities
Investments..................................................... 116,412,447
Futures contracts............................................... 444,125
Undistributed net investment income............................... 5,483,984
------------
NET ASSETS........................................................ $828,318,800
============
</TABLE>
ACES--Automatically convertible equity stock
DECS--Dividend enhanced convertible stock
LYON--Liquid yield option note, zero coupon
MIPS--Monthly income paying security
PEN--Pharmaceutical exchange note
PERCS--Preferred equity redeemable cumulative stock
*Non-income producing security.
**Securities with a market value of approximately $32.2 million were placed as
collateral for futures contracts (see Note 1B).
See Notes to Financial Statements.
F-10
<PAGE> 117
GROWTH AND INCOME FUND FINANCIAL STATEMENTS
STATEMENT of Operations
<TABLE>
<CAPTION>
Year Ended
October 31, 1995
----------------
<S> <C>
Investment Income
Dividends .................................................................................. $ 18,964,829
Interest ................................................................................... 5,576,108
------------
Investment income ........................................................................ 24,540,937
------------
Expenses
Advisory fees .............................................................................. 4,937,121
Shareholder service agent's fees and expenses .............................................. 1,864,452
Accounting services ........................................................................ 123,458
Trustees' fees and expenses ................................................................ 66,447
Audit fees ................................................................................. 21,234
Custodian fees ............................................................................. 41,577
Legal fees ................................................................................. 6,008
Reports to shareholders .................................................................... 124,201
Registration and filing fees ............................................................... 58,712
Miscellaneous .............................................................................. 24,466
------------
Total expenses ........................................................................... 7,267,676
------------
Net investment income .................................................................... 17,273,261
------------
Realized and Unrealized Gain on Securities
Net realized gain on securities
Investments .............................................................................. 83,590,199
Futures contracts ........................................................................ 1,261,711
Net unrealized appreciation of securities during the period
Investments .............................................................................. 52,512,988
Futures contracts ........................................................................ 491,867
------------
Net realized and unrealized gain on securities ........................................... 137,856,765
------------
Increase in net assets resulting from operations ......................................... $155,130,026
============
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of period ............................................... $712,895,284 $712,367,257
------------ ------------
Operations
Net investment income ....................................................... 17,273,261 12,993,062
Net realized gain on securities ............................................. 84,851,910 72,326,560
Net unrealized appreciation (depreciation) of securities during the period .. 53,004,855 (81,656,758)
------------ ------------
Increase (decrease) in net assets resulting from operations ............... 155,130,026 3,662,864
------------ ------------
Distributions to shareholders from
Net investment income ....................................................... (14,344,183) (12,164,102)
Net realized gain on securities ............................................. (71,729,488) (48,603,788)
------------ ------------
Total distributions ....................................................... (86,073,671) (60,767,890)
------------ ------------
Capital transactions
Proceeds from shares sold ................................................... 94,833,007 124,276,586
Proceeds from shares issued for distributions reinvested .................... 84,847,579 59,928,843
Cost of shares redeemed ..................................................... (133,313,425) (126,572,376)
------------ ------------
Increase in net assets resulting from capital transactions ................ 46,367,161 57,633,053
------------ ------------
Increase in Net Assets ........................................................ 115,423,516 528,027
------------ ------------
NET ASSETS, end of period ..................................................... $828,318,800 $712,895,284
============ ============
CAPITAL TRANSACTIONS
Shares sold ................................................................. 6,095,770 7,820,632
Shares issued for distributions reinvested .................................. 6,153,341 3,781,949
Shares redeemed ............................................................. (8,600,756) (7,984,398)
------------ ------------
Increase in shares outstanding ............................................ 3,648,355 3,618,183
============ ============
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE> 118
GOVERNMENT FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
United States Government Agencies 47.6%
Federal National Mortgage Association
$ 9,808,713 7.00% Pools, 4/1/24 to 5/1/25........................................................... $ 9,725,928
9,400,488 7.50% Pools, 12/31/23 to 11/1/24........................................................ 9,497,406
28,723,524 8.00% Pools, 5/1/22 to 7/1/25........................................................... 29,423,804
Federal Home Loan Mortgage Corp.
5,738,334 6.50% 5 yr. Pools, 10/1/97 to 7/1/98.................................................... 5,768,805
655,215 7.00% 5 yr. Pools, 12/1/96 to 8/1/97.................................................... 662,999
5,004,038 7.00% 30 yr. Pools, 7/1/24 to 9/1/24.................................................... 4,964,956
24,189,221 7.50% 30 yr. Pools, 4/1/24 to 10/1/24................................................... 24,461,350
9,449,628 8.00% 30 yr. Pools, 6/1/24 to 10/1/24................................................... 9,680,010
Government National Mortgage Association
23,726,589 7.00% Pools, 3/15/22 to 5/15/24......................................................... 23,563,587
17,561,169 7.50% Pools, 3/15/22 to 10/15/24........................................................ 17,791,747
12,148,781 8.00% Pools, 6/15/16 to 7/15/24......................................................... 12,498,058
8,210,879 8.50% Pools, 12/15/05 to 6/15/23........................................................ 8,539,128
13,747 10.00% Pool, 3/15/16.................................................................... 14,993
------------
TOTAL UNITED STATES GOVERNMENT AGENCIES (Cost $150,362,195)............................. 156,592,771
------------
United States Treasury Notes 49.8%
**9,000,000 6.50%, 8/15/97.......................................................................... 9,129,420
**20,000,000 7.75%, 12/31/99......................................................................... 21,415,600
**25,000,000 7.875%, 2/15/96......................................................................... 25,152,250
**45,000,000 7.875%, 1/15/98......................................................................... 47,025,000
**10,000,000 8.00%, 5/15/01.......................................................................... 11,006,300
10,000,000 9.00%, 5/15/98.......................................................................... 10,768,800
**39,000,000 9.25%, 1/15/96.......................................................................... 39,268,320
------------
TOTAL UNITED STATES TREASURY NOTES (Cost $163,208,203).................................. 163,765,690
------------
Forward Purchase Commitments 17.8%
Federal National Mortgage Association
*10,000,000 7.50%, settling December '95............................................................ 10,088,400
*8,500,000 7.50%, settling January '96............................................................. 8,563,070
Government National Mortgage Association
*30,000,000 7.00%, settling November '95............................................................ 29,793,900
*10,000,000 7.50%, settling December '95............................................................ 10,116,900
------------
TOTAL FORWARD PURCHASE COMMITMENTS (Cost $57,619,375)................................... 58,562,270
------------
</TABLE>
F-12
<PAGE> 119
GOVERNMENT FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement 0.9%
$ 2,840,000 SBC Capital Markets, Inc., dated 10/31/95, 5.90%, due 11/01/95
(collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $2,840,465 (Cost $2,840,000).................. $ 2,840,000
------------
TOTAL INVESTMENTS (Cost $374,029,773) 116.1%................................. 381,760,731
Receivable for investments sold 13.8%........................................ 45,519,531
Other assets and liabilities, net 1.5%....................................... 4,981,524
Payable for investments purchased (23.7%).................................... (77,867,031)
Payable for forward sale commitments (7.7%).................................. (25,379,800)
------------
NET ASSETS, equivalent to $10.67 per share 100%.............................. $329,014,955
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par $.01 per share; unlimited shares authorized;
30,839,945 shares outstanding............................................................ $ 308,399
Capital surplus............................................................................ 352,075,117
Accumulated net realized loss on securities................................................ (32,693,720)
Net unrealized appreciation of securities
Investments.............................................................................. 7,730,958
Forward commitments...................................................................... 459,911
Futures contracts........................................................................ 757,898
Undistributed net investment income........................................................ 376,392
------------
NET ASSETS................................................................................. $329,014,955
============
</TABLE>
* Non-income producing security.
** Securities with a market value of approximately $156.5 were placed as
collateral for futures contracts and forward commitments (see Note 1B).
See Notes to Financial Statements.
F-13
<PAGE> 120
GOVERNMENT FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations
Year Ended
October 31, 1995
----------------
<S> <C>
Investment Income
Interest....................................................................................... $ 25,311,576
------------
Expenses
Advisory fees.................................................................................. 1,979,623
Shareholder service agent's fees and expenses.................................................. 483,108
Accounting services............................................................................ 92,277
Trustees' fees and expenses.................................................................... 47,762
Audit fees..................................................................................... 13,934
Custodian fees................................................................................. 62,234
Legal fees..................................................................................... 2,335
Reports to shareholders........................................................................ 33,087
Registration and filing fees................................................................... 6,429
Miscellaneous.................................................................................. 11,113
------------
Total expenses............................................................................... 2,731,902
------------
Net investment income........................................................................ 22,579,674
------------
Realized and Unrealized Gain (Loss) on Securities
Net realized gain (loss) on securities
Investments.................................................................................. (2,531,140)
Forward commitments.......................................................................... 5,294,570
Futures contracts............................................................................ (2,220,552)
Net unrealized appreciation of securities during the period
Investments.................................................................................. 19,778,951
Forward commitments.......................................................................... 433,218
Futures contracts............................................................................ 761,879
------------
Net realized and unrealized gain on securities............................................... 21,516,926
------------
Increase in net assets resulting from operations............................................. $ 44,096,600
============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31
--------------------------------
1995 1994
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of period.............................................. $334,961,646 $370,213,049
------------ ------------
Operations
Net investment income....................................................... 22,579,674 24,980,745
Net realized gain (loss) on securities...................................... 542,878 (34,030,620)
Net unrealized appreciation (depreciation) of securities during the period.. 20,974,048 (11,216,315)
------------ ------------
Increase (decrease) in net assets resulting from operations................ 44,096,600 (20,266,190)
------------ ------------
Distributions to shareholders from
Net investment income....................................................... (22,389,062) (22,822,040)
Excess of book-basis net realized gain on securities (see Note 1F).......... - (16,458,421)
------------ ------------
Total distributions........................................................ (22,389,062) (39,280,461)
------------ ------------
Capital transactions
Proceeds from shares sold................................................... 40,107,323 82,600,565
Proceeds from shares issued for distributions reinvested.................... 19,322,483 34,396,895
Cost of shares redeemed..................................................... (87,084,035) (92,702,212)
------------ ------------
Increase (decrease) in net assets resulting from capital transactions...... (27,654,229) 24,295,248
------------ ------------
Decrease in Net Assets....................................................... (5,946,691) (35,251,403)
------------ ------------
NET ASSETS, end of period.................................................... $329,014,955 $334,961,646
============ ============
CAPITAL TRANSACTIONS
Shares sold................................................................. 3,887,096 7,689,030
Shares issued for distributions reinvested.................................. 1,865,887 3,189,561
Shares redeemed............................................................. (8,448,288) (8,707,829)
------------ ------------
Increase (decrease) in shares outstanding.................................. (2,695,305) 2,170,762
============ ============
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE> 121
MUNICIPAL BOND FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bonds 99.0%
EDUCATION 8.1%
$ 500,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07........................................ $ 651,360
500,000 Connecticut State Health & Educational Facilities Authority Rev. (University of Hartford)
Series S, 6.75%, 7/1/12................................................................... 497,960
500,000 District of Columbia Rev. (Howard University) Series A, MBIA, 8.00%, 10/1/17................ 532,930
500,000 Erie, Pennsylvania, Higher Education Building Authority, College Rev.
Series A, 8.50%, 6/1/15................................................................... 576,885
Frenship, Texas, Independent School District, Refunding
500,000 5.50%, 2/15/03............................................................................ 523,940
500,000 5.50%, 2/15/04............................................................................ 522,135
200,000 Huron Valley, Michigan, School District, FGIC, 7.10%, 5/1/08................................ 227,798
1,000,000 Illinois Educational Facilities Authority Rev. (Illinois State University,
Auxiliary Facilities System) MBIA, 5.75%, 4/1/14.......................................... 993,210
500,000 Merrillville, Indiana, Multi-School Building Corp., 1st Mtg. Bonds,
MBIA, 7.50%, 7/15/09...................................................................... 572,415
350,000 New York City, New York, Industrial Development Agency, Civil Facility Rev.
(Marymount Manhattan College Project) 7.00%, 7/1/23....................................... 363,898
New York State Dormitory Authority Rev.
100,000 City University System, Series A, 8.00%, 7/1/07........................................... 108,353
500,000 City University System, Series C, 6.00%, 7/1/16........................................... 492,390
750,000 State University Education Facilities, Series A, 7.70%, 5/15/12........................... 865,132
Pennsylvania State Higher Educational Facilities Authority Rev.
500,000 Hahnemann University Project, Series 1989, MBIA, 7.20%, 7/1/19............................ 547,200
150,000 Thomas Jefferson University, 8.00%, 1/1/18................................................ 164,448
250,000 Medical College of Pennsylvania, Series A, 8.375%, 3/1/11................................. 271,813
500,000 Shenandoah Valley Pennsylvania, School District, Series B, Zero Coupon, 2/1/12.............. 191,320
480,000 Volusia County, Florida, School Board Certificates Participation
(Florida Master Lease Program) FSA, 5.30%, 8/1/10......................................... 475,598
1,000,000 Wisconsin State Health & Educational Facilities Rev. (Marquette University Project)
FGIC, 6.45%, 12/1/19...................................................................... 1,050,560
-----------
9,629,345
-----------
HEALTH CARE 9.4%
660,000 Delaware County, Ohio, Health Care, FHA, 6.55%, 2/1/35...................................... 668,006
250,000 Illinois, Finance and Development Authority Rev., 8.50%, 2/1/15............................. 271,882
1,500,000 Illinois Health Facilities Authority Rev. (Cent. DuPage Health--Wyndemere)
MBIA, 5.75%, 11/1/22...................................................................... 1,469,805
1,000,000 Indiana Health Facilities Finance Authority, MBIA, 6.85%, 7/1/22............................ 1,073,230
500,000 New York State Medical Care Facilities Agency Rev. (Montefiore Medical Center) FHA,
7.25%, 2/15/24............................................................................ 539,645
1,250,000 Harris County, Texas, Health Facilities (TECO Project), Series A, AMBAC, 7.25%, 2/15/15..... 1,348,750
2,000,000 Massachusetts State Health & Educational Facilities Authority Rev.
(Cape Cod Health System), Series A, CONN, 5.625%, 11/15/23................................ 1,887,080
370,000 New Hampshire Higher Educational & Health Facilities Authority Rev., First Mtg.
(Odd Fellows Home) 9.00%, 6/1/14.......................................................... 417,874
3,675,000 South Carolina Jobs Economic Development Authority, Hospital Facilities Rev.
(Toumey Regional Medical Center) Series A, MBIA, 5.50%, 11/1/20........................... 3,539,797
-----------
11,216,069
-----------
</TABLE>
F-15
<PAGE> 122
MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS 23.8%
$ 500,000 Ames, Iowa, Hospital Rev. (Mary Greeley Medical Center Project) AMBAC, 5.75%, 8/15/22 ................. $ 486,635
500,000 Bexar County, Texas, Health Facilities Development Rev. (St. Lukes Lutheran Hospital Project)
7.90%, 5/1/18 ....................................................................................... 600,505
500,000 Boston, Massachusetts, Rev. (Boston City Hospital) FHA, 7.625%, 2/15/21 ............................... 575,970
250,000 Delaware State, Economic Development Authority Rev. (Osteopathic Hospital Association) Series A,
6.75%, 1/1/13 ....................................................................................... 237,100
500,000 Ector County, Texas, Hospital District (Medical Center Hospital) 7.125%, 4/15/02 ...................... 536,765
250,000 Erie County, Pennsylvania, Hospital Authority Rev. (Metro Health Center) Series 1992, 7.25%, 7/1/12 ... 263,427
250,000 Harris County, Texas, Health Facilities Development Corp. (Memorial Hospital System Project)
7.125%, 6/1/15 ...................................................................................... 270,117
Illinois Health Facilities Authority Rev.
105,000 Community Pooled Program, Series A, MBIA, 7.90%, 8/15/03 ............................................ 108,085
40,000 Community Pooled Program, Series A, MBIA, 7.90%, 8/15/03 ............................................ 47,347
500,000 Delnor Community Hospital, 8.00%, 5/15/19 ........................................................... 568,015
500,000 Lutheran Health Systems, Series B, MBIA, 6.00%, 4/1/18 .............................................. 502,260
500,000 Masonic Medical Center, Series 1989-B, 7.70%, 10/1/19 ............................................... 568,340
250,000 Memorial Hospital, 7.25%, 5/1/24 .................................................................... 255,717
300,000 Mercy Center For Health Care Services, 6.625%, 10/1/12 .............................................. 307,275
500,000 Northwestern Memorial Hospital, 6.75%, 8/15/11 ...................................................... 532,595
500,000 Kent Hospital Finance Authority, Michigan (Butterworth Hospital) Series A, 7.25%, 1/15/12 ............. 561,630
100,000 Leesburg, Florida, Hospital Rev., 8.40%, 7/1/08 ....................................................... 103,756
3,000,000 Loma Linda, California, Hospital Rev. (Loma Linda University Medical Center) Series C, MBIA,
5.375%, 12/1/22 ..................................................................................... 2,793,780
500,000 Louisiana Public Facilities Authority, Hospital Rev. (Southern Baptist Hospital Project) FSA,
6.80%, 5/15/12 ...................................................................................... 567,710
2,250,000 Massachusetts State, Series B, 6.50%, 7/1/15 .......................................................... 2,215,417
500,000 Michigan State, Hospital Finance Authority Rev., 7.50%, 10/1/07 ....................................... 518,710
250,000 Michigan State Hospital Finance Authority Rev. (Detroit Medical Center) Series A, 8.125%, 8/15/12 ..... 278,616
Mississippi, Hospital Equipment and Facilities, Series A
500,000 Magnolia Hospital Project, 7.375%, 10/1/21 .......................................................... 515,645
250,000 Wesley Health System Inc., CONN, 6.05%, 4/1/12 ...................................................... 255,160
Missouri State Health and Educational Facilities Authority Rev.
500,000 Heartland Health Systems Project, 6.875%, 11/15/04 .................................................. 543,895
250,000 Heartland Health Systems Project, 8.125%, 10/1/10 ................................................... 284,972
500,000 Lake of the Ozarks Hospital, 8.00%, 2/15/11 ......................................................... 538,545
280,000 Montgomery County, Pennsylvania, IDR (Pennsburg Nursing & Rehabilitation Center) 7.625%, 7/1/18 ....... 269,749
520,000 New Hampshire Higher Education & Health, 7.50%, 6/1/05 ................................................ 574,189
250,000 Newton, Kansas, Hospital Rev. (Newton Healthcare Corp.) Series A, 7.375%, 11/15/14 .................... 261,918
250,000 North Carolina Medical Care Community Health Care Facility Rev. (Stanley Memorial Hospital Project)
7.80%, 10/1/19 ...................................................................................... 267,728
Northeastern Pennsylvania, Hospital Authority Rev.
100,000 Nesbitt Memorial Hospital, Series A, 7.50%, 7/1/12 .................................................. 114,391
500,000 Wilkes Barre General Hospital, 8.375%, 7/1/06 ....................................................... 543,865
2,400,000 Pitt County, North Carolina, Rev. (Pitt County Memorial Hospital) 5.25%, 12/1/21 ...................... 2,260,344
250,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev. (Henderson Memorial Hospital Project)
7.75%, 4/1/13 ....................................................................................... 263,455
</TABLE>
F-16
<PAGE> 123
MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS--continued
$ 250,000 Scranton-Lackawanna, Pennsylvania, Health & Welfare Authority Rev. (Moses Taylor Hospital Project)
Series B, 8.50%, 7/1/20 ............................................................................. $ 273,590
South Dakota State Health & Educational Facility Authority Rev.
250,000 Sioux Valley Hospital, 7.625%, 11/1/13 .............................................................. 277,741
500,000 Huron Regional Medical Center, 7.25%, 4/1/20 ........................................................ 512,810
500,000 St. Joseph County, Indiana, Hospital Authority Rev. (Memorial Hospital South Bend Project) MBIA,
6.25%, 8/15/22 ...................................................................................... 510,175
500,000 St. Petersburg, Florida, Health Facilities Authority Rev., Allegany Health System (St. Mary Hospital)
Series B, 7.75%, 12/1/15 ............................................................................ 573,570
3,495,000 Tampa, Florida, Rev., Allegany Health Systems, St. Mary's, MBIA, 5.125%, 12/1/23 ...................... 3,180,800
500,000 Tarrant County, Texas, Health Facilities Development Corp., Hospital Rev., Refunding & Improvement
(Fort Worth Osteopathic Hospital) 7.00%, 5/15/28 .................................................... 522,970
500,000 Tulsa, Oklahoma, Industrial Authority, Hospital Rev. (Tulsa Regional Medical Center) 6.20%, 6/1/17 .... 540,885
500,000 Warren County, Pennsylvania, Hospital Authority Rev. (Warren General Hospital Project) Series A,
6.90%, 4/1/11 ....................................................................................... 510,380
1,000,000 Weslaco, Texas, Health Facilities Development (Knapp Medical Center Project) Series-A, Connie Lee,
5.25%, 6/1/16 ....................................................................................... 936,630
1,000,000 Wisconsin State Health & Educational Facilities Authority, Rev. (Waukesha Memorial Hospital) Series A,
AMBAC, 5.25%, 8/15/19 ............................................................................... 918,550
------------
28,351,729
------------
HOUSING 6.3%
685,000 Austin, Texas, Housing Finance Corp., Multi-Family Housing Rev., 6.50%, 10/1/10 ....................... 690,103
70,000 East Baton Rouge, Louisiana, Mtg. Finance Authority, Single Family Mtg. Rev., Series C, GNMA,
8.375%, 2/1/17 ...................................................................................... 72,888
1,000,000 Greater Cincinnati, Ohio, (FHA Cambridge Apartments), Series A, 6.60%, 8/1/25 ......................... 1,017,500
500,000 Lebanon County, Pennsylvania, Health Facilities (United Church of Christ Homes Project) Series A,
6.75%, 10/1/10 ...................................................................................... 507,840
1,000,000 Lynchburg, Virginia, Redevelopment & Housing Authority Rev. (Waldon Pond III) Series A, GNMA,
6.20%, 7/20/27 ...................................................................................... 1,000,000
250,000 Maine State Housing Authority, Mtg. Purchase Rev., Series B, FHA, 7.90%, 11/15/06 ..................... 263,125
400,000 Maricopa County, Arizona, IDR, Multi-Family Rev., Refunding (Laguna Point Apartments Project)
6.50%, 7/1/09 ....................................................................................... 415,228
250,000 Massachusetts State, Single Family, Series 31, 6.45%, 12/1/16 ......................................... 256,875
150,000 Minneapolis, Minnesota, Health Care Facility (Ebenezer Society Project) Series A, 7.00%, 7/1/12 ....... 150,000
500,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd. Project) Series A, 7.75%, 12/1/15 ............ 516,850
500,000 South Carolina State Housing Finance and Development Authority, Homeownership Mtg., Series A,
7.625%, 7/1/16 ...................................................................................... 531,250
1,000,000 Tennessee Housing Development Agency, 6.80%, 7/1/17 ................................................... 1,045,100
Texas Housing Agency
485,000 Residential Development Rev., Adjustable Mtg., Series A, GNMA, 7.60%, 7/1/16 ........................ 503,774
320,000 Single Family Mtg., Refunding, Series A, 7.15%, 9/1/12 .............................................. 332,970
90,000 Utah State Housing Finance Agency, Single Family Mtg., Series G-1, FHA, 8.10%, 7/1/16 ................. 95,625
150,000 Wisconsin Housing & Economical Development Authority Rev., Series B, 8.00%, 11/1/18 ................... 154,443
------------
7,553,571
------------
</TABLE>
F-17
<PAGE> 124
MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIFECARE 0.2%
$ 225,000 Scottsdale, Arizona, Industrial Development, Series A, 8.25%, 6/1/15 .................................. $ 244,395
------------
MISCELLANEOUS 14.3%
250,000 Berry Creek Metropolitan District, Eagle, Colorado, G.O., Refunding & Improvement, 8.25%, 12/1/11 ..... 269,845
100,000 California Special District Finance Authority, Certificates of Participation Rev., Series A,
8.50%, 7/1/18 ....................................................................................... 108,987
2,000,000 Clark County, Nevada (Nevada Power Co. Project) IDR, AMBAC, 7.20%, 10/1/22 ............................ 2,222,000
500,000 Compton, California, Certificates of Participation, Refunding, Series B, 7.50%, 8/1/15 ................ 541,035
500,000 Cook County, Illinois, MBIA, 7.00%, 11/1/10 ........................................................... 564,860
500,000 Detroit, Michigan, Tax Increment (Development Area No. 1) Series A, 7.60%, 7/1/10 ..................... 527,880
500,000 District of Columbia, Series A, AMBAC, 7.50%, 6/1/10 .................................................. 570,970
500,000 Du Page County, Illinois, Alternative Rev. (Stormwater Project) 6.55%, 1/1/21 ......................... 558,205
1,000,000 El Paso County, Texas, Parking Facilities Rev., 6.50%, 8/15/11 ........................................ 1,091,630
250,000 Emmaus, Pennsylvania, General Authority, Local Government Pool Program Rev., Series A, BIG,
8.15%, 5/15/18 ...................................................................................... 269,912
1,000,000 Hawaii State, Series -CD, 5.00%, 2/1/03 ............................................................... 1,024,970
500,000 Highlands Ranch, Colorado, Metropolitan District No. 1, Refunding & Improvement, Series A,
7.30%, 9/1/12 ....................................................................................... 588,045
1,500,000 Irving, Texas, Flood Control District, Section #3, AMBAC, Zero Coupon, 9/1/08 ......................... 755,145
1,200,000 Kansas City, Missouri, Redevelopment Authority Lease Rev., 5.90%, 12/1/18 ............................. 1,218,300
500,000 Milwaukee County, Wisconsin, Refunding, Series A, 5.25%, 9/1/00 ....................................... 519,185
1,000,000 New York, New York, G.O., Series B, 7.00%, 8/15/16 .................................................... 1,064,200
1,000,000 Orange County, California, Series A, MBIA, 6.00%, 6/1/09 .............................................. 1,044,420
50,000 Pocahontas, Iowa, IDR (International Harvester Co.) 10.25%, 10/1/00 ................................... 52,066
2,000,000 Sullivan County, Tennessee, Industrial Development Board Rev., Mtg. (Brandy Mill I) Series A, GNMA,
6.35%,7/20/27 ....................................................................................... 2,033,300
100,000 Tampa, Florida, Capital Improvement Project Rev., Series B, 8.375%, 10/1/18 ........................... 106,632
Texas General Services, Community Partner Interests (Office Building and Land Acquisition Project)
130,000 7.00%, 8/1/14 ....................................................................................... 134,081
330,000 7.00%, 8/1/24 ....................................................................................... 340,372
250,000 Utah State Building Ownership Authority Lease Rev. (Dept. of Employment Security) 7.80%, 8/15/10 ..... 273,498
1,000,000 Valdez, Alaska, Marine Term Rev., Refunding (Sohio Pipeline) 7.125%, 12/1/25 .......................... 1,112,580
------------
16,992,118
------------
MUNICIPAL UTILITY DISTRICT (MUD) 0.6%
250,000 Brazoria County, Texas, MUD No. 2, Refunding, 7.00%, 9/1/08 ........................................... 257,422
500,000 Harris County, Texas, #322, 6.25%, 5/1/17 ............................................................. 488,455
------------
745,877
------------
NURSING HOMES 0.5%
100,000 Carmel, Indiana, Retirement Rent Housing Rev., Refunding (Beverly Enterprises, Inc. Project) Series
1992, 8.75%, 12/1/08 ................................................................................ 113,000
230,000 Louisiana Public Facilities Authority, IDR, Refunding (Beverly Enterprises, Inc.) 8.25%, 9/1/08 ....... 247,781
250,000 Massachusetts, Industrial Finance Agency, IDR, Refunding (Beverly Enterprises/Gloucester and Lexington
Projects) Series 1992, 8.00%, 5/1/02 ................................................................ 266,765
------------
627,546
------------
</TABLE>
F-18
<PAGE> 125
MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE (PCR) 5.3%
$ 250,000 County of Coshocton, Ohio, Solid Waste Disposal Rev., Refunding (Stone Container Corp. Project) Series
1992, 7.875%, 8/1/13 ................................................................................ $ 262,440
1,000,000 Farmington, New Mexico, PCR, Refunding, 7.20%, 4/1/21 ................................................. 1,095,030
1,000,000 Ohio State Water Development Authority Facilities Rev., PCR (Ohio Edison Co. Project) 5.95%, 5/15/29 .. 931,670
570,000 Ohio State Air Quality Development Authority Rev., PCR (Cleveland Co. Project) FGIC, 8.00%, 12/1/13 ... 663,544
1,000,000 Petersburg, Indiana, PCR, Refunding (Indianapolis Power & Lighting) Series 1993-A, 6.10%, 1/1/16 ...... 1,008,270
1,500,000 Skowhegan, Maine, PCR, Refunding (Scott Paper Company Project) 5.90%, 11/1/13 ......................... 1,486,875
400,000 Stevens County, Washington, Public Corp., PCR (Washington Water & Power Co., Kettle Project)
6.00%, 12/1/23 ...................................................................................... 383,756
500,000 Sweetwater County, Wyoming, PCR (Idaho Power Co.) Series C, 7.625%, 12/1/13 ........................... 524,835
------------
6,356,420
------------
POOL FINANCING PROGRAM 2.7%
Arapahoe County, Colorado, Local Public Improvement
1,000,000 7.00%, 8/31/26 ...................................................................................... 1,042,060
4,500,000 Zero Coupon, 8/31/15 ................................................................................ 1,102,230
10,000,000 Zero Coupon, 8/31/26 ................................................................................ 1,057,800
------------
3,202,090
------------
RESOURCE RECOVERY REVENUE 1.6%
440,000 Broward County, Florida, (North Project) 7.95%, 12/1/08 ............................................... 496,069
1,000,000 Montgomery County, Pennsylvania, Industrial Development Authority, 7.50%, 1/1/12 ...................... 1,067,040
250,000 Regional Waste Systems, Inc., Maine, Solid Waste, 7.95%, 7/1/10 ....................................... 272,870
------------
1,835,979
------------
SALES TAX REVENUE 3.2%
500,000 Arvada, Colorado, Refunding & Improvement, FGIC, 6.25%, 12/1/12 ....................................... 525,915
250,000 Crestwood, Illinois, Tax Increment Rev., Refunding, 7.25%, 12/1/08 .................................... 251,792
400,000 Edgewater, Colorado, Redevelopment Authority Tax Increment Rev., Refunding (Edgewater Development
Project) 6.75%, 12/1/08 ............................................................................. 414,160
100,000 Jefferson County, Colorado, Southeast Jefferson County Local Improvement District, 8.20%, 12/1/13 111,481
2,000,000 Orange County, Florida, Rev., Series B, FGIC, 5.375%, 1/1/24 .......................................... 1,910,520
500,000 Rhode Island Depositors' Economic Corp., Special Obligation, Series A, FSA, 6.625%, 8/1/19 ............ 564,105
------------
3,777,973
------------
TRANSPORTATION 5.0%
500,000 Cleveland, Ohio, Parking Facilities Improvement Rev., 8.00%, 9/15/12 .................................. 530,875
500,000 Delaware Transportation Authority Rev., 5.50%, 7/1/16 ................................................. 488,495
2,000,000 Denver, Colorado, City & County Airport Rev., Series A, MBIA, 5.70%, 11/15/25 ......................... 1,957,740
1,000,000 Des Moines, Iowa, Parking Facilities Rev., FGIC, 7.25%, 7/1/15 ........................................ 1,098,550
1,000,000 New Jersey State Turnpike Authority, Series C, 6.50%, 1/1/16 .......................................... 1,097,610
Triborough Bridge & Tunnel Authority, New York, Rev.
150,000 Series A, 8.00%, 1/1/18 ............................................................................. 164,091
500,000 Series R, 7.375%, 1/1/16 ............................................................................ 563,410
------------
5,900,771
------------
</TABLE>
F-19
<PAGE> 126
MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 18.0%
$ 500,000 Brownsville, Texas, Utility System Rev., AMBAC, 6.50%, 9/1/17 ......................................... $ 552,410
500,000 Chicago, Illinois, Metropolitan Water District, G.O., 7.00%, 1/1/11 ................................... 587,210
500,000 Chicago, Illinois, Wastewater Transmission, Rev., FGIC, 6.30%, 1/1/12 ................................ 555,650
500,000 Houston, Texas, Water System Rev., 7.25%, 12/1/07 ..................................................... 540,940
Intermountain Power Agency, Utah
500,000 1st Crossover Series, Special Obligation, 7.875%, 7/1/14 ............................................ 521,960
1,000,000 Power Supply Rev., Series B, 7.00%, 7/1/21 .......................................................... 1,056,940
250,000 Jefferson, Wisconsin, Sewer System, Waterworks, 7.40%, 7/1/16 ......................................... 285,350
1,000,000 Los Angeles, California, Dept. of Water & Power, Electric Plan Rev., 5.375%, 9/1/23 ................... 930,460
930,000 Louisia, Virginia, Industrial Development Authority Hospital Facility Rev. (Virginia Electric & Power)
AMBAC, 5.45%, 1/1/24 ................................................................................ 883,779
100,000 Massachusetts Municipal Wholesale Electric Co., Power Supply System Rev., Series A, 8.75%, 7/1/18 ..... 110,344
500,000 Massachusetts State Water Resource Authority, Series A, 7.50%, 4/1/16 ................................. 568,960
500,000 New York City Municipal Water Finance Authority, New York, Water & Sewer System Rev., Series C,
7.75%, 6/15/20 ...................................................................................... 587,370
North Carolina Eastern Municipal Power Agency, Power System Rev.
500,000 Series A, 4.50%, 1/1/24 ............................................................................. 414,170
50,000 8.00%, 1/1/21 ....................................................................................... 54,926
400,000 8.00%, 1/1/21, Pre-Refunded, 11/1/98 ................................................................ 439,408
1,000,000 North Carolina Municipal Power Agency, Catawba Electric Rev., MBIA, 5.75%, 1/1/20 ..................... 998,610
250,000 North Carolina Municipal Power Agency #1, Catawba Electric Rev., 7.875%, 1/1/19 ....................... 273,963
1,000,000 Northern Minnesota Municipal Power Agency, Series A, AMBAC, 7.25%, 1/1/16 ............................. 1,086,760
Puerto Rico, Electric Power Authority Rev., Series Z
2,650,000 5.25%, 7/1/21 ....................................................................................... 2,436,569
2,250,000 5.50%, 7/1/16 ....................................................................................... 2,161,283
775,000 Sam Rayburn, Texas, Municipal Power Agency, Refunding, Series A, 6.75%, 10/1/14 ....................... 717,418
500,000 Texas Water Resource Finance Authority Rev., AMBAC, 7.50% 8/15/13 ..................................... 532,845
Washington State Public Power Supply System Rev.
250,000 Nuclear Project #1, Series B, FGIC, 7.125%, 7/1/16 .................................................. 286,450
250,000 Nuclear Project #2, Series 1990-C, 7.625%, 7/1/10 ................................................... 289,050
1,500,000 Nuclear Project #3, MBIA, 5.60%, 7/1/17 ............................................................. 1,445,235
3,000,000 Series C, FGIC, 5.375%, 7/1/15 ...................................................................... 2,836,140
250,000 Winters, Texas, Water Works & Sewer Rev., 8.50%, 8/1/17 ............................................... 311,268
------------
21,465,468
------------
TOTAL MUNICIPAL BONDS (Cost $112,360,413) ........................................................... 117,899,351
------------
</TABLE>
F-20
<PAGE> 127
MUNICIPAL BOND FUND STATEMENT OF NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Variable Rate Demand Notes+ 2.6%
$1,000,000 Subseries A-4, 3.90%, 8/1/22.............................................................. $ 1,000,000
1,900,000 Subseries A-10, 4.00%, 8/1/16............................................................. 1,900,000
200,000 Series 1993-A4, 3.90%, 8/1/21............................................................. 200,000
------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES (Cost $3,100,000).............................. 3,100,000
------------
TOTAL INVESTMENTS (Cost $115,460,413) 101.6%................................................ 120,999,351
Other assets and liabilities, net (1.6)%.................................................... (1,876,431)
------------
NET ASSETS, equivalent to $13.77 per share 100%............................................. $119,122,920
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, par value $.01 per share; unlimited shares authorized; 8,649,853
shares outstanding.................................................................................... $ 86,498
Capital surplus......................................................................................... 112,964,627
Undistributed net realized gain on securities........................................................... 374,277
Net unrealized appreciation of investments.............................................................. 5,538,937
Undistributed net investment income..................................................................... 158,581
------------
NET ASSETS.............................................................................................. $119,122,920
============
</TABLE>
<TABLE>
<S> <C>
+Interest rates are as of October 31, 1995 Insurers:
FHA--Federal Housing Administration AMBAC--AMBAC Indemnity Corp.
G.O.--General obligation bond BIG--Bond Investors Guaranty Insurance Co.
Rev.--Revenue bond CONN--Connie Lee
IDR--Industrial Development Revenue Bond FGIC--Financial Guaranty Insurance Corp.
FSA--Financial Security Assurance, Inc.
MBIA--Municipal Bond Investor's Assurance Corp.
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE> 128
MUNICIPAL BOND FUND FINANCIAL STATEMENTS
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
October 31, 1995
----------------
<S> <C>
Investment Income
Interest.................................................................................. $ 7,405,369
------------
Expenses
Advisory fees............................................................................. 678,530
Shareholder service agent's fees and expenses............................................. 219,615
Accounting services....................................................................... 90,522
Trustees' fees and expenses............................................................... 27,472
Audit fees................................................................................ 16,933
Custodian fees............................................................................ 5,823
Legal fees................................................................................ 2,351
Reports to shareholders................................................................... 18,750
Registration and filing fees.............................................................. 26,447
Miscellaneous............................................................................. 3,931
------------
Total expenses.......................................................................... 1,090,374
------------
Net investment income................................................................... 6,314,995
------------
Realized and Unrealized Gain on Securities
Net realized gain on securities........................................................... 401,050
Net unrealized appreciation of securities during the period............................... 6,922,298
------------
Net realized and unrealized gain on securities.......................................... 7,323,348
------------
Increase in net assets resulting from operations........................................ $ 13,638,343
============
</TABLE>
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of period.............................................. $112,088,419 $ 95,903,641
------------ ------------
Operations
Net investment income....................................................... 6,314,995 5,614,009
Net realized gain on securities............................................. 401,050 14,380
Net unrealized appreciation (depreciation) of securities during the period.. 6,922,298 (9,413,118)
------------ ------------
Increase (decrease) in net assets resulting from operations................ 13,638,343 (3,784,729)
------------ ------------
Distributions to shareholders from net investment income..................... (6,187,572) (5,586,734)
------------ ------------
Net equalization credit...................................................... -- 34,076
------------ ------------
Capital transactions
Proceeds from shares sold................................................... 26,976,160 46,071,557
Proceeds from shares issued for distributions reinvested.................... 5,355,586 4,883,341
Cost of shares redeemed..................................................... (32,748,016) (25,432,733)
------------ ------------
Increase (decrease) in net assets resulting from capital transactions...... (416,270) 25,522,165
------------ ------------
Increase in Net Assets....................................................... 7,034,501 16,184,778
------------ ------------
NET ASSETS, end of period.................................................... $119,122,920 $112,088,419
============ ============
CAPITAL TRANSACTIONS
Shares sold................................................................. 2,026,724 3,404,943
Shares issued for distributions reinvested.................................. 402,352 363,194
Shares redeemed............................................................. (2,471,996) (1,889,648)
------------ ------------
Increase (decrease) in shares outstanding.................................. (42,920) 1,878,489
============ ============
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE> 129
MONEY MARKET FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements* 49.6%
$9,970,000 Lehman Government Securities, 5.90%, repurchase proceeds $9,971,634..................... $ 9,970,000
9,965,000 SBC Capital Markets, Inc, 5.90%, repurchase proceeds $9,966,633......................... 9,965,000
9,965,000 State Street Bank & Trust Co., 5.88%, repurchase proceeds $9,966,628.................... 9,965,000
-----------
TOTAL REPURCHASE AGREEMENTS (Cost $29,900,000).......................................... 29,900,000
-----------
United States Agencies Obligations 32.3%
Federal Home Loan Banks
2,000,000 5.68%, 03/15/96......................................................................... 1,958,218
2,425,000 5.69%, 03/06/96......................................................................... 2,377,521
3,000,000 Federal Home Loan Mortgage Corp., 5.55%, 12/01/95....................................... 2,986,050
Federal National Mortgage Association
3,000,000 5.62%, 02/12/96......................................................................... 2,952,160
1,280,000 5.64%, 04/11/96......................................................................... 1,248,240
2,000,000 5.68%, 01/17/96......................................................................... 1,976,080
3,000,000 5.70%, 12/21/95......................................................................... 2,976,455
3,000,000 5.79%, 12/18/95......................................................................... 2,977,520
-----------
TOTAL UNITED STATES AGENCIES OBLIGATIONS (Cost $19,452,244)............................. 19,452,244
-----------
Commercial Paper 18.4%
2,800,000 Associates Corp. of North America, 5.77%, 01/09/96...................................... 2,769,021
2,800,000 General Electric Capital Corp, 5.78%, 11/14/95.......................................... 2,793,793
2,800,000 General Electric Co., 5.67%, 12/11/95................................................... 2,782,174
2,800,000 Pitney Bowes Credit Corp., 5.78%, 11/27/95.............................................. 2,788,198
-----------
TOTAL COMMERCIAL PAPER (Cost $11,133,186)............................................... 11,133,186
-----------
TOTAL INVESTMENTS (Cost $60,485,430) 100.3%............................................. 60,485,430
Other assets and liabilities, net (0.3%)................................................ (180,531)
-----------
NET ASSETS, equivalent to $1.00 per share 100%.......................................... $60,304,899
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par value $.01 per share; unlimited shares authorized;
60,304,001 shares outstanding...................................................................... $ 603,040
Capital surplus..................................................................................... 59,700,713
Undistributed net investment income................................................................. 1,146
-----------
NET ASSETS.......................................................................................... $60,304,899
===========
</TABLE>
*dated 10/31/95, due 11/1/95, collaterallized by U.S. Government obligations in
a pool cash account.
See Notes to Financial Statements.
F-23
<PAGE> 130
MONEY MARKET FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations
Year Ended
October 31, 1995
----------------
<S> <C>
Investment Income
Interest............................................................................... $3,316,783
----------
Expenses
Advisory fees.......................................................................... 281,553
Shareholder service agent's fees and expenses.......................................... 520,976
Accounting services.................................................................... 57,991
Trustees' fees and expenses............................................................ 25,254
Audit fees............................................................................. 13,373
Custodian fees......................................................................... 7,283
Legal fees............................................................................. 2,565
Report to shareholders................................................................. 22,951
Registration and filing fees........................................................... 29,242
Miscellaneous.......................................................................... 2,086
Expense reimbursement.................................................................. (400,167)
----------
Total expenses..................................................................... 563,107
----------
Net investment income.............................................................. 2,753,676
----------
Increase in net assets resulting from operations................................... $2,753,676
==========
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets
Year Ended October 31
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of period............................................ $ 56,401,350 $ 59,198,092
------------ ------------
Operations
Net investment income.................................................... 2,753,676 1,621,523
------------ -------------
Distributions to shareholders from net investment income................... (2,753,721) (1,621,596)
------------ ------------
Capital transactions
Proceeds from shares sold................................................ 63,147,486 59,396,624
Proceeds from shares issued for distributions reinvested................. 2,705,499 1,600,922
Cost of shares redeemed.................................................. (61,949,391) (63,794,215)
------------ ------------
Increase (decrease) in net assets resulting from capital transactions.. 3,903,594 (2,796,669)
------------ ------------
Increase (decrease) in Net Assets.......................................... 3,903,549 (2,796,742)
------------ ------------
NET ASSETS, end of period.................................................. $ 60,304,899 $ 56,401,350
============ ============
CAPITAL TRANSACTIONS
Shares sold.............................................................. 63,147,478 59,396,624
Shares issued for distributions reinvested............................... 2,705,499 1,600,922
Shares redeemed.......................................................... (61,949,391) (63,794,215)
------------ ------------
Increase (decrease) in shares outstanding.............................. 3,903,586 (2,796,669)
============ ============
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE> 131
NOTES TO FINANCIAL STATEMENTS
Note 1--Significant Accounting Policies
Common Sense Trust (the "Trust"), is registered under the Investment Company Act
of 1940, as amended, as a diversified open-end management investment company
which offers shares in ten separate portfolios, five of which are described in
this report: Growth Fund ("Growth"), Growth and Income Fund ("Growth and
Income"), Government Fund ("Government"), Municipal Bond Fund ("Municipal Bond")
and Money Market Fund ("Money Market"). Each Fund is accounted for as a separate
entity. The following is a summary of significant accounting policies
consistently followed by the Trust in the preparation of its financial
statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are valued at
the last sales price. Unlisted securities and listed securities for which the
last sales price is not available are valued at the most recent bid price.
U.S. Government securities are valued at the last reported bid price.
Municipal bonds are valued at the last quoted bid prices or at bid prices
based on a matrix system (which considers such factors as security prices,
yields, maturities and ratings) furnished by dealers and an independent
pricing service. Variable rate securities are valued at par; periodic rate
changes reflect current market conditions. Securities for which market
quotations are not readily available are valued at fair value under a method
approved by the Board of Trustees.
Short-term investments with a maturity of more than 60 days when purchased
are valued based on market quotations until the remaining days to maturity
become less than 61 days. From such time, until maturity, such investments
are valued at amortized cost. For Money Market, all investments are valued at
amortized cost.
Municipal Bond investments include lower rated debt securities which may be
more susceptible to adverse economic conditions than other investment grade
holdings. These securities are often subordinated to the prior claims of
other senior lenders and uncertainties exist as to an issuer's ability to
meet principal and interest payments. At the end of the period, debt
securities rated below investment grade and comparable unrated securities
represented approximately 6% of Municipal Bond's investment portfolio.
Issuers of certain securities owned by Municipal Bond have obtained insurance
guaranteeing their timely payment of principal at maturity and interest. The
insurance reduces financial risk but not market risk of the securities.
B. Futures Contracts and Forward Commitments
General--Transactions in futures contracts and forward commitments are
utilized in strategies to manage the market risk of the Trust's Investments.
The purchase of a futures contract or forward commitment increases the impact
on net asset value of changes in the market price of investments. Forward
commitments have a risk of loss due to nonperformance of counterparties.
There is also a risk that the market movement of such instruments may not be
in the direction forecasted. Note 3--Investment Activity contains additional
information.
Futures Contracts--Upon entering into futures contracts, the Trust maintains,
in a segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is held
as collateral in an account in the name of the broker, the Trust's agent in
acquiring the futures position. During the period the futures contract is
open, changes in the value of the contract ("variation margin") are
recognized by marking the contract to market on a daily basis. As unrealized
gains or losses are incurred, variation margin payments are received from or
made to the broker. Upon the closing or cash settlement of a contract, gains
and losses are realized. The cost of securities acquired through delivery
under a contract is adjusted by the unrealized gain or loss on the contract.
Forward Commitments--The Trust trades certain securities under the terms of
forward commitments, whereby the settlement for payment and delivery occurs
at a specified future date. Forward commitments are privately negotiated
transactions between the Trust and dealers. Upon executing a forward
commitment and during the period of obligation, the Trust maintains
collateral of cash or securities in a segregated account with its custodian
in an amount sufficient to relieve the obligation. If the intent of the Trust
is to accept delivery of a security traded under a forward purchase
commitment, the commitment is recorded as a long-term purchase. For forward
purchase commitments, which security settlement is not intended by the Trust
and all forward sales commitments, changes in the value of the commitment are
recognized by marking the commitment to market on a daily basis. During the
commitment, the Trust may either resell or repurchase the forward commitment
and enter into a new forward commitment, the effect
F-25
<PAGE> 132
NOTES TO FINANCIAL STATEMENTS, CONTINUED
of which is to extend the settlement date. In addition, the Trust may
occasionally close such forward commitments prior to delivery. Gains and
losses are realized upon the ultimate closing or cash settlement of forward
commitments.
C. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Trust acquires
ownership of a debt security and the seller agrees to repurchase the security
at a future time and specified price. The Trust may invest independently in
repurchase agreements, or transfer uninvested cash balances into a pooled
cash account along with other investment companies advised by Van Kampen
American Capital Asset Management, Inc. (the "Adviser"), the daily aggregate
of which is invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Trust will make payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the repurchase
proceeds due the Trust.
D. Federal Income Taxes
No provision for federal income taxes is required because the Trust has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all taxable net investment income and taxable net realized
capital gains to its shareholders. It is anticipated that no distributions of
capital gains will be made until tax basis capital loss carryforwards, if
any, expire or are offset by net realized capital gains.
The net realized capital loss carryforward at October 31, 1995 for Government
was approximately $31.3 million, which will expire in 2002. Money Market had
a capital loss carryforward of approximately $4,100, which will expire in
2002 and 2003. The net realized capital loss carryforwards may be utilized to
offset future capital gains until expiration.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily.
F. Dividends and Distributions
The Trust, excluding Money Market, declares annual distributions from long-
term gains. Dividends from net investment income are declared daily for
Government, Municipal Bond and Money Market, quarterly for Growth and Income
and annually for Growth. Dividends and distributions to shareholders are
recorded on the record date.
The Trust distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ from
generally accepted accounting principles. Such dividends or distributions may
exceed financial statement earnings.
Municipal Bond intends to continue to invest principally in tax-exempt
obligations sufficient in amount to qualify it to pay "exempt-interest
dividends" as defined in the Internal Revenue Code. However, a portion of
such dividends may represent tax preference items subject to alternative
minimum tax.
G. Equalization
At October 31, 1994, the Municipal Bond discontinued the accounting practice
of equalization, which it had used since its inception. Equalization is a
practice whereby a portion of the proceeds from sales and the costs of
redemptions of Trust shares, equivalent on a per-share basis to the amount of
the undistributed net investment income, is charged or credited to
undistributed net investment income.
H. Debt Discount or Premium
For financial reporting purposes, debt discounts or premiums are accounted
for on the same basis as is used for federal income tax reporting.
Accordingly, original issue discounts on long-term debt securities purchased
are amortized over the life of the security. For Money Market and Municipal
Bond, all premiums are amortized. Market discounts and premiums are
recognized at the time of sale as realized gains and realized losses,
respectively, for book purposes, and ordinary income and ordinary loss,
respectively, for tax purposes.
F-26
<PAGE> 133
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Note 2--Advisory Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Trust. Advisory fees to Adviser
are paid monthly, based on the average daily net assets of each fund at an
annual rate as indicated by the following graduated fee schedules.
<TABLE>
<CAPTION>
Growth Fund &
Growth and Income Government Municipal Bond Money Market
- --------------------------- ------------------------- -------------------------- --------------------------
Average Daily Annual Average Daily Annual Average Daily Annual Average Daily Annual
Net Assets Rate Net Assets Rate Net Assets Rate Net Assets Rate
- ---------------- ------ ---------------- ------ ---------------- ------ ---------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
First $1 billion .65% First $1 billion .60% First $1 billion .60% First $2 billion .50%
Next $1 billion .60% Next $1 billion .55% Next $1 billion .55% Next $2 billion .475%
Next $1 billion .55% Next $1 billion .50% Next $1 billion .50% Over $4 billion .45%
Next $1 billion .50% Next $1 billion .45% Over $3 billion .45%
Over $4 billion .45% Next $1 billion .40%
Over $5 billion .35%
</TABLE>
The Adviser has voluntarily elected to reimburse Money Market for any ordinary
business expenses in excess of 1.00% of its average daily net assets. The
Adviser may modify or terminate this election at any time without prior notice.
During the period, the Adviser reimbursed $400,167 of Money Market's expenses.
Accounting services include the salaries and overhead expenses of the Trust's
Treasurer and the personnel operating under his direction. Charges are allocated
among investment companies advised by the Adviser. These charges include the
employee costs attributable to the Trust's accounting officers. A portion of the
accounting services expense was paid to the Adviser in reimbursement of
personnel, facilities and equipment costs attributable to the provision of
accounting services. The services provided by the Adviser are at cost.
PFS Distributors, a wholly owned subsidiary of Travelers Group, Inc., serves as
Distributor of the Trust's shares. The Distributor has an exclusive selling
agreement with PFS Investments Inc. to sell shares of the Trust. During the
period, the Trust paid brokerage commissions of $406,044 to companies which are
deemed affiliates of the Distributor's parent because it owns more than 5% of
the companies' outstanding voting securities. Certain officers and trustees of
the Trust are officers and trustees of the Adviser or its affiliates.
Amounts paid by the Trust to affiliates during the period were as follows:
<TABLE>
<CAPTION>
Growth Municipal Money
Growth and Income Government Bond Market
---------- ---------- ---------- --------- ------
<S> <C> <C> <C> <C> <C>
Accounting services............................. $ 38,471 $ 16,553 $ 10,679 $ 7,656 $6,854
Sales of Trust shares, Distributor commissions.. 3,711,115 929,500 378,331 118,219 --
</TABLE>
F-27
<PAGE> 134
NOTES TO FINANCIAL STATEMENTS, CONTINUED
At the end of the period, Growth owned approximately 51% of the Van Kampen
American Capital Small Capitalization Fund, ("Small Cap"), an investment company
managed by the Adviser. Small Cap comprised approximately 3.9% of Growth's total
net assets. Small Cap's portfolio consisted of the following securities.
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------
<S> <C> <C>
Common Stock
CONSUMER DISTRIBUTION
22,000 Big B, Inc............................. $ 316,250
22,000 Books-A-Million, Inc................... 280,500
11,000 Cardinal Health, Inc................... 577,500
3,000 Carson Pirie Scott & Co................ 50,625
4,000 CDW Computer Centers, Inc.............. 195,000
21,000 Circuit City Stores, Inc............... 698,250
42,000 Claire's Stores, Inc................... 834,750
12,000 CompUSA, Inc........................... 481,500
14,000 Consolidated Stores Corp............... 327,250
1,000 Dole Food, Inc......................... 38,000
9,800 Eckerd Corp............................ 390,775
52,000 Fingerhut Companies, Inc............... 695,500
46,000 General Nutrition Companies, Inc....... 1,115,500
1,000 Great Atlantic & Pacific............... 20,375
29,000 Gymboree Corp.......................... 659,750
11,000 Health Management, Inc................. 126,500
2,000 Hills Stores Co........................ 15,250
10,000 Lear Seating Corp...................... 290,000
14,000 MacFrugals Bargains Closeouts.......... 164,500
9,000 Medicine Shoppe International, Inc..... 389,250
6,000 Mens Wearhouse, Inc.................... 235,500
15,000 Micro Wharehouse, Inc.................. 678,750
38,000 OfficeMax, Inc......................... 940,500
83,900 Pier 1 Imports. Inc.................... 818,025
5,000 Proffitts, Inc......................... 118,750
6,000 Rexel, Inc............................. 69,000
3,000 Richfood Holdings, Inc................. 74,625
7,000 Ross Stores, Inc....................... 110,250
25,000 Staples, Inc........................... 668,750
42,800 Stop & Shop Companies, Inc............. 877,400
40,000 Sunglass Hut International, Inc........ 1,090,000
4,000 Tiffany & Co........................... 174,500
25,000 Viking Office Products, Inc............ 1,109,375
43,000 Waban, Inc............................. 661,125
6,000 Whole Foods Market, Inc................ 72,750
3,000 Younkers, Inc.......................... 66,375
32,000 Zale Corp.............................. 472,000
-----------
15,904,700
-----------
CONSUMER DURABLES
3,000 Borg Warner Automotive, Inc............ 86,625
50,000 Breed Technologies, Inc................ 925,000
47,000 Brunswick Corp......................... 922,375
21,000 Champion Enterprises, Inc.............. 546,000
35,000 Clayton Homes, Inc..................... 936,250
23,000 Cobra Golf, Inc........................ 621,000
4,000 Department 56, Inc..................... 182,500
24,000 Echlin, Inc............................ 864,000
5,000 Fleetwood Enterprises, Inc............. 103,125
14,000 Gencorp, Inc........................... 148,750
8,400 Harman International Industries, Inc... 389,550
46,000 Leggett & Platt, Inc................... 1,115,500
7,000 Lennar Corp............................ 161,875
14,000 Outboard Marine Corp................... 297,500
7,000 Smith (A. O.) Corp..................... 146,125
6,000 Snap-On Tools, Inc..................... 254,250
22,000 Toro Co................................ 632,500
-----------
8,332,925
-----------
CONSUMER NON-DURABLES
1,000 Alberto Culver Co., Class B............ 31,625
34,000 American Greetings Corp., Class A...... 1,079,500
29,000 Barefoot, Inc.......................... 337,125
7,000 Fieldcrest Cannon, Inc................. 134,750
9,000 Fossil, Inc............................ 96,750
2,000 Hormel (G. A.) & Co.................... 46,000
13,000 IBP, Inc............................... 781,625
41,000 Liz Claiborne, Inc..................... 1,158,250
23,000 Nautica Enterprises, Inc............... 787,750
10,000 Nu-Kote Holdings, Inc., Class A........ 198,750
11,000 Phillips-Van Heusen Corp............... 111,375
3,000 Scotts Co., Class A.................... 60,000
9,000 Smithfield Foods, Inc.................. 236,250
15,000 Springs Industries, Inc................ 643,125
8,000 St. John Knits, Inc.................... 382,000
21,000 Starbucks Corp......................... 834,750
56,000 Topps, Inc............................. 343,000
1,000 Unifi, Inc............................. 22,750
9,000 Universal Foods Corp................... 309,375
18,000 Westpoint Stevens, Inc................. 382,500
25,000 Whitman Corp........................... 534,375
18,000 Wolverine World Wide, Inc.............. 549,000
-----------
9,060,625
-----------
CONSUMER SERVICES
4,000 Advo, Inc.............................. 102,500
10,000 Banta Corp............................. 427,500
12,000 Belo (A. H.) Corp...................... 414,000
14,000 Boston Chicken, Inc.................... 476,000
26,000 Bowne & Co., Inc....................... 481,000
11,000 Boyd Gaming Corp....................... 148,500
1,000 Casino America, Inc.................... 7,000
19,000 Equifax, Inc........................... 722,000
9,000 HFS, Inc............................... 559,125
30,000 Kelly Services, Inc.................... 765,000
25,000 King World Productions, Inc............ 865,625
21,000 Lone Star Steakhouse Saloon, Inc....... 813,750
9,000 Media General, Inc., Class A........... 250,875
21,000 Mirage Resorts, Inc.................... 695,625
19,000 New York Times Co., Class A............ 529,625
27,760 Ogden Corp............................. 635,010
16,000 Olsten Corp............................ 612,000
17,000 Omnicom Group.......................... 1,088,000
26,000 Outback Steakhouse, Inc................ 809,250
3,000 Papa John's International, Inc......... 116,625
13,200 PHH Corp............................... 580,800
31,500 Players International, Inc............. 342,563
1,000 Pulitzer Publishing Co................. 45,375
19,000 Regal Cinemas, Inc..................... 741,000
17,000 Reynolds & Reynolds Co................. 603,500
23,000 Rio Hotel & Casino, Inc................ 293,250
</TABLE>
F-28
<PAGE> 135
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------
<S> <C> <C>
28,000 Robert Half International, Inc............ $ 1,029,000
26,000 Sbarro, Inc............................... 549,250
12,500 Scientific Games Holdings Corp............ 415,625
6,000 Sonic Corp................................ 132,000
13,500 Spelling Entertainment Group, Inc......... 173,813
24,000 Wendys International, Inc................. 480,000
32,000 Westcott Communications, Inc.............. 444,000
-----------
16,349,186
-----------
ENERGY
17,000 BJ Services Co............................ 401,625
13,000 Brooklyn United Gas Co.................... 326,625
24,100 Eastern Enterprises....................... 716,975
38,000 El Paso Natural Gas Co.................... 1,026,000
25,000 KCS Energy, Inc........................... 246,875
12,000 K.N. Energy, Inc.......................... 307,500
25,000 Mesa, Inc................................. 106,250
91,000 Nabors Industries, Inc.................... 784,875
14,000 NACCO Industries, Inc., Class A........... 805,000
2,500 National Fuel Gas Co...................... 75,000
24,000 NICOR, Inc................................ 648,000
15,000 Nuevo Energy Co........................... 333,750
16,000 Offshore Logistics, Inc................... 198,000
14,400 ONEOK, Inc................................ 356,400
28,000 Pacific Enterprises....................... 693,000
48,000 Smith International, Inc.................. 768,000
1,000 Tidewater, Inc............................ 26,375
25,000 Union Texas Petroleum Holdings, Inc....... 459,375
12,000 United Meridian Corp...................... 202,500
24,000 Valero Energy Corp........................ 567,000
30,000 Varco International, Inc.................. 277,500
6,000 Washington Gas & Light Co................. 115,500
500 Weatherford Enterra, Inc.................. 12,250
3,000 Western Atlas, Inc........................ 133,500
12,400 WICOR, Inc................................ 370,450
188 Williams Companies........................ 7,285
-----------
9,965,610
-----------
FINANCE
12,000 Advanta Corp., Class A.................... 468,000
25,000 Ahmanson (H. F.) & Co..................... 634,375
15,000 AMBAC, Inc................................ 643,125
34,000 American Financial Group, Inc............. 956,250
25,000 American Re Corp.......................... 956,250
29,000 Bankers Life Holding Corp................. 525,625
33,000 Bear Stearns Companies, Inc............... 660,000
24,000 California Federal Bank................... 357,000
4,000 CCB Financial Corp........................ 196,000
26,000 Charter One Financial, Inc................ 737,750
58,000 City National Corp........................ 783,000
10,000 CMAC Investment Corp...................... 475,000
23,000 Commercial Federal Corp................... 750,375
1,500 Countrywide Credit Industries, Inc........ 33,188
23,000 Crestar Financial Corp.................... 1,319,625
41,000 Edwards (A.G.), Inc....................... 1,040,375
22,000 Finova Group, Inc......................... 1,001,000
7,000 First American Corp....................... 306,250
10,000 First Financial Corp...................... 210,000
18,000 First Tennessee National Corp............. 972,000
13,000 First USA, Inc............................ 606,125
20,300 Fremont General Corp...................... 596,313
19,000 GATX Corp................................. 909,625
49,000 Mercury Financial Co...................... 943,250
7,300 MGIC Investment Corp...................... 415,188
9,000 North American Mtg., Co................... 185,625
21,000 North Fork Bancorporation................. 459,375
22,000 Northern Trust Corp....................... 1,050,500
12,880 Norwest Corp.............................. 388,010
2,000 Ohio Casualty Corp........................ 71,500
10,000 Penncorp Financial Group, Inc............. 238,750
32,000 Peoples Heritage Financial................ 620,000
25,000 Protective Life Corp...................... 712,500
18,000 Regions Financial Corp.................... 720,000
109,000 Reliance Group Holding.................... 803,875
17,000 Reliastar Financial Corp.................. 716,125
3,000 Roosevelt Financial Group, Inc............ 48,375
38,000 Southtrust Corp........................... 959,500
5,000 Sovereign Bancorp, Inc.................... 50,000
19,300 Star Banc Corp............................ 1,061,500
16,000 TCF Financial Corp........................ 936,000
6,000 TIG Holdings, Inc......................... 151,500
6,000 Transatlantic Holdings, Inc............... 405,750
28,000 Union Planters Corp....................... 854,000
5,000 Vesta Insurance Group, Inc................ 203,125
38,000 Washington Mutual, Inc.................... 980,875
15,000 Webb Del Corp............................. 313,125
9,000 Zions Bancorporation...................... 623,250
-----------
29,048,949
-----------
HEALTH CARE
25,000 Amsco International, Inc.................. 409,375
24,000 Bausch & Lomb, Inc........................ 840,000
5,000 Bio Rad Labs, Inc., Class A.............. 190,625
19,000 CNS, Inc.................................. 199,500
11,000 Community Health Systems, Inc............. 349,250
52,000 Cor Therapeutics, Inc..................... 533,000
1,000 Cordis Corp............................... 110,625
4,000 Dentsply International, Inc............... 138,000
29,000 Foundation Health Corp.................... 1,236,125
2,000 HBO & Co.................................. 143,250
20,000 Healthcare Compare Corp................... 770,000
8,000 Healthsouth Rehabilitation................ 211,000
39,000 Horizon/CMS Healthcare.................... 784,875
37,073 ICN Pharmaceuticals, Inc.................. 759,997
24,000 Integrated Health Services, Inc........... 519,000
29,000 Lincare Holdings, Inc..................... 725,000
3,000 Manor Care, Inc........................... 98,625
1,000 Maxicare Health Plans..................... 17,625
32,000 Medisense, Inc............................ 716,000
47,500 Mylan Labs, Inc........................... 890,625
16,000 Nellcor Puritan Bennett, Inc.............. 924,000
8,000 North American Biological................. 65,000
2,000 Orthofix International, NV............... 19,500
16,000 Oxford Health Plans, Inc.................. 1,260,000
6,000 Pacific Physician Services................ 94,500
3,000 Quintiles Transnational Corp.............. 192,750
17,000 Renal Treatment Centers, Inc.............. 612,000
6,000 Rexall Sundown, Inc....................... 90,000
3,000 Target Therapeutics, Inc.................. 229,500
18,000 Thermo Cardiosystems, Inc................. 877,500
2,000 United American Healthcare Corp........... 22,250
12,000 Universal Health Services, Inc., Class B.. 448,500
20,000 Vivra, Inc................................ 660,000
25,320 Watsons Pharmaceuticals, Inc.............. 1,145,730
-----------
16,283,727
-----------
</TABLE>
F-29
<PAGE> 136
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING
16,000 Agco Corp. $ 754,000
3,000 Alliant Techsystems, Inc. 139,500
5,000 Ametek, Inc. 88,750
14,600 Aptar Group, Inc. 501,875
7,000 Blount, Inc., Class A 305,375
21,000 Briggs & Stratton Corp. 847,875
6,000 Cognex Corp. 363,000
22,000 Cummins Engine Co., Inc. 792,000
26,000 Danaher Corp. 812,500
22,000 Detroit Diesel Corp. 396,000
11,000 Duracraft Corp. 239,250
6,000 Granite Construction, Inc. 171,750
18,500 IDEX Corp. 698,375
7,000 INDRESCO, Inc. 120,750
1,000 Johnson Controls, Inc. 58,500
20,000 Juno Lighting, Inc. 292,500
2,000 Kent Electrics Corp. 97,750
16,000 Kulicke & Sofa Industries, Inc. 560,000
24,000 Mueller Industries, Inc. 561,000
4,000 National Service Industries, Inc. 119,500
9,000 Navistar International Corp. 93,375
19,000 PACCAR, Inc. 798,000
30,000 Southdown, Inc. 495,000
90,000 Sterling Chemicals, Inc. 731,250
11,000 Teledyne, Inc. 275,000
28,300 Thermo Instrument Systems, Inc. 856,075
26,000 Timken Co. 1,036,750
8,000 United Waste Systems, Inc. 316,000
31,000 Varity Corp. 1,108,250
6,000 Watts Industries, Inc., Class A 123,750
32,000 Wellman, Inc. 752,000
9,000 Wolverine Tube, Inc. 319,500
-----------
14,825,200
-----------
RAW MATERIALS/PROCESSING INDUSTRIES
17,000 Cleveland Cliffs, Inc. 641,750
16,000 Cyprus Amax Minerals 428,000
4,000 Cytec Industries, Inc. 218,000
6,000 First Mississippi Corp. 123,750
14,000 Geon Co. 346,500
24,000 Georgia Gulf Corp. 801,000
15,000 Goodrich (B. F.) Co. 990,000
46,000 Handy & Harman 644,000
8,000 Inland Steel Industries, Inc. 186,000
2,000 International Specialty Products, Inc. 17,500
62,000 Jefferson Smurfit Corp. 759,500
40,000 J&L Specialty Steel, Inc. 660,000
44,000 Longview Fibre Co. 643,500
15,000 Lubrizol Corp. 435,000
41,000 Lyondell Petrochemical Co. 881,500
46,000 Magma Copper Co., Class B 770,500
6,000 Medusa Corp. 149,250
3,000 NCH Corp. 163,125
14,000 Olin Corp. 904,750
51,000 Owens-Illinois, Inc. 643,875
12,000 Potlatch Corp. 505,500
3,000 Quanex Corp. 58,875
11,000 Rayonier, Inc. 418,000
69,000 Rexene Corp. 621,000
20,000 Sealed Air Corp. 522,500
5,000 Sigma-Aldrich Corp. 240,000
33,000 Sonoco Products Co. 833,250
43,000 Stone Container Corp. 736,375
46,000 Terra Industries, Inc. 580,750
1,000 Texas Industries, Inc. 52,875
23,000 USG Corp. 669,875
15,000 Vigoro Corp. 652,500
5,000 Vulcan Materals Co. 277,500
43,500 Worthington Industries, Inc. 744,938
-----------
17,321,438
-----------
TECHNOLOGY
6,000 Adaptec, Inc. 264,000
20,000 Alantec Corp. 710,000
4,000 Altera Corp. 244,000
15,000 America Online, Inc. 1,215,000
3,000 Analysts International Corp. 90,000
28,000 Aspect Telecommunications Corp. 973,000
19,000 Atmel Corp. 594,936
1,000 Auspex Systems, Inc. 14,812
27,000 Autodesk, Inc. 911,250
21,400 Avnet, Inc. 1,080,700
10,000 BMC Industries, Inc. 386,250
18,000 BMC Software, Inc. 641,250
56,000 Borland International, Inc. 777,000
36,000 Cadence Design Systems, Inc. 1,174,500
19,000 Cascade Communications 1,344,250
21,000 Cidco, Inc. 588,000
2,000 Computer Network Technology 13,125
60,000 Conner Peripherals, Inc. 1,095,000
22,000 Credence Systems Corp. 825,000
1,000 Dallas Semiconductor Co. 21,250
13,000 Dovatron International, Inc. 399,750
22,000 Dynatech Corp. 335,500
12,000 Electroglas, Inc. 867,000
13,000 Electronics For Imaging, Inc. 1,082,250
4,000 FTP Software, Inc. 108,188
34,000 Gateway 2000, Inc. 1,160,250
9,000 Harris Corp. 525,375
23,000 In Focus Systems, Inc. 730,250
44,000 Integrated Device Technology, Inc. 844,250
22,000 International Rectifier Corp. 1,009,250
37,000 Intervoice, Inc. 689,125
24,000 KLA Instruments Corp. 1,050,000
3,000 Komag, Inc. 172,875
13,000 Lam Research Corp. 809,250
3,000 Littelfuse, Inc. 98,625
17,000 McAfee Associates, Inc. 998,750
10,000 Microchip Technology, Inc. 397,500
26,000 Netmanage, Inc. 542,750
14,000 Network Equipment Technologies 465,500
22,000 Network General Corp. 907,500
12,500 Novellus Systems, Inc. 857,812
8,000 Peoplesoft, Inc. 688,000
4,500 Pioneer Standard Electronics, Inc. 62,438
9,000 Policy Management Systems Corp. 426,375
5,000 Quantum Corp. 86,250
23,000 Read-Rite Corp. 819,375
4,000 Recoton Corp. 89,000
38,000 S3, Inc. 650,750
14,000 Seagate Technology 638,750
30,000 Sequent Computer Systems, Inc. 525,000
25,000 Solectron Corp. 1,018,750
9,000 Sterling Software, Inc. 416,250
19,000 Symbol Technologies, Inc. 665,000
</TABLE>
F-30
<PAGE> 137
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------
<S> <C> <C>
20,000 Teradyne, Inc............................. $ 670,000
12,000 3Com Corp................................. 582,000
11,474 U.S. Robotics Corp........................ 1,067,080
19,000 Unitrode Corp............................. 513,000
8,500 Varian Associates, Inc.................... 437,750
27,000 Vishay Intertechnology, Inc............... 972,000
19,000 Wyle Electronics, Inc..................... 814,625
21,000 Xilinx, Inc............................... 1,000,125
------------
39,157,591
------------
TRANSPORTATION
49,000 Arkansas Best Corp........................ 453,250
32,000 Comair Holdings, Inc...................... 896,000
10,800 Consolidated Freightways, Inc............. 252,450
1,000 Continental Airlines, Inc., Class B....... 35,625
24,000 Fritz Companies, Inc...................... 846,000
26,000 Illinois Central Corp..................... 1,001,000
22,000 MS Carriers, Inc.......................... 341,000
12,000 Northwest Airlines, Inc., Class A......... 486,000
19,000 Pittston Company Services Group........... 520,125
6,000 Stolt Nielsen, S.A........................ 182,250
11,000 TNT Freightways Corp...................... 203,500
------------
5,217,200
------------
UTILITIES
29,000 AES Corp.................................. 572,750
26,000 AT&T Corp................................. 1,040,000
34,100 Boston Edison Co.......................... 937,750
4,500 C-Tec Corp................................ 94,500
12,000 California Energy, Inc.................... 216,000
27,000 Centerior Energy Corp..................... 273,375
4,300 Central Hudson Gas & Electric Corp........ 131,688
1,000 Colorado Public Service Co................ 34,000
10,000 Commnet Cellular, Inc..................... 252,500
38,000 Delmarva Power & Light Co................. 845,500
17,000 DQE, Inc.................................. 469,625
8,000 Eastern Utilities Association............. 187,000
4,251 Firstmiss Gold, Inc....................... 77,049
42,000 Frontier Corp............................. 1,139,250
36,000 Illinova Corp............................. 1,026,000
41,000 Long Island Lighting Co................... 707,250
33,000 New Mexico Public Service Co.............. 556,875
24,000 NIPSCO Industries, Inc.................... 879,000
9,500 Oklahoma Gas & Electric Co................ 380,000
3,000 Orange & Rockland Utilities............... 105,375
27,000 Pinnacle West Capital Corp................ 742,500
32,000 Portland General Corp..................... 872,000
14,200 Southern New England Telecommunications... 514,750
23,000 U.S. Cellular Corp........................ 790,625
1,000 U.S. Long Distance Corp................... 13,000
------------
12,858,362
------------
TOTAL COMMON STOCK...................... 194,325,513
------------
Convertible Preferred Stock
1,600 FHP International, $1.25, Series A........ 38,000
------------
Principal
Amount
(000) Repurchase Agreement
- ---------
$ 5,805 Lehman Government Securities, Inc.,
5.75%, 11/01/95 5,805,000
------------
TOTAL INVESTMENTS......................... 200,168,513
Other assets and liabilities, net......... 176,308
------------
NET ASSETS................................ $200,344,821
============
</TABLE>
Note 3--Investment Activity
During the period, the cost of purchases and proceeds from sales and maturities
of investments, excluding short-term investments, forward commitments and
variable rate demand notes were:
<TABLE>
<CAPTION>
Growth Municipal
Growth and Income Government Bond
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Purchases.................................... $5,043,956,174 $839,567,650 $711,194,232 $59,686,173
Sales........................................ 5,091,891,937 860,305,407 802,093,408 53,754,489
</TABLE>
Money Market held only short-term investments.
The following table presents the identified cost of investments at the end of
the period for federal income tax purposes with the associated net unrealized
appreciation.
<TABLE>
<CAPTION>
Growth Municipal
Growth and Income Government Bond
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Identified cost.................. $2,349,280,952 $705,387,413 $374,263,301 $115,460,414
============== ============ ============ ============
Gross unrealized appreciation.... $ 292,498,875 $129,326,111 $ 8,463,025 $ 5,934,935
Gross unrealized depreciation.... (30,865,282) (13,070,508) (965,595) (395,998)
-------------- ------------ ------------ ------------
Net unrealized appreciation...... $ 261,633,593 $116,255,603 $ 7,497,430 $ 5,538,937
============== ============ ============ ============
</TABLE>
F-31
<PAGE> 138
NOTES TO FINANCIAL STATEMENTS, CONTINUED
At the end of the period, the Trust held the following long futures contracts:
<TABLE>
<CAPTION>
Unrealized
Number of Market Appreciation
Fund Description Contracts Value (Depreciation)
----------------- ------------------------------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Growth Standard & Poor's 500 Index
(expiring Dec. 95) 340 $99,254,500 $ 39,318
=========== ========
Growth and Income Standard & Poor's 500 Index
(expiring Dec. 95) 110 $32,111,750 $444,125
=========== ========
Government U.S. Treasury Bond
(expiring Dec. 95) 190 $22,241,875 $405,422
U.S. Treasury Notes, five years
(expiring Dec. 95) 80 8,666,250 136,493
U.S. Treasury Notes, ten years
(expiring Dec. 95) 80 8,922,500 201,494
U.S. Treasury Bond
(expiring Mar. 96) 90 10,504,688 4,181
U.S. Treasury Notes, ten years
(expiring Mar. 96) 50 5,578,125 10,308
----------- --------
$55,913,438 $757,898
=========== ========
</TABLE>
At the end of the period, Government held the following forward commitments for
which delivery was not intended:
<TABLE>
<CAPTION>
Unrealized
Principal Market Appreciation
Amount Security Value (Depreciation)
----------- ---------------------------------------- ------------- --------------
<S> <C> <C> <C>
Federal National Mortgage Association
$10,000,000 8.00%, settling 11/95 (sale) $(10,243,800) $ (6,300)
Government National Mortgage Association
10,000,000 7.00%, settling 11/95 (sale) (9,931,300) (50)
10,000,000 7.00%, settling 12/95 (purchase) 9,918,800 79,737
6,000,000 7.00%, settling 1/96 (purchase) 5,943,780 26,280
20,000,000 7.50%, settling 11/95 (purchase) 20,262,600 414,944
5,000,000 8.50%, settling 11/95 (sale) (5,204,700) (54,700)
------------ --------
(Net obligation $10,285,469) $ 10,745,380 $459,911
============ ========
</TABLE>
Note 4--Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Trust at
the annual rate of $19,240 plus a fee of $1,285 per day for the Board meetings
attended.
<TABLE>
<CAPTION>
Growth
and Municipal Money
Growth Income Government Bond Market
-------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Trustees' fees for the period............ $150,855 $60,707 $43,787 $24,604 $22,723
======== ======= ======= ======= =======
</TABLE>
F-32
<PAGE> 139
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
Year Ended October 31
-------------------------------------------------------------
1995 1994 1993 1992 1991
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Growth Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ....................... $ 15.31 $ 16.26 $ 16.02 $ 15.47 $ 11.26
--------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income .......................................... .32 .29 .281 .30 .36
Expenses ................................................... (.16) (.16) (.165) (.17) (.17)
--------- ---------- ---------- ---------- ----------
Net investment income ...................................... .16 .13 .116 .13 .19
Net realized and unrealized gain or losses on securities ... 3.18 .2075 2.0065 1.3925 4.2425
--------- ---------- ---------- ---------- ----------
Total from investment operations ........................... 3.34 .3375 2.1225 1.5225 4.4325
--------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS FROM
Net investment income ...................................... (.155) (.1125) (.115) (.17) (.2225)
Net realized gain on securities ............................ (1.035) (1.175) (1.3996) (.8025) --
Excess of book-basis net realized gain on securities ....... -- -- (.3679) -- --
--------- ---------- ---------- ---------- ----------
Total distributions ........................................ (1.19) (1.2875) (1.8825) (.9725) (.2225)
--------- ---------- ---------- ---------- ----------
Net asset value, end of period ............................. $ 17.46 $ 15.31 $ 16.26 $ 16.02 $ 15.47
========= ========== ========== ========== ==========
TOTAL RETURN(1) .......................................... 24.01% 2.04% 14.27% 9.83% 39.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) ....................... $2,611.5 $2,169.9 $2,065.7 $1,648.0 $1,311.5
Average net assets (millions) .............................. $2,352.1 $2,123.1 $1,894.0 $1,479.7 $1,127.8
Ratios to average net assets
Expenses ............................................... 1.00% 1.09% 1.14% 1.18% 1.26%
Net investment income .................................. 1.04% .89% .80% .91% 1.44%
Portfolio turnover rate .................................... 230% 164% 166% 134% 100%
- -----------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ....................... $ 15.77 $ 17.13 $ 15.54 $ 14.70 $ 11.49
--------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income .......................................... .51 .45 .46 .435 .46
Expenses ................................................... (.15) (.16) (.17) (.16) (.155)
--------- ---------- ---------- ---------- ----------
Net investment income ...................................... .36 .29 .29 .275 .305
Net realized and unrealized gain or losses on securities ... 2.715 (.2125) 1.8775 1.2875 3.2225
--------- ---------- ---------- ---------- ----------
Total from investment operations ........................... 3.075 .0775 2.1675 1.5625 3.5275
--------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS FROM
Net investment income ...................................... (.30) (.275) (.2775) (.295) (.3175)
Net realized gain on securities ............................ (1.595) (1.1625) (.30) (.4275) --
--------- ---------- ---------- ---------- ----------
Total distributions ........................................ (1.895) (1.4375) (.5775) (.7225) (.3175)
--------- ---------- ---------- ---------- ----------
Net asset value, end of period ............................. $ 16.95 $ 15.77 $ 17.13 $ 15.54 $ 14.70
========= ========== ========== ========== ==========
TOTAL RETURN(1) .......................................... 22.45% .51% 14.13% 10.85% 31.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) ....................... $ 828.3 $ 712.9 $ 712.4 $ 591.0 $ 499.6
Average net assets (millions) .............................. $ 759.6 $ 707.5 $ 659.5 $ 545.0 $ 449.4
Ratios to average net assets
Expenses ............................................... .96% 1.02% 1.05% 1.09% 1.14%
Net investment income .................................. 2.27% 1.84% 1.76% 1.84% 2.29%
Portfolio turnover rate .................................... 117% 88% 51% 32% 42%
</TABLE>
(1)Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-33
<PAGE> 140
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
Year Ended October 31
------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Government Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $ 9.99 $ 11.80 $ 11.56 $ 11.47 $ 10.79
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .79 .78 .8536 .97 1.012
Expenses................................................ (.09) (.09) (.0920) (.11) (.107)
--------- --------- --------- --------- ---------
Net investment income................................... .70 .69 .7616 .86 .905
Net realized and unrealized gain or loss on securities.. .6779 (1.358) .4249 .1639 .6788
--------- --------- --------- --------- ---------
Total from investment operations........................ 1.3779 (.668) 1.1865 1.0239 1.5838
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.6979) (.6878) (.7615) (.8639) (.9038)
Net realized gain on securities......................... - - (.185) (.07) -
Excess of book-basis net realized gains on securities... - (.4542) - - -
Total distributions..................................... (.6979) (1.142) (.9465) (.9339) (.9038)
--------- --------- --------- --------- ---------
Net asset value, end of period.......................... $ 10.67 $ 9.99 $ 11.80 $ 11.56 $ 11.47
========= ======== ========= ========= =========
TOTAL RETURN(1)......................................... 14.27% (5.45%) 10.55% 9.32% 15.16%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $ 329.0 $ 335.0 $ 370.2 $ 282.0 $ 189.0
Average net assets (millions)........................... $ 329.9 $ 353.8 $ 330.1 $ 229.5 $ 161.2
Ratios to average net assets
Expenses............................................... .83% .89% .89% .95% .96%
Net investment income.................................. 6.84% 7.06% 7.35% 7.46% 8.15%
Portfolio turnover rate................................. 214% 256% 218% 112% 39%
</TABLE>
(1) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-34
<PAGE> 141
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
Year Ended October 31
---------------------------------------------
1995 1994 1993 1992 1991
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Municipal Bond Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $ 12.89 $ 14.07 $ 13.03 $ 12.84 $ 12.18
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .87 .84 .859 .875 .905
Expenses................................................ (.13) (.13) (.141) (.15) (.145)
Expense reimbursement(2)................................ - - .01 - -
------- ------- ------- ------- -------
Net investment income................................... .74 .71 .728 .725 .76
Net realized and unrealized gain or loss on securities.. .867 (1.182) 1.038 .2175 .648
------- ------- ------- ------- -------
Total from investment operations........................ 1.607 (.472) 1.766 .9425 1.408
------- ------- ------- ------- -------
DISTRIBUTIONS FROM NET INVESTMENT INCOME................ (.727) (.708) (.726) (.7525) (.748)
------- ------- ------- ------- -------
Net asset value, end of period.......................... $ 13.77 $ 12.89 $ 14.07 $ 13.03 $ 12.84
======= ======= ======= ======= =======
TOTAL RETURN(1)......................................... 12.72% (3.38%) 13.84% 7.57% 11.79%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $ 119.1 $ 112.1 $ 95.9 $ 60.3 $ 42.5
Average net assets (millions)........................... $ 113.1 $ 106.6 $ 77.1 $ 50.0 $ 39.2
Ratios to average net assets(2)
Expenses............................................... .96% .99% .96% 1.14% 1.15%
Expenses, without expense reimbursement................ - - 1.04% - -
Net investment income.................................. 5.58% 5.27% 5.29% 5.56% 6.08%
Net investment income, without expense reimbursement... - - 5.21% - -
Portfolio turnover rate................................. 49% 4% 4% 6% 1%
- -----------------------------------------------------------------------------------------------------------
Money Market Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income....................................... .0593 .0388 .033 .0424 .0647
Expenses................................................ (.0172) (.0184) (.0174) (.016) (.014)
Expense reimbursement(2)................................ .0071 .0084 .0074 .006 .0041
-------- ------- ------- ------- -------
Net investment income................................... .0492 .0288 .023 .0324 .0548
-------- ------- ------- ------- -------
DISTRIBUTIONS FROM NET INVESTMENT INCOME................ (.0492) (.0288) (.023) (.0324) (.0548)
-------- ------- ------- ------- -------
Net asset value, end of period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN(1)......................................... 5.01% 2.91% 2.31% 3.29% 5.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $ 60.3 $ 56.4 $ 59.2 $ 72.5 $ 84.8
Average net assets (millions)........................... $ 56.3 $ 56.6 $ 65.8 $ 77.9 $ 92.6
Ratios to average net assets(2)
Expenses............................................... 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, without expense reimbursement................ 1.71% 1.84% 1.74% 1.60% 1.41%
Net investment income.................................. 4.89% 2.87% 2.30% 3.27% 5.53%
Net investment income, without expense reimbursement... 4.18% 2.03% 1.56% 2.67% 5.12%
</TABLE>
(1)Total return does not consider the effect of sales charges.
(2)See Note 2.
See Notes to Financial Statements.
F-35
<PAGE> 142
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Common Sense Trust
We have audited the accompanying statements of net assets of Common Sense Growth
Fund, Common Sense Growth and Income Fund, Common Sense Government Fund, Common
Sense Municipal Bond Fund, and Common Sense Money Market Fund (cumulatively the
"Funds"), five of the ten portfolios constituting the series of the Common Sense
Trust (the "Trust"), as of October 31, 1995, and for each of the Funds, the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective funds of the Common Sense Trust listed above at October
31, 1995, the results of their operations, the changes in their net assets and
the financial highlights for each of the periods identified above, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 1, 1995
F-36
<PAGE> 143
GROWTH II FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
Common Stock 86.5%
CONSUMER DISTRIBUTION 5.3%
3,000 Dayton Hudson Corp.............................. $ 206,250
*9,500 Eckerd Corp..................................... 376,437
8,000 Gap, Inc........................................ 315,000
*3,000 Kohl's Corp..................................... 136,125
*16,000 Kroger Co....................................... 534,000
8,000 May Department Stores Co........................ 314,000
6,000 Nordstrom, Inc.................................. 222,375
*9,500 OfficeMax, Inc.................................. 235,125
15,000 Sears, Roebuck & Co............................. 510,000
----------
2,849,312
----------
CONSUMER DURABLES 1.4%
2,500 Chrysler Corp................................... 129,062
8,000 Echlin, Inc..................................... 286,000
8,000 General Motors Corp............................. 350,000
----------
765,062
----------
CONSUMER NON-DURABLES 8.9%
9,500 ConAgra, Inc.................................... 366,937
4,000 CPC International, Inc.......................... 265,500
9,700 Duracell International, Inc..................... 508,037
6,000 General Mills, Inc.............................. 344,250
6,000 Gillette Co..................................... 290,250
5,500 Heinz (H. J.) Co................................ 255,750
17,000 Nabisco Holdings Corp., Class A................. 456,875
14,000 PepsiCo, Inc.................................... 738,500
8,000 Procter & Gamble Co............................. 648,000
10,000 Ralston Purina Group............................ 593,750
13,000 Sara Lee Corp................................... 381,875
----------
4,849,724
----------
CONSUMER SERVICES 4.2%
2,400 Capital Cities ABC, Inc......................... 284,700
*8,000 Cox Communications, Inc......................... 150,000
4,000 Disney (Walt) Co................................ 230,500
6,600 Marriott International, Inc..................... 243,375
12,500 Service Corp. International..................... 501,563
*10,000 Tele-Communications International, Class A...... 226,250
7,000 Time Warner, Inc................................ 255,500
3,300 Tribune Co...................................... 208,313
*4,000 Viacom, Inc., Class B........................... 200,000
----------
2,300,201
----------
</TABLE>
F-37
<PAGE> 144
GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 6.5%
13,500 Coastal Corp........................................................ $ 437,062
7,500 Exxon Corp.......................................................... 572,812
5,500 Mobil Corp.......................................................... 554,125
17,500 Panhandle Eastern Corp.............................................. 441,875
6,000 Repsol SA, ADR...................................................... 177,750
4,000 Schlumberger, Ltd................................................... 249,000
7,500 Texaco, Inc......................................................... 510,938
10,500 USX-Marathon Group.................................................. 186,375
11,000 Williams Companies.................................................. 424,875
----------
3,554,812
----------
FINANCE 14.7%
10,000 Ahmanson (H.F.) & Co................................................ 250,000
6,500 American Express Co................................................. 264,062
3,500 American International Group, Inc................................... 295,312
14,300 Bank Of Boston Corp................................................. 636,350
5,700 Bank of New York, Inc............................................... 239,400
4,300 BankAmerica Corp.................................................... 247,250
8,500 Bankers Trust New York Corp......................................... 541,875
7,500 BayBanks, Inc....................................................... 607,500
3,000 Chase Manhattan Corp................................................ 171,000
3,000 Chemical Banking Corp............................................... 170,625
7,000 CoreStates Financial Corp........................................... 254,625
*900 Donaldson, Lufkin & Jenrette, Inc................................... 26,775
7,000 Federal National Mortgage Association............................... 734,125
13,000 Greenpoint Financial Corp........................................... 351,000
18,000 Green Tree Financial Corp........................................... 479,250
5,000 Merrill Lynch & Co., Inc............................................ 277,500
2,500 Morgan Stanley Group, Inc........................................... 217,500
5,700 Morgan (J.P.) & Co., Inc............................................ 439,613
147,311 Van Kampen American Capital Small Capitalization Fund (see Note 2).. 1,792,776
----------
7,996,538
----------
HEALTH CARE 11.7%
3,000 American Home Products Corp......................................... 265,875
*4,800 Amgen, Inc.......................................................... 230,400
5,500 Astra, AB, Series A, ADR............................................ 202,125
4,500 Baxter International, Inc........................................... 173,812
3,500 Becton Dickinson & Co............................................... 227,500
15,000 Caremark International, Inc......................................... 309,375
*1,500 Cordis Corp......................................................... 165,750
*10,000 Genzyme Corp........................................................ 582,500
4,300 Lilly (Eli) & Co.................................................... 415,488
5,000 Mallinckrodt Group, Inc............................................. 173,750
6,000 Medtronic, Inc...................................................... 346,500
4,600 Merck & Co., Inc.................................................... 264,500
*3,000 Nellcor Puritan Bennett, Inc........................................ 172,500
10,000 Pfizer, Inc......................................................... 573,750
</TABLE>
F-38
<PAGE> 145
GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE-continued
12,000 Schering-Plough Corp........................... $ 643,500
12,500 SmithKline Beecham, ADR........................ 648,438
1,600 St. Jude Medical, Inc.......................... 85,200
10,000 U. S. Healthcare, Inc.......................... 385,000
5,500 Warner Lambert Co.............................. 468,188
----------
6,334,151
----------
PRODUCER MANUFACTURING 6.0%
3,200 Fluor Corp..................................... 180,800
5,500 General Electric Co............................ 347,875
8,000 Honeywell, Inc................................. 336,000
3,000 Illinois Tool Works, Inc....................... 174,375
6,000 ITT Corp....................................... 735,000
3,300 Rockwell International Corp.................... 146,850
*12,000 Thermo Fibertek, Inc........................... 189,000
2,000 TRW, Inc....................................... 131,500
9,000 United Technologies Corp....................... 798,750
7,000 WMX Technologies, Inc.......................... 196,875
----------
3,237,025
----------
RAW MATERIALS/PROCESSING INDUSTRIES 3.1%
4,200 Champion International Corp.................... 224,700
5,800 Freeport-McMoRan, Copper Gold, Series B........ 131,950
4,200 Grace (W.R.) & Co.............................. 234,150
18,000 James River Corp............................... 578,250
5,000 Monsanto Co.................................... 523,750
----------
1,692,800
----------
TECHNOLOGY 17.3%
3,000 Adobe Systems, Inc............................. 171,000
*6,000 Bay Networks, Inc.............................. 397,500
5,000 Boeing Co...................................... 328,125
*8,000 Cisco Systems, Inc............................. 620,000
*11,500 Compaq Computer Corp........................... 641,125
12,000 Computer Associates International, Inc......... 660,000
*12,700 Dell Computer Corp............................. 592,138
*11,500 Digital Equipment Corp......................... 622,437
3,200 DST Systems, Inc............................... 67,200
7,000 General Motors Corp., Class H.................. 294,000
6,000 Hewlett-Packard Co............................. 555,750
10,000 Intel Corp..................................... 698,750
7,000 International Business Machines Corp........... 680,750
9,000 Loral Corp..................................... 266,625
*6,000 LSI Logic Corp................................. 282,750
3,500 McDonnell Douglas Corp......................... 286,125
*5,000 Microsoft Corp................................. 500,000
2,500 Motorola, Inc.................................. 164,063
*4,000 National Semiconductor Corp.................... 97,500
3,000 Northrop Grumman Corp.......................... 171,750
</TABLE>
F-39
<PAGE> 146
GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-continued
*3,000 Oracle System Corp.................................................................... $ 130,875
*1,200 Parametric Technology Corp............................................................ 80,400
*8,500 Symantec Corp......................................................................... 206,656
3,800 Texas Instruments, Inc................................................................ 259,350
*11,000 3Com Corp............................................................................. 517,000
2,800 Varian Associates, Inc................................................................ 143,850
-----------
9,435,719
-----------
TRANSPORTATION 1.5%
3,000 Burlington Northern Santa Fe, Inc..................................................... 251,625
8,000 Conrail, Inc.......................................................................... 550,000
-----------
801,625
-----------
UTILITIES 5.9%
3,000 Ameritech Corp........................................................................ 162,000
10,000 AT&T Corp............................................................................. 640,000
*10,000 Cellular Communications, Inc., Class A................................................ 536,250
14,000 Frontier Corp......................................................................... 378,000
26,000 MCI Communications Corp............................................................... 648,375
3,000 SBC Communications, Inc............................................................... 167,625
*21,000 WorldCom, Inc......................................................................... 685,125
-----------
3,217,375
-----------
TOTAL COMMON STOCK (Cost $43,295,733)............................................... 47,034,344
-----------
Principal
Amount Short-Term Investments 14.4%
- -------------
REPURCHASE AGREEMENT 11.7%
**$6,380,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%, due 11/01/95 (Collateralized by
U.S. Government obligations in a pooled cash account)
repurchase proceeds $6,381,040...................................................... 6,380,000
-----------
UNITED STATES GOVERNMENT OBLIGATIONS 2.7%
**1,500,000 United States Treasury Bills, 5.46%, 2/1/96........................................... 1,479,390
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $7,859,326)...................................... 7,859,390
-----------
TOTAL INVESTMENTS (Cost $51,155,059) 100.9%.......................................... 54,893,734
Other assets and liabilities, net (0.9)%............................................. (469,946)
-----------
NET ASSETS, equivalent to $14.57 per share for Class A
and $14.41 per share for Class B shares 100%....................................... $54,423,788
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 1,447,190 Class A and 2,313,448 Class B shares outstanding... $ 37,606
Capital surplus..................................................................................... 47,981,929
Undistributed net realized gain on securities....................................................... 2,593,885
Net unrealized appreciation of securities
Investments....................................................................................... 3,738,675
Futures contracts................................................................................. 71,693
-----------
NET ASSETS.......................................................................................... $54,423,788
===========
</TABLE>
* Non-income producing security
**Securities with a market value of approximately $5.9 million were placed as
collateral for futures contracts (see Note 1D)
See Notes to Financial Statements.
F-40
<PAGE> 147
GROWTH II FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations Year Ended
October 31, 1995
----------------
<S> <C>
INVESTMENT INCOME
Dividends.................................................... $ 391,376
Interest..................................................... 206,534
----------
Investment income.......................................... 597,910
----------
EXPENSES
Advisory fees................................................ 189,060
Shareholder service agent's fees and expenses................ 376,333
Accounting services.......................................... 47,314
Service fees--Class A........................................ 28,641
Distribution and service fees--Class B....................... 176,297
Trustees' fees and expenses.................................. 24,084
Audit fees................................................... 11,883
Legal fees................................................... 1,364
Reports to shareholders...................................... 28,200
Registration and filing fees................................. 90,032
Miscellaneous................................................ 1,344
Expense reimbursement........................................ (42,461)
----------
Total expenses............................................. 932,091
----------
Net investment loss........................................ (334,181)
---------
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities
Investments................................................ 2,897,521
Futures contracts.......................................... 226,423
Net unrealized appreciation of securities during the period
Investments................................................ 3,467,222
Futures contracts.......................................... 55,205
----------
Net realized and unrealized gain on securities............... 6,646,371
----------
Increase in net assets resulting from operations............. $6,312,190
==========
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets
May 3, 1994*
Year Ended through
October 31, 1995 October 31, 1994
---------------- ----------------
<S> <C> <C>
NET ASSETS, beginning of period.............................. $10,163,636 $ 200
----------- -----------
OPERATIONS
Net investment loss........................................ (334,181) (8,840)
Net realized gain (loss) on securities..................... 3,123,944 (195,878)
Net unrealized appreciation of securities during the period 3,522,427 287,941
----------- ----------
Increase in net assets resulting from operations.......... 6,312,190 83,223
----------- ----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A.................................................. 17,139,771 4,406,808
Class B.................................................. 25,723,932 5,848,735
----------- -----------
42,863,703 10,255,543
----------- -----------
Cost of shares redeemed
Class A.................................................. (2,973,033) (63,815)
Class B.................................................. (1,942,708) (111,515)
----------- -----------
(4,915,741) (175,330)
----------- -----------
Increase in net assets resulting from capital transactions. 37,947,962 10,080,213
----------- -----------
INCREASE IN NET ASSETS....................................... 44,260,152 10,163,436
----------- -----------
NET ASSETS, end of period.................................... $54,423,788 $10,163,636
=========== ===========
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-41
<PAGE> 148
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------
<S> <C> <C>
Common Stock 87.3%
CONSUMER DISTRIBUTION 5.3%
*3,500 Ann Taylor Stores, Inc............ $ 38,500
2,300 Dayton Hudson Corp................ 158,125
*11,500 Federated Department Stores, Inc.. 291,812
3,900 Fleming Companies, Inc............ 88,238
3,900 Gap, Inc.......................... 153,563
900 Interstate Bakeries Co............ 19,238
11,000 May Department Stores Co.......... 431,750
*3,200 Nine West Group, Inc.............. 142,400
5,300 Nordstrom, Inc.................... 196,431
8,900 Sears, Roebuck & Co............... 302,600
----------
1,822,657
----------
CONSUMER DURABLES 1.3%
3,200 Eastman Kodak Co.................. 200,399
3,300 General Motors Corp............... 144,375
6,300 Sunbeam-Oster, Inc................ 94,500
----------
439,274
----------
CONSUMER NON-DURABLES 8.1%
4,900 Coca-Cola Co...................... 352,187
3,300 CPC International, Inc............ 219,038
2,500 General Mills, Inc................ 143,438
5,500 Gillette Co....................... 266,062
2,000 Kellogg Co........................ 144,500
16,800 Nabisco Holdings Corp., Class A... 451,500
2,200 Nike, Inc., Class B............... 124,850
5,900 Procter & Gamble Co............... 477,900
5,900 Quaker Oats Co.................... 201,337
7,500 Ralston Purina Group.............. 445,313
----------
2,826,125
----------
CONSUMER SERVICES 4.3%
2,200 Capital Cities ABC, Inc........... 260,974
4,800 Disney (Walt) Co.................. 276,600
6,700 McDonald's Corp................... 274,700
3,100 Omnicom Group, Inc................ 198,013
*5,700 Viacom, Inc., Class B............. 285,000
9,100 Wendy's International, Inc........ 180,863
----------
1,476,150
----------
</TABLE>
F-42
<PAGE> 149
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 9.0%
3,700 British Petroleum Co., PLC, ADR.......................... $ 326,525
9,300 Exxon Corp............................................... 710,288
4,900 Mobil Corp............................................... 493,675
15,400 Pacific Enterprises...................................... 381,150
5,400 Panhandle Eastern Corp................................... 136,350
5,700 Royal Dutch Petroleum Co., ADR........................... 700,387
5,600 Texaco, Inc.............................................. 381,500
----------
3,129,875
----------
FINANCE 14.4%
2,800 Ahmanson (H.F.) & Co..................................... 70,000
3,450 American International Group, Inc........................ 291,094
6,400 Banc One Corp............................................ 216,000
4,800 Bank Of Boston Corp...................................... 213,600
8,000 Bankers Trust New York Corp.............................. 510,000
3,300 BayBanks, Inc............................................ 267,300
2,300 Beacon Properties Corp................................... 50,025
5,200 Chemical Banking Corp.................................... 295,750
3,100 Chubb Corp............................................... 278,613
6,900 CoreStates Financial Corp................................ 250,988
5,500 Debartolo Realty Corp.................................... 71,500
1,300 Duke Realty Investments, Inc............................. 39,812
7,700 Federal National Mortgage Association.................... 807,538
1,200 Health Care Property Investors, Inc...................... 40,650
8,400 Horace Mann Educators Corp............................... 223,649
6,500 Morgan (J.P.) & Co., Inc................................. 501,312
14,100 Prudential Reinsurance Holdings.......................... 287,288
3,500 St. Paul Companies, Inc.................................. 177,625
9,400 State Street Boston Corp................................. 365,425
300 Vornado Realty Trust..................................... 10,763
1,100 Weingarten Realty Investors.............................. 37,950
----------
5,006,882
----------
HEALTH CARE 11.4%
5,200 Abbott Laboratories, Inc................................. 206,700
4,300 American Home Products Corp.............................. 381,087
*7,800 Amgen, Inc............................................... 374,400
4,000 Astra, AB, Series A, ADR................................. 147,000
6,000 Baxter International, Inc................................ 231,750
*9,000 Charter Medical Corp..................................... 162,000
5,300 Mallinckrodt Group, Inc.................................. 184,175
9,900 Merck & Co., Inc......................................... 569,250
6,200 Pfizer, Inc.............................................. 355,725
7,200 Pharmacia Aktiebolag, ADR................................ 252,000
9,100 Schering-Plough Corp..................................... 487,988
9,200 Tenet Healthcare Corp.................................... 164,450
3,600 Teva Pharmaceutical, Ltd., ADR........................... 141,300
*4,600 Vencor, Inc.............................................. 127,650
3,100 Zeneca Group PLC, ADR.................................... 174,763
----------
3,960,238
----------
</TABLE>
F-43
<PAGE> 150
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ----------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING 6.1%
7,800 Allied-Signal, Inc....................... $ 331,500
7,100 Fluor Corp............................... 401,150
5,000 General Electric Co...................... 316,250
10,600 Honeywell, Inc........................... 445,200
4,800 Illinois Tool Works, Inc................. 279,000
4,300 Stewart & Stevenson Services, Inc........ 97,825
8,200 WMX Technologies, Inc.................... 230,625
----------
2,101,550
----------
RAW MATERIALS/PROCESSING INDUSTRIES 6.2%
3,700 Air Products & Chemicals, Inc........... 191,013
4,400 Aluminum Co. of America................. 224,400
8,100 Bemis, Inc.............................. 210,600
4,800 Champion International Corp............. 256,800
4,400 Grace (W.R.) & Co....................... 245,300
5,400 James River Corp........................ 173,475
4,400 Monsanto Co............................. 460,900
4,400 Scott Paper Co.......................... 234,300
3,100 Sigma-Aldrich Corp...................... 147,250
----------
2,144,038
----------
TECHNOLOGY 10.5%
3,600 Adobe Systems, Inc....................... 205,200
4,800 Alcatel Alsthom, ADR..................... 81,000
4,600 Boeing Co................................ 301,875
*5,400 Compaq Computer Corp..................... 301,050
8,000 Computer Associates International, Inc... 440,000
*5,000 Digital Equipment Corp................... 270,625
3,000 Hewlett-Packard Co....................... 277,874
1,300 International Business Machines Corp..... 126,425
9,700 Loral Corp............................... 287,362
3,100 McDonnell Douglas Corp................... 253,425
*2,200 Microsoft Corp........................... 220,000
1,100 Motorola, Inc............................ 72,187
1,700 Nokia Corp., ADS......................... 94,775
3,200 Northrop Grumman Corp.................... 183,200
*4,300 Symantec Corp............................ 104,544
3,300 Xerox Corp............................... 428,175
----------
3,647,717
----------
TRANSPORTATION 0.9%
4,800 Union Pacific Corp...................... 313,800
----------
UTILITIES 9.8%
4,300 Ameritech Corp.......................... 232,200
8,000 AT&T Corp............................... 512,000
6,900 Cincinnati Bell, Inc.................... 202,688
6,400 Duke Power Co........................... 286,400
</TABLE>
F-44
<PAGE> 151
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------------
<S> <C> <C>
UTILITIES--continued
14,100 Frontier Corp................................... $ 380,700
18,000 MCI Communications Corp......................... 448,875
7,100 National Power, PLC, ADR........................ 88,750
19,000 Pacificorp...................................... 358,624
4,400 Peco Energy Co.................................. 128,700
6,500 PowerGen, PLC, ADR.............................. 108,062
5,100 Southern New England Telecommunications Corp.... 184,238
11,500 Telefonos de Mexico, S.A., ADR.................. 316,250
2,800 U. S. West, Inc................................. 133,350
----------
3,380,837
----------
TOTAL COMMON STOCK (Cost $28,102,546)......... 30,249,143
----------
Convertible Preferred Stock 2.9%
5,000 Browning-Ferris, ACES, $7.25.................... 164,375
3,000 Corning Glassworks, MIPS, 6%.................... 135,000
5,800 James River Corp., DECS, $1.55.................. 176,900
2,000 SCI Finance, NV, LLC, 6.25%..................... 141,000
4,500 Time Warner, Inc., $1.24, PERCS................. 144,000
3,700 Williams Companies, Inc. $3.50.................. 251,600
----------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost $950,093)............................. 1,012,875
----------
Principal
Amount
- --------- Convertible Corporate Obligations 4.8%
CONSUMER DISTRIBUTION 0.6%
$145,000 Federated Department Stores, Inc., 5.00%,
10/01/03...................................... 140,650
160,000 Rite Aid Corp., LYON, Zero Coupon, 7/24/06...... 79,600
----------
220,250
----------
CONSUMER SERVICES 1.7%
600,000 ADT Operations, Inc., LYON, Zero Coupon,
7/06/10........................................ 270,000
300,000 News America Holdings, Inc., LYON, Zero Coupon,
3/11/13........................................ 133,500
Time Warner, Inc.
54,850 8.75%, 1/10/15................................. 57,113
300,000 LYON, Zero Coupon, 6/22/13..................... 120,000
----------
580,613
----------
HEALTH CARE 1.6%
100,000 Ciba-Geigy, 6.25%, 3/15/16....................... 100,000
500,000 Roche Holdings, Inc., LYON, Zero Coupon, 4/20/10. 206,250
90,000 Sandoz, Ltd. 2.00%, 10/06/02..................... 78,975
150,000 United Technologies Corp., PEN, Zero Coupon,
9/08/97........................................ 178,500
----------
563,725
----------
UTILITIES 0.9%
4,000 Sprint Corp., DECS, 8.25%, 3/30/00............... 145,104
500,000 U. S. Cellular Corp., LYON, Zero Coupon, 6/15/15. 170,000
----------
315,104
----------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $1,551,702).............................. 1,679,692
----------
</TABLE>
F-45
<PAGE> 152
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Investments 9.3%
REPURCHASE AGREEMENT 9.0%
**$ 3,125,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%, due
11/1/95 (Collateralized by U.S. Government obligations
in a pooled cash account) repurchase proceeds $3,125,510. $ 3,125,000
-----------
UNITED STATES GOVERNMENT OBLIGATIONS 0.3%
**100,000 United States Treasury Bills, 5.33%, 2/8/96................ 98,525
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,223,550)............. 3,223,525
-----------
TOTAL INVESTMENTS (Cost $33,827,891) 104.3%................ 36,165,235
Other assets and liabilities, net (4.3%)................... (1,498,311)
-----------
NET ASSETS, equivalent to $13.92 per share for
Class A and $13.88 per share for Class B shares 100%...... $34,666,924
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 970,197 Class A and 1,525,260 Class B
shares outstanding..................................................................... $ 24,955
Capital surplus......................................................................... 31,524,800
Undistributed net realized gain on securities........................................... 784,850
Net unrealized appreciation (depreciation) of securities
Investments........................................................................... 2,337,344
Futures contracts..................................................................... (5,025)
----------
NET ASSETS.............................................................................. $34,666,924
===========
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $600,000 were placed as
collateral for futures contracts (see Note 1D)
ACES--Automatically convertible equity stock
DECS--Dividend enhanced convertible stock
LYON--Liquid yield option note, zero coupon
MIPS--Monthly income paying security
PEN--Pharmaceutical exchange note
PERCS--Preferred equity redeemable cumulative stock
See Notes to Financial Statements.
F-46
<PAGE> 153
GROWTH AND INCOME II FUND STATEMENT OF OPERATIONS
Year Ended October 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends........................................................................................................... $ 390,874
Interest............................................................................................................ 179,223
----------
Investment income................................................................................................. 570,097
----------
EXPENSES
Advisory fees...................................................................................................... 115,168
Shareholder service agent's fees and expenses...................................................................... 111,024
Accounting services................................................................................................ 46,448
Service fees--Class A.............................................................................................. 18,742
Distribution and service fees--Class B............................................................................. 102,215
Trustees' fees and expenses........................................................................................ 23,354
Audit fees......................................................................................................... 12,633
Legal fees......................................................................................................... 1,119
Reports to shareholders............................................................................................ 12,870
Registration and filing fees....................................................................................... 86,375
Miscellaneous...................................................................................................... 873
Expense reimbursement.............................................................................................. (26,000)
----------
Total expenses................................................................................................... 504,821
----------
Net investment income............................................................................................ 65,276
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities
Investments..................................................................................................... 794,752
Futures contracts............................................................................................... 127,864
Net unrealized appreciation (depreciation) of securities during the period
Investments..................................................................................................... 2,256,207
Futures contracts............................................................................................... (900)
----------
Net realized and unrealized gain on securities.................................................................... 3,177,923
----------
Increase in net assets resulting from operations.................................................................. $3,243,199
==========
</TABLE>
See Notes to Financial Statements.
F-47
<PAGE> 154
GROWTH AND INCOME II FUND STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
May 3, 1994*
Year Ended through
October 31, 1995 October 31, 1994
---------------- ----------------
<S> <C> <C>
NET ASSETS, beginning of period................................... $ 7,111,500 $ 200
----------- ----------
Operations
Net investment income........................................... 65,276 54,709
Net realized gain (loss) on securities.......................... 922,616 (121,393)
Net unrealized appreciation of securities during the period..... 2,255,307 77,012
----------- ----------
Increase in net assets resulting from operations.............. 3,243,199 10,328
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM (see Note 1H)
Net investment income
Class A....................................................... (60,588) (11,970)
Class B....................................................... (4,688) (6,840)
----------- ----------
(65,276) (18,810)
----------- ----------
Excess of book-basis net investment income
Class A....................................................... (19,387) --
Class B....................................................... (32,885) --
----------- ----------
(52,272) --
----------- ----------
Total distributions........................................... (117,548) (18,810)
----------- ----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A....................................................... 11,271,055 3,526,516
Class B....................................................... 17,102,298 3,654,518
----------- ----------
28,373,353 7,181,034
----------- ----------
Proceeds from shares issued for distributions reinvested
Class A....................................................... 78,007 11,544
Class B....................................................... 37,331 6,749
----------- ----------
115,338 18,293
----------- ----------
Cost of shares redeemed
Class A....................................................... (2,680,200) (56,689)
Class B....................................................... (1,378,718) (22,856)
----------- ----------
(4,058,918) (79,545)
----------- ----------
Increase in net assets resulting from capital transactions.... 24,429,773 7,119,782
----------- ----------
INCREASE IN NET ASSETS............................................ 27,555,424 7,111,300
----------- ----------
NET ASSETS, end of period......................................... $34,666,924 $7,111,500
=========== ==========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-48
<PAGE> 155
GOVERNMENT II FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
United States Treasury Notes 54.2%
$ 800,000 6.50%, 8/15/97............................................................ $ 811,504
**400,000 7.25%, 11/15/96........................................................... 406,376
400,000 7.50%, 12/31/96........................................................... 408,312
600,000 7.75%, 12/31/99........................................................... 642,468
800,000 7.875%, 7/31/96........................................................... 812,752
**1,200,000 7.875%, 1/15/98........................................................... 1,254,000
**1,900,000 8.50%, 11/15/95........................................................... 1,901,482
**3,280,000 8.875%, 2/15/96........................................................... 3,308,700
400,000 9.00%, 5/15/98............................................................ 430,752
**500,000 9.25%, 1/15/96............................................................ 503,440
-----------
TOTAL UNITED STATES TREASURY NOTES (Cost $10,514,718)................... 10,479,786
-----------
United States Government Agencies 39.7%
Federal Home Loan Mortgage Corp.
184,606 7.00%, pool, 10/01/24..................................................... 183,164
737,647 7.50%, pools, 7/01/24 to 6/01/25.......................................... 745,946
957,996 8.00%, pools, 4/01/23 to 10/01/25......................................... 981,352
Federal National Mortgage Association
385,582 7.00%, pool, 5/01/24...................................................... 382,328
712,679 7.50%, pools, 8/01/24 to 11/01/24......................................... 720,027
793,750 8.00%, pools, 8/01/24 to 8/01/25.......................................... 813,102
Government National Mortgage Association
170,969 7.00%, pool, 6/15/22...................................................... 169,795
2,144,680 7.50%, pools, 10/15/22 to 6/15/24......................................... 2,172,839
1,453,332 8.00%, pools, 2/15/23 to 6/15/25.......................................... 1,495,115
-----------
TOTAL UNITED STATES GOVERNMENT AGENCIES (Cost $7,275,810)............... 7,663,668
-----------
Forward Purchase Commitments 19.6%
*100,000 Federal Home Loan Mortgage Corp., 7.50%, settling 1/96...................... 100,838
Federal National Mortgage Association
*600,000 7.50%, settling 12/95..................................................... 605,304
*200,000 7.50%, settling 1/96...................................................... 201,484
Government National Mortgage Association
*2,500,000 7.00%, settling 1/96...................................................... 2,476,575
*400,000 7.50%, settling 12/95..................................................... 404,676
-----------
TOTAL FORWARD PURCHASE COMMITMENTS (Cost $3,770,500).................... 3,788,877
-----------
Repurchase Agreement 1.7%
330,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%, due 11/1/95
(collateralized by U.S. Government obligations in a pooled cash account)
repurchase proceeds $330,054 (Cost $330,000)............................. 330,000
-----------
TOTAL INVESTMENTS (Cost $21,891,028) 115.2%............................... 22,262,331
Other assets and liabilities, net 4.7%.................................... 913,372
Receivable for investments sold 2.6%...................................... 496,563
Payable for investments purchased (22.5%)................................. (4,353,063)
-----------
NET ASSETS, equivalent to $12.14 per share for Class A
and $12.14 per share for Class B shares 100%............................ $19,319,203
===========
</TABLE>
F-49
<PAGE> 156
GOVERNMENT II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
<S> <C>
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 809,931 Class A and 780,836 Class B shares outstanding...... $ 15,908
Capital surplus.................................................................................... 18,879,404
Accumulated net realized loss on securities........................................................ (22,577)
Net unrealized appreciation of securities:
Investments...................................................................................... 371,303
Forward commitments.............................................................................. 13,313
Futures contracts................................................................................ 61,852
-----------
NET ASSETS......................................................................................... $19,319,203
===========
</TABLE>
*Non-income producing security
**Securities with a market value of approximately $7.6 million were placed as
collateral for forwards commitments and futures contracts (see Note 1D)
See Notes to Financial Statements.
F-50
<PAGE> 157
GOVERNMENT II FUND STATEMENT OF OPERATIONS
Year Ended October 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest...................................................... $ 933,882
----------
EXPENSES
Advisory fees................................................. 71,599
Shareholder service agent's fees and expenses................. 39,267
Accounting services........................................... 50,709
Service fees--Class A......................................... 16,075
Distribution and service fees--Class B........................ 55,032
Trustees' fees and expenses................................... 23,241
Audit fees.................................................... 14,883
Legal fees.................................................... 1,165
Reports to shareholders....................................... 7,212
Registration and filing fees.................................. 87,812
Miscellaneous................................................. 683
----------
Total expenses.............................................. 367,678
----------
Net investment income....................................... 566,204
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments................................................. 42,159
Forward commitments......................................... 17,172
Futures contracts........................................... (33,004)
Net unrealized appreciation of securities during the period
Investments................................................. 518,081
Forward commitments......................................... 13,313
Futures contracts........................................... 61,852
----------
Net realized and unrealized gain on securities................ 619,573
----------
Increase in net assets resulting from operations.............. $1,185,777
==========
</TABLE>
See Notes to Financial Statements.
F-51
<PAGE> 158
GOVERNMENT II FUND STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended May 3, 1994*
October 31, through October 31,
1995 1994
------------- -------------------
<S> <C> <C>
NET ASSETS, beginning of period.............................................. $ 7,342,156 $ 200
----------- -----------
OPERATIONS
Net investment income....................................................... 566,204 89,214
Net realized gain (loss) on securities...................................... 26,327 (35,179)
Net unrealized appreciation (depreciation) of securities during the period.. 593,246 (146,778)
----------- -----------
Increase (decrease) in net assets resulting from operations............... 1,185,777 (92,743)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM (see Note 1H)
Net investment income
Class A.................................................................... (328,298) (66,280)
Class B.................................................................... (237,906) (17,949)
----------- -----------
(566,204) (84,229)
----------- -----------
Excess of book-basis net investment income
Class A.................................................................... (10,291) --
Class B.................................................................... (8,419) --
----------- -----------
(18,710) --
----------- -----------
Total distributions...................................................... (584,914) (84,229)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A.................................................................... 6,491,908 5,138,916
Class B.................................................................... 7,373,364 2,976,454
----------- -----------
13,865,272 8,115,370
----------- -----------
Proceeds from shares issued for distributions reinvested
Class A.................................................................... 331,815 60,050
Class B.................................................................... 237,404 17,072
----------- -----------
569,219 77,122
----------- -----------
Cost of shares redeemed
Class A.................................................................... (1,866,580) (516,794)
Class B.................................................................... (1,191,727) (156,770)
----------- -----------
(3,058,307) (673,564)
----------- -----------
Increase in net assets resulting from capital transactions................. 11,376,184 7,518,928
----------- -----------
INCREASE IN NET ASSETS....................................................... 11,977,047 7,341,956
----------- -----------
NET ASSETS, end of period.................................................... $19,319,203 $ 7,342,156
=========== ===========
</TABLE>
*Commencement of operations
See Notes to Financial Statements
F-52
<PAGE> 159
EMERGING GROWTH II FUND Statement of Net Assets
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 94.9%
CONSUMER DISTRIBUTION 7.4%
2,500 Alco Standard Corp...................................... $ 221,250
*1,000 Baby Superstore, Inc.................................... 47,250
*1,000 Boise Cascade Office Products Corp...................... 36,125
3,500 Casey's General Stores, Inc............................. 80,500
*1,500 CDW Computer Centers, Inc............................... 72,750
*5,000 CompUSA, Inc............................................ 191,250
*4,000 Consolidated Stores Corp................................ 92,500
*4,000 Corporate Express, Inc.................................. 104,500
*1,000 Creative Computer, Inc.................................. 29,000
3,000 Fastenal Co............................................. 104,437
*2,000 Garden Ridge Corp....................................... 71,500
*6,000 General Nutrition Companies, Inc........................ 149,250
2,500 Just For Feet, Inc...................................... 59,062
*4,000 Kroger Co............................................... 133,500
*2,000 Micro Warehouse, Inc.................................... 89,000
*1,000 Petco Animal Supplies................................... 28,000
2,500 Richfood Holdings, Inc.................................. 62,500
*2,500 Safeway, Inc............................................ 118,125
*3,500 Staples Inc............................................. 93,188
*7,500 Sunglass Hut International, Inc......................... 204,375
----------
1,988,062
----------
CONSUMER DURABLES 1.3%
2,000 Black & Decker Corp..................................... 67,750
2,500 Clayton Homes, Inc...................................... 65,625
2,000 Harman International Industries, Inc.................... 92,250
*4,000 Toll Brothers, Inc...................................... 71,500
*500 TransPro, Inc........................................... 5,500
*2,000 Ultralife Batteries, Inc................................ 40,500
----------
343,125
----------
CONSUMER NON-DURABLES 3.3%
2,000 Coca-Cola Enterprises, Inc.............................. 53,250
2,000 Fila Holdings, ADR...................................... 86,250
2,500 First Brands Corp....................................... 114,375
*3,000 Nu-Kote Holding, Inc., Class A.......................... 62,250
*2,500 Quiksilver, Inc......................................... 77,500
2,000 St. John Knits, Inc..................................... 95,750
2,000 Starbucks Corp.......................................... 78,500
*5,500 Tommy Hilfiger Corp..................................... 209,688
*500 USA Detergents, Inc..................................... 12,750
3,500 Wolverine World Wide, Inc............................... 105,000
----------
895,313
----------
CONSUMER SERVICES 8.8%
*2,000 Alternative Resources Corp.............................. 62,000
2,000 American Radio Systems Corp............................. 45,000
3,500 Applebees International, Inc............................ 98,437
*4,000 Boston Chicken, Inc..................................... 135,250
</TABLE>
F-53
<PAGE> 160
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES--continued
*2,000 Clear Channel Communications, Inc......................... $ 164,000
*3,500 Corrections Corp. of America.............................. 190,750
3,500 Equifax, Inc.............................................. 136,500
*2,500 Evergreen Media Corp., Class A............................ 68,125
*2,500 Gartner Group, Inc........................................ 109,062
2,000 Hospitality Franchise System, Inc......................... 122,500
*4,000 Infinity Broadcasting Corp................................ 130,000
2,000 Interpublic Group Companies, Inc.......................... 77,500
4,000 La Quinta Inns, Inc....................................... 103,000
*3,500 Lone Star Steakhouse & Saloon, Inc........................ 135,187
3,000 Meredith Corp............................................. 107,250
*5,000 Mirage Resorts, Inc....................................... 163,750
3,000 National Data Corp........................................ 79,500
*700 Outback Steakhouse, Inc................................... 21,963
*2,000 Regal Cinemas, Inc........................................ 78,500
3,000 Reynolds & Reynolds Co.................................... 106,875
*2,000 Scientific Games Holdings Corp............................ 65,500
*1,500 Sinclair Broadcast Group, Class A......................... 31,125
3,000 V-Tel Corp................................................ 54,000
1,000 Wallace Computer Services, Inc............................ 56,375
500 Wendy's International, Inc................................ 9,938
----------
2,352,087
----------
ENERGY 4.5%
2,000 Apache Corp............................................... 51,000
*3,448 BJ Services Co. (includes 60 warrants, expiring 4/13/00).. 79,888
*1,500 Cairn Energy USA, Inc..................................... 18,000
2,000 Camco International, Inc.................................. 45,750
*3,000 Chesapeake Energy Corp.................................... 87,750
*2,000 Diamond Offshore Drilling................................. 49,750
500 Enron Oil & Gas Co........................................ 10,000
*7,500 Global Marine, Inc........................................ 48,750
*4,000 Input/Output, Inc......................................... 149,500
2,500 Kerr McGee Corp........................................... 137,813
*2,500 Newfield Exploration Co................................... 73,750
1,000 Phoenix Resource Co....................................... 17,750
4,500 Pogo Producing Co......................................... 90,563
*6,500 Pride Petroleum Services, Inc............................. 56,875
*4,500 Smith International, Inc.................................. 72,000
4,500 Sonat Offshore Drilling, Inc.............................. 142,875
2,500 Tidewater, Inc............................................ 65,938
1,000 Varco International, Inc.................................. 9,125
----------
1,207,077
----------
FINANCE 10.3%
2,000 AAMES Financial Corp...................................... 50,000
4,000 Bank of New York, Inc..................................... 168,000
6,500 Bank of Boston Corp....................................... 289,250
2,500 BayBanks, Inc............................................. 202,500
3,000 City National Corp........................................ 39,750
1,200 CMAC Investment Corp...................................... 57,000
</TABLE>
F-54
<PAGE> 161
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------
<S> <C> <C>
FINANCE--continued
*2,500 Credit Acceptance Corp............................... $ 58,750
2,500 Cullen Frost Bankers, Inc............................ 127,500
2,500 EXEL Limited......................................... 133,750
3,000 FINOVA Group, Inc.................................... 135,750
2,500 First American Corp.................................. 109,687
2,000 First Bank System, Inc............................... 99,500
7,000 Green Tree Financial Corp............................ 186,375
1,000 Household International, Inc......................... 56,250
2,000 MBNA Corp............................................ 73,750
2,500 Mercantile Bancorporation, Inc....................... 110,000
3,500 Mercury Financial Co................................. 67,375
2,500 Mercury General Corp................................. 105,000
1,500 Meridian Bancorp, Inc................................ 64,125
2,000 Money Store, Inc..................................... 80,000
*3,500 Oxford Resources Corp., Class A...................... 91,875
2,000 Peoples Heritage Financial Group, Inc................ 38,000
1,500 Star Banc Corp....................................... 83,063
3,000 TCF Financial Corp................................... 176,250
3,500 United Companies Financial Corp...................... 98,875
1,500 Vesta Insurance Group, Inc........................... 60,563
----------
2,762,938
----------
HEALTH CARE 15.2%
*500 American Oncology Resources.......................... 17,500
*3,500 AMSCO International, Inc............................. 56,000
*5,000 Boston Scientific Corp............................... 210,625
*1,000 Coherent, Inc........................................ 28,250
*1,200 Community Health Systems, Inc........................ 38,100
*2,000 CompDent, Corp....................................... 62,250
*2,500 Cycare System, Inc................................... 77,500
*4,000 Dura Pharmaceuticals, Inc............................ 117,000
*1,500 Genzyme Corp......................................... 87,375
5,000 Guidant Corp......................................... 160,000
*2,500 Gulf South Medical Supply, Inc....................... 51,875
6,000 HBO & Co............................................. 424,500
*8,000 Health Management Associates, Inc., Class A.......... 172,000
*1,500 Health Management Systems, Inc....................... 48,000
*3,500 Healthsouth Rehabilitation........................... 91,438
*1,000 HPR, Inc............................................. 26,000
4,000 Invacare Corp........................................ 101,000
*1,500 Medaphis Corp........................................ 47,625
*2,000 Medpartners, Inc..................................... 56,000
7,000 Medtronic, Inc....................................... 404,250
4,000 Mentor Corp.......................................... 88,000
*2,000 Nellcor Puritan Bennett, Inc......................... 115,000
*3,000 OccuSystems, Inc..................................... 62,062
5,000 OmniCare, Inc........................................ 181,250
*1,500 Oxford Health Plans, Inc............................. 117,375
*7,000 Phycor, Inc.......................................... 257,250
*1,500 Physician Reliance Network........................... 49,875
</TABLE>
F-55
<PAGE> 162
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE--continued
*4,500 Physician Sales & Service, Inc.................. $ 73,125
*1,000 Quintiles Transnational Corp.................... 64,250
*2,000 Renal Treatment Centers, Inc.................... 72,000
*2,500 Research Industries Corp........................ 68,750
1,500 Respironics, Inc................................ 32,712
2,000 St. Jude Medical, Inc........................... 106,500
*3,000 Steris Corp..................................... 101,250
*1,500 Sybron Corp..................................... 63,750
*1,000 Target Therapeutics, Inc........................ 77,500
*2,000 Thermedics, Inc................................. 36,750
*1,500 United Dental Care, Inc......................... 45,750
*467 Vencor, Inc..................................... 12,959
*3,500 Watsons Pharmaceuticals, Inc.................... 156,625
----------
4,060,021
----------
PRODUCER MANUFACTURING 6.2%
2,500 BMC Industries, Inc............................. 96,563
2,500 Case Corp....................................... 95,312
*1,500 Cognex Corp..................................... 89,625
4,500 Danaher Corp.................................... 139,500
2,500 Dover Corp...................................... 98,750
2,500 Duriron, Inc.................................... 66,875
*1,000 FMC Corp........................................ 71,625
*4,500 Glenayre Technologies........................... 289,125
2,000 Greenfield Industries, Inc...................... 60,000
1,000 Helix Technology Corp........................... 37,500
*1,500 Kent Electronics Corp........................... 73,125
3,000 Measurex Corp................................... 92,250
*2,500 Mueller Industries, Inc......................... 58,750
1,500 Precision Castparts Co.......................... 53,625
*3,000 Robotic Vision Systems, Inc..................... 68,625
*3,500 Sanifill, Inc................................... 110,250
*3,000 United Waste Systems, Inc....................... 118,500
*2,000 USA Waste Services, Inc......................... 42,000
----------
1,662,000
----------
RAW MATERIALS/PROCESSING INDUSTRIES 4.5%
5,000 Albemarle Corp.................................. 93,125
1,150 Eastman Chemical Co............................. 68,425
1,500 Goodrich B. F. Co............................... 98,813
1,500 Hercules, Inc................................... 80,062
3,500 IMC Global, Inc................................. 245,000
2,500 Millipore Corp.................................. 88,437
3,000 Mineral Technologies, Inc....................... 119,625
3,000 Potash Corp. Sask, Inc.......................... 208,875
1,500 Rayonier, Inc................................... 56,250
*2,000 Sealed Air Corp................................. 52,750
2,000 Sonoco Products Co.............................. 49,500
*1,500 UCAR International, Inc......................... 42,750
----------
1,203,612
----------
</TABLE>
F-56
<PAGE> 163
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ----------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 28.4%
2,000 Allen Group, Inc................................ $ 49,000
*5,500 Altera Corp..................................... 332,750
1,500 America Online, Inc............................. 120,000
*5,000 Analog Devices, Inc............................. 180,625
*3,000 Applied Materials, Inc.......................... 150,375
*7,000 Ascend Communications, Inc...................... 455,000
*1,500 Aspect Telecommunications Corp.................. 51,562
*1,500 Aspen Technology, Inc........................... 41,250
*9,000 Atmel Corp...................................... 281,250
*3,000 Bay Networks, Inc............................... 198,750
*500 C P Clare Corp.................................. 12,938
*2,500 Cabletron Systems, Inc.......................... 196,562
*7,250 Cadence Design Systems, Inc..................... 233,812
*1,500 Cambridge Technology Partners, Inc.............. 85,125
*2,000 C-Cube Microsystems, Inc........................ 138,250
3,000 Ceridian Corp................................... 130,500
*2,000 Credence Systems Corp........................... 74,750
*2,000 Cyberoptics Corp................................ 66,000
*5,500 Dell Computer Corp.............................. 256,438
*6,000 Informix Corp................................... 174,750
*3,000 International Rectifier Corp.................... 135,375
*4,000 Kemet Corp...................................... 138,000
*3,500 KLA Instruments Corp............................ 149,625
*2,000 Komag, Inc...................................... 114,000
*1,500 Kronos, Inc..................................... 69,000
7,000 Linear Technology Corp.......................... 306,250
*5,500 LSI Logic Corp.................................. 259,187
*2,500 Macromedia, Inc................................. 92,500
*2,500 McAfee Associations, Inc........................ 145,625
*4,000 Medic Computer Systems, Inc..................... 213,000
2,000 Micron Technology, Inc.......................... 141,250
*2,500 Mylex Corp...................................... 46,563
*3,000 National Semiconductor Corp..................... 73,125
*2,500 Network General Corp............................ 103,750
*2,000 Parametric Technology Corp...................... 134,000
*1,500 Peoplesoft, Inc................................. 129,000
*2,000 PRI Automation.................................. 74,000
1,500 Project Software & Development, Inc............. 39,750
*5,000 SCI Systems, Inc................................ 175,625
*2,000 Sierra On-Line, Inc............................. 74,500
*4,000 Sierra Semiconductor Corp....................... 71,500
2,000 Sundstrand Corp................................. 122,500
*3,000 Sunguard Data Systems, Inc...................... 82,500
1,500 Tektronix, Inc.................................. 88,875
*2,000 Tencor Instruments.............................. 85,250
*1,000 Teradyne, Inc................................... 33,375
*500 Thermolase Corp................................. 10,188
*500 Thermospectra Corp.............................. 8,125
*7,000 3Com Corp....................................... 329,000
*4,500 U.S. Robotics Corp.............................. 416,250
*5,000 Ultratech Stepper, Inc.......................... 200,000
*4,500 Vicor Corp...................................... 91,969
</TABLE>
F-57
<PAGE> 164
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY--continued
*3,000 Vishay Intertechnology, Inc........................................................... $ 105,750
2,000 Watkins Johnson Co.................................................................... 96,250
-----------
7,585,344
-----------
TRANSPORTATION 3.0%
2,500 Airborne Freight Corp................................................................. 65,625
4,000 Comair Holdings, Inc.................................................................. 112,250
2,000 Conrail, Inc.......................................................................... 137,500
*2,500 Continental Airlines, Inc., Class B................................................... 89,062
*2,000 Fritz Companies, Inc.................................................................. 70,000
*3,500 Northwest Airlines, Inc., Class A..................................................... 140,437
*1,000 UAL Corp.............................................................................. 175,875
-----------
790,749
-----------
UTILITIES 2.0%
2,500 AT&T Capital Corp..................................................................... 100,000
*1,000 Cellular Communications Inc., Class A................................................. 53,625
4,000 Cincinnati Bell, Inc.................................................................. 117,500
4,500 Frontier Corp......................................................................... 121,500
*6,000 LCI International, Inc................................................................ 108,000
*1,000 Midcom Communications, Inc............................................................ 15,000
*1,000 Palmer Wireless, Inc.................................................................. 22,750
-----------
538,375
-----------
TOTAL COMMON STOCK (Cost $23,221,938)............................................... 25,388,703
-----------
<CAPTION>
Principal
Amount Repurchase Agreement 9.7%
- ----------
$2,585,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%, due 11/1/95
(collateralized by U.S. Government obligations in a pooled
cash account) repurchase proceeds $2,585,421 (Cost $2,585,000)....................... 2,585,000
-----------
TOTAL INVESTMENTS (Cost $25,806,938) 104.6%.......................................... 27,973,703
Other assets and liabilities, net (4.6%) (1,230,130)
-----------
NET ASSETS, equivalent to $15.12 per share for Class A and
$15.04 per share for Class B shares 100%............................................ $26,743,573
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 1,054,794 Class A and 717,720 Class B shares outstanding.. $ 17,725
Capital surplus.................................................................................. 24,589,075
Accumulated net realized loss on securities...................................................... (29,992)
Net unrealized appreciation of securities........................................................ 2,166,765
-----------
NET ASSETS ...................................................................................... $26,743,573
===========
</TABLE>
*Non-income producing security.
See Notes to Financial Statements.
F-58
<PAGE> 165
EMERGING GROWTH II FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations February 21, 1995*
through
October 31, 1995
------------------
<S> <C>
INVESTMENT INCOME
Dividends...................................................... $ 35,352
Interest....................................................... 44,084
----------
Investment income............................................ 79,436
----------
EXPENSES
Advisory fees.................................................. 47,662
Shareholder service agent's fees and expenses.................. 104,742
Accounting services............................................ 6,365
Service fees--Class A.......................................... 11,480
Distribution and service fees--Class B......................... 27,405
Trustees' fees and expenses.................................... 7,196
Audit fees..................................................... 10,300
Legal fees..................................................... 1,336
Reports to shareholders........................................ 4,434
Registration and filing fees................................... 43,600
Organization................................................... 2,805
Miscellaneous.................................................. 369
Expense reimbursement.......................................... (45,493)
----------
Total expenses............................................... 222,201
----------
Net investment loss.......................................... (142,765)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities................................ (29,992)
Net unrealized appreciation of securities during the period.... 2,166,765
----------
Net realized and unrealized gain on securities............... 2,136,773
----------
Increase in net assets resulting from operations............. $1,994,008
==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
February 21, 1995*
through
October 31, 1995
------------------
<S> <C>
NET ASSETS, beginning of period................................ $ 200
-----------
OPERATIONS
Net investment loss.......................................... (142,765)
Net realized loss on securities.............................. (29,992)
Net unrealized appreciation of securities during the period.. 2,166,765
-----------
Increase in net assets resulting from operations........... 1,994,008
-----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A.................................................... 15,664,882
Class B.................................................... 10,338,125
-----------
26,003,007
-----------
Cost of shares redeemed
Class A.................................................... (1,038,319)
Class B.................................................... (215,323)
-----------
(1,253,642)
-----------
Increase in net assets resulting from capital transactions... 24,749,365
-----------
INCREASE IN NET ASSETS......................................... 26,743,373
-----------
NET ASSETS, end of period...................................... $26,743,573
===========
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-59
<PAGE> 166
INTERNATIONAL EQUITY II FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 85.7%
AUSTRALIA 2.3%
10,000 Burns Philp & Co...................................... $ 22,395
25,000 Coca-Cola Amatil...................................... 193,480
--------
215,875
--------
AUSTRIA 6.0%
1,500 Austria Micro System.................................. 277,988
1,200 Baumax, AG............................................ 48,841
1,500 Burgenland Holding.................................... 60,900
*1,000 Va Stahl, AG.......................................... 30,601
1,200 Va Technologie, AG.................................... 139,130
--------
557,460
--------
CANADA 2.1%
2,500 Loewen Group, Inc..................................... 100,295
*18,000 Wescam, Inc........................................... 92,364
--------
192,659
--------
CHILE 1.7%
2,500 Embotelladora Andina, ADR............................. 83,125
3,000 Madeco, SA, ADR....................................... 74,625
--------
157,750
--------
DENMARK 3.4%
2,000 Kobenhavn Lufthave.................................... 150,073
*7,000 Scandinav Mobility.................................... 166,545
--------
316,618
--------
FINLAND 1.2%
1,600 Nokia (AB) OY, Series A............................... 91,534
400 Nokia (AB) OY, Series K............................... 23,354
--------
114,888
--------
FRANCE 4.5%
1,214 Castorama Dubois...................................... 108,321
1,000 Ecco, SA.............................................. 155,007
440 Sidel, SA............................................. 152,782
--------
416,110
--------
GERMANY 4.1%
200 Bayer Motoren Werk.................................... 107,275
2,000 Fielmann, AG.......................................... 110,117
2,500 SGL Carbon............................................ 163,931
--------
381,323
--------
</TABLE>
F-60
<PAGE> 167
INTERNATIONAL EQUITY II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
HONG KONG 3.4%
40,000 Hong Kong Electric................................... $136,063
20,000 Hutchison Whampoa.................................... 110,196
10,000 Swire Pacific........................................ 75,016
--------
321,275
--------
IRELAND 4.9%
30,248 Bank of Ireland...................................... 201,751
12,000 CRH.................................................. 79,262
30,000 Independent News..................................... 179,699
--------
460,712
--------
ISRAEL 0.7%
*3,000 Gilat Satellite Networks, Ltd........................ 66,750
--------
ITALY 6.3%
5,000 Alleanza Assicuraz................................... 34,661
*10,000 De Rigo, ADS......................................... 206,250
*5,000 Gucci Group, NV...................................... 150,000
50,000 Telecom Italia....................................... 75,910
70,000 Telecom Italia, Mobile............................... 117,472
--------
584,293
--------
JAPAN 7.3%
3,000 Bunkyodo Co.......................................... 67,745
10,000 Hitachi.............................................. 102,644
1,000 Kyocera Corp......................................... 81,920
2,000 Mabuchi Motor Co..................................... 121,023
4,000 Ohmoto Gumi Co....................................... 89,936
5,000 Sato Corp............................................ 102,645
2,000 Trans Cosmos, Inc.................................... 111,051
--------
676,964
--------
MALAYSIA 3.6%
20,000 Gamuda Berhad........................................ 83,432
20,000 Leader Univ Holdings................................. 53,916
20,000 Sungei Way Holdings.................................. 67,295
25,000 Sunway Building Tech................................. 66,903
25,000 UMW Holding Berhad................................... 59,524
--------
331,070
--------
MEXICO 4.2%
60,000 Cifra SA, DE CV...................................... 61,137
30,400 Gruma................................................ 89,600
*15,000 Grupo Carso.......................................... 78,526
7,000 Kimberly Clark, Mexico............................... 91,369
2,500 Telefonos de Mexico, SA, ADR......................... 68,750
--------
389,382
--------
</TABLE>
F-61
<PAGE> 168
INTERNATIONAL EQUITY II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS 6.7%
3,500 Getronics, NV.......................................... $167,036
500 Heineken, NV........................................... 88,731
4,000 IHC Caland, NV......................................... 113,829
2,000 Philips Electronics, NV................................ 77,250
4,000 Randstad Holdings...................................... 180,505
--------
627,351
--------
NEW ZEALAND 0.7%
1,000 Telecom Corp of New Zealand, ADR....................... 66,375
--------
NORWAY 2.6%
3,000 Petroleum Geo Service.................................. 56,849
30,000 Tomra Systems, AS...................................... 189,337
--------
246,186
--------
PHILIPPINES 1.3%
*300,000 Bankard, Inc........................................... 123,991
--------
SINGAPORE 4.8%
10,000 Cerebos Pacific........................................ 62,279
6,000 Fraser & Neave......................................... 70,913
75,000 QAF.................................................... 90,764
15,000 Sembawang Maritime..................................... 50,743
100,000 Steamers Maritime...................................... 74,310
20,000 Van Der Horst.......................................... 102,619
--------
451,628
--------
SWEDEN 5.7%
2,500 Astra, AB, Series A.................................... 91,859
1,500 Autoliv, AB............................................ 86,061
400 Ericsson (LM) Telephone................................ 8,493
4,000 Ericsson (LM) Telephone, Series B...................... 84,932
1,000 Hennes & Mauritz....................................... 65,356
5,000 Hoganas, AG............................................ 134,777
2,000 Kinnerik Investment, Series B.......................... 55,417
--------
526,895
--------
SWITZERLAND 2.3%
20 Roche Holdings, AG..................................... 145,336
1,000 Roche Holdings, Ltd, ADR............................... 71,875
--------
217,211
--------
THAILAND 1.5%
20,000 Quality Houses Co...................................... 88,218
4,000 UTD Communications Industries.......................... 50,546
--------
138,764
--------
</TABLE>
F-62
<PAGE> 169
INTERNATIONAL EQUITY II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM 4.4%
15,000 British Biotech.................................................................... $ 211,541
5,000 Carlton Communications............................................................. 76,166
25,000 Rentokil Group..................................................................... 124,506
----------
412,213
----------
TOTAL COMMON STOCKS (Cost $7,387,128)............................................ 7,993,743
----------
<CAPTION>
Principal
Amount Repurchase Agreement 14.0%
- -----------
$1,303,000 State Street Bank & Trust Co., dated 10/31/95, 4.50%, due 11/01/95
(collateralized by U.S. Government Bond, 8.75%, 5/15/17)
repurchase proceeds $1,303,163 (Cost $1,303,000).................................. 1,303,000
----------
TOTAL INVESTMENTS (Cost $8,690,128) 99.7%......................................... 9,296,743
Foreign currency (Cost $364,109) 3.9%............................................. 363,565
Other assets and liabilities, net (3.6%).......................................... (338,579)
----------
NET ASSETS, equivalent to $13.86 per share for Class A and $13.79
per share for Class B shares 100%................................................ $9,321,729
==========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 474,025 Class A, 199,498 Class B shares outstanding...... $ 6,735
Capital surplus................................................................................. 8,709,504
Net unrealized appreciation (depreciation) of securities
Investments................................................................................... 606,615
Foreign currency.............................................................................. (544)
Other foreign denominated assets and liabilities.............................................. (581)
----------
NET ASSETS...................................................................................... $9,321,729
==========
</TABLE>
*Non-income producing security
See Notes to Financial Statements.
F-63
<PAGE> 170
INTERNATIONAL EQUITY II FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations
February 21, 1995*
through
October 31, 1995
------------------
<S> <C>
INVESTMENT INCOME
Dividends (net of $7,178 of foreign taxes withheld at source)......................... $ 51,723
Interest.............................................................................. 21,913
----------
Investment Income.................................................................. 73,636
----------
EXPENSES
Advisory fees......................................................................... 35,227
Shareholder service agent's fees and expenses......................................... 28,604
Accounting services................................................................... 4,807
Service fees--Class A................................................................. 6,920
Distribution and service fees--Class B................................................ 7,546
Trustees' fees and expenses........................................................... 6,987
Audit fees............................................................................ 17,300
Custodian fees........................................................................ 66,374
Legal fees............................................................................ 1,260
Reports to shareholders............................................................... 2,932
Registration and filing fees.......................................................... 34,696
Organization.......................................................................... 2,805
Miscellaneous......................................................................... 226
Expense reimbursement................................................................. (82,201)
----------
Total expenses..................................................................... 133,483
----------
Net investment loss................................................................ (59,847)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments........................................................................ 13,300
Foreign currency................................................................... (75)
Net unrealized appreciation (depreciation) of securities during the period
Investments........................................................................ 606,615
Foreign currency................................................................... (544)
Other foreign denominated assets and liabilities................................... (581)
----------
Net realized and unrealized gain on securities........................................ 618,715
----------
Increase in net assets resulting from operations...................................... $ 558,868
==========
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets
February 21, 1995*
through
October 31, 1995
------------------
<S> <C>
NET ASSETS, beginning of period....................................................... $ 200
----------
OPERATIONS
Net investment loss.................................................................. (59,847)
Net realized gain on securities...................................................... 13,225
Net unrealized appreciation of securities during the period.......................... 605,490
----------
Increase in net assets resulting from operations.................................... 558,868
----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A.............................................................................. 6,176,592
Class B.............................................................................. 2,722,626
----------
8,899,218
----------
Cost of shares redeemed
Class A.............................................................................. (94,421)
Class B.............................................................................. (42,136)
----------
(136,557)
----------
Increase in net assets resulting from capital transactions........................... 8,762,661
----------
Increase in Net Assets................................................................ 9,321,529
----------
NET ASSETS, end of period............................................................. $9,321,729
==========
</TABLE>
*Commencement of operations
See Notes to Financial Statements
F-64
<PAGE> 171
NOTES TO FINANCIAL STATEMENTS
Note 1--Significant Accounting Policies
Common Sense Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as a diversified open-end management investment company
which offers shares in ten separate portfolios, five of which are described in
this report: Common Sense II Growth Fund ("Growth II"), Common Sense II Growth
and Income Fund ("Growth and Income II"), Common Sense II Government Fund
("Government II"), Common Sense II Emerging Growth Fund ("Emerging Growth II")
and Common Sense II International Equity Fund ("International Equity II"). Each
Fund is accounted for as a separate entity. Investments in foreign securities
involve certain risks not ordinarily associated with investments in securities
of domestic issuers, including fluctuations in foreign exchange rates, future
political and economical developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. The following is a
summary of significant accounting policies consistently followed by the Trust in
the preparation of its financial statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which the
last sale price is not available are valued at the most recent bid price.
U.S. Government securities are valued at the last reported bid price.
Securities for which market quotations are not readily available are valued
at fair value under a method approved by the Board of Trustees.
Short-term investments with a maturity of more than 60 days when purchased
are valued based on market quotations until the remaining days to maturity
become less than 61 days. From such time, until maturity, the investments are
valued at amortized cost.
B. Foreign Currency Translation
The market values of foreign securities, forward currency exchange contracts
and other assets and liabilities stated in foreign currency are translated
into U.S. dollars based on quoted exchange rates as of Noon Eastern Time. The
cost of securities is determined using historical exchange rates. Income and
expenses are translated at prevailing exchange rates when accrued or
incurred. Gains and losses on the sale of securities are not segregated for
financial reporting purposes between amounts arising from changes in exchange
rates and amounts arising from changes in the market prices of securities.
Realized gain and loss on foreign currency includes the net realized amount
from the sale of currency and the amount realized between trade date and
settlement date on security transactions.
C. Forward Currency Exchange Contracts
International Equity II enters into forward currency exchange contracts in
order to hedge its exposure to changes in foreign currency exchange rates on
its foreign portfolio holdings or settle transactions. A forward currency
exchange contract is a commitment to buy or sell a foreign security at a set
price on a future date. Changes in the value of the contract are recognized
by marking the contract to market on a daily basis to reflect current
currency translation rates. The Fund realizes gains or losses at the time the
forward currency exchange contract is closed. Risks may arise as a result of
the potential inability of the counterparties to meet the terms of their
contracts, and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
D. Futures Contracts and Forward Commitments
General--Transactions in futures contracts and forward commitments are
utilized in strategies to manage the market risk of the Trust's investments.
The purchase of a futures contract or forward commitments increases the
impact on net asset value of changes in the market price of investments.
Forward commitments have a risk of loss due to non performance of
counterparties. There is also a risk that the market movement of such
instruments may not be in the direction forecasted. Note 3--Investment
Activity contains additional information.
Futures Contracts--Upon entering into futures contracts, the Trust maintains
in a segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is held
as collateral in an account in the name of the broker, the Trust's agent in
acquiring the futures position. During the period the futures contract is
open, changes in the value of the contract ("variation margin") are
recognized by marking the contract to market on a daily basis. As unrealized
gains or losses are incurred, variation margin payments are received from or
made to the broker. Upon the closing or cash settlement of a contract, gains
and losses are realized. The cost of securities acquired through delivery
under a contract is adjusted by the unrealized gain or loss on the contract.
F-65
<PAGE> 172
NOTES TO FINANCIAL STATEMENTS, continued
Forward Commitments--The Trust trades certain securities under the terms of
forward commitments, whereby the settlement for payment and delivery occurs
at a specified future date. Forward commitments are privately negotiated
transactions between the Trust and dealers. Upon executing a forward
commitment and during the period of obligation, the Trust maintains
collateral of cash or securities in a segregated account with its custodian
in an amount sufficient to relieve the obligation. If the intent of the Trust
is to accept delivery of a security traded under a forward purchase
commitment, the commitment is recorded as a long-term purchase. For forward
purchase commitments which security settlement is not intended by the Trust
and all forward sales commitments, changes in the value of the commitment are
recognized by marking the commitment to market on a daily basis. During the
commitment, the Trust may either resell or repurchase the forward commitment
and enter into a new forward commitment, the effect of which is to extend the
settlement date. In addition, the Trust may occasionally close such forward
commitments prior to delivery. Gains and losses are realized upon the
ultimate closing or cash settlement of forward commitments.
E. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Trust acquires
ownership of a debt security and the seller agrees to repurchase the security
at a future time and specified price. The Trust may invest independently in
repurchase agreements, or transfer uninvested cash balances into a pooled
cash account along with other investment companies advised by Van Kampen
American Capital Asset Management, Inc. (the "Adviser"), the daily aggregate
of which is invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Trust will make payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the repurchase
proceeds due the Trust.
F. Federal Income Taxes
No provision for federal income taxes is required because each Fund intends
to elect to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all taxable net investment income and taxable net realized
capital gains to shareholders. It is anticipated that no distributions of
capital gains will be made until tax basis capital loss carryovers, if any,
expire or are offset by net realized capital gains.
At the end of the period, Emerging Growth II had a net realized capital loss
carryforward of approximately $20,000 for federal income tax purposes and may
be utilized to offset future capital gains until expiration in 2003.
G. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily.
Under the applicable foreign tax laws, a tax may be imposed on interest,
dividends, and realized gains generated from foreign investments. Such taxes
are generally reflected on the Statement of Operations as a reduction of the
related income or gains.
H. Dividends and Distributions
The Trust declares annual distributions from net capital gains. Dividends
from net investment income are declared daily for Government II, quarterly
for Growth and Income II and annually for Growth II, Emerging Growth II, and
International Equity II. Dividends and distributions to shareholders are
recorded on the record date.
The Trust distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ from
generally accepted accounting principles. Such dividends or distributions may
exceed financial statement earnings.
I. Debt Discount or Premium
The Trust accounts for debt discounts and premiums on the same basis as is
used for federal income tax reporting. Accordingly, original issue discounts
on debt securities purchased are amortized over the life of the security.
Premiums on debt securities are not amortized. Market discounts are
recognized at the time of sale as realized gains for book purposes, and
ordinary income for tax purposes.
F-66
<PAGE> 173
NOTES TO FINANCIAL STATEMENTS, continued
Note 2--Advisory Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Trust. Advisory fees to Adviser
are paid monthly, based on the average daily net assets of each Fund at an
annual rate as indicated by the following graduated fee schedules:
<TABLE>
<CAPTION>
Emerging Growth II, Growth II
& Growth and Income II Government II
----------------------------- --------------------------
Average Daily Annual Average Daily Annual
Net Assets Rate Net Assets Rate
---------------- ------ ---------------- ------
<S> <C> <C> <C>
First $1 billion .65% First $1 billion .60%
Next $1 billion .60% Next $1 billion .55%
Next $1 billion .55% Next $1 billion .50%
Next $1 billion .50% Next $1 billion .45%
Over $4 billion .45% Next $1 billion .40%
Over $5 billion .35%
</TABLE>
The Adviser has entered into a subadvisory agreement with Smith Barney Mutual
Funds Management, Inc. (the "Subadviser"), who provides advisory services to the
International Equity II Fund and the Adviser with respect to its investments in
foreign securities. Advisory fees for the International Equity II Fund are
calculated monthly, based on the average daily net assets of the Fund at the
annual rate of 1.00%. The Adviser pays 50% of its advisory fee to the
Subadviser.
The Adviser has agreed that it will reimburse the Trust for any expenses
(including the advisory fee, but excluding interest, brokerage commissions,
distribution and service fees, and other extraordinary expenses) in excess of
the most restrictive limitation imposed by state securities commissions. The
most restrictive expense limitation is presently believed to be 2.5% of the
Fund's average daily net assets up to $30 million, 2.0% of the next $70 million
of such net assets and 1.5% of the Fund's net assets in excess of $100 million.
The Trust received from California a waiver which allows each Fund to exclude
shareholder service costs from the calculation of the expense limitation. The
Adviser and, in the case of the International Equity II Fund, the Subadviser
may, from time to time, agree to waive their respective investment advisory fees
or any portion thereof or elect to reimburse a Fund for ordinary business
expenses in excess of an agreed upon amount. For the period, the entire expense
reduction amount for Growth II, Growth & Income II, and Emerging Growth II was
voluntary. For International Equity II, $26,302 of the expense reduction was
voluntary and $55,899 was reimbursed due to the contractual expense limitation.
The Adviser prepaid the Trust's initial registration and filing expenses. The
Trust amortized such expenses over a ten month period ended April 1995 for
Growth II, Growth and Income II, and Government II and ending in December 1995
for Emerging Growth II and International Equity II, respectively.
At the end of the period, the Adviser owned approximately 17.9% of International
Equity II's Class A outstanding shares.
Accounting services include the salaries and overhead expenses of the Trust's
Treasurer and the personnel operating under his direction. Charges are allocated
among investment companies advised by the Adviser. These charges include the
employee costs attributable to the Trust's accounting officers. A portion of the
accounting services expense was paid to the Adviser in reimbursement of
personnel, facilities and equipment costs attributable to the provision of
accounting services. The services provided by the Adviser are at cost.
PFS Distributors (the "Distributor"), a wholly owned subsidiary of Travelers
Group, Inc., serves as Distributor of the Trust's shares. The Distributor has an
exclusive selling agreement with PFS Investments, Inc. to sell shares of the
Trust. During the period, the Trust paid brokerage commissions of $406,044 to
companies which are deemed affiliates of the Distributor's parent because it
owns more than 5% of the companies' outstanding voting securities. Certain
officers and trustees of the Trust are officers and trustees of the Adviser or
its affiliates.
Under the Distribution Plans, each class of shares pays .25% per annum of its
average daily net assets to the Distributor as a service fee. The service fee is
intended to cover personal services provided to the shareholders by
representatives of PFS Investments, Inc. Class B shares pay an additional fee of
.75% per annum of their average daily net assets to reimburse the Distributor
for its distribution costs. Actual distribution expenses incurred by the
Distributor for Class B shares may exceed the amounts reimbursed to the
Distributor by the Fund. At the end of the period, the unreimbursed expenses
incurred by the Distributor under the Class B plan are as shown in the following
table and may be carried forward and reimbursed through either the collection of
the contingent deferred sales charges from share redemptions or, subject to the
annual renewal of the plans, future Trust reimbursements of distribution fees.
F-67
<PAGE> 174
NOTES TO FINANCIAL STATEMENTS, continued
Amounts paid by the affiliates during the period were as follows:
<TABLE>
<CAPTION>
Growth & Emerging International
Growth II Income II Government II Growth II Equity II
---------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Accounting services............................ $ 5,674 $ 5,525 $ 5,450 $ 687 $ --
Sales of Fund shares, Distributor commissions.. 115,963 67,581 37,676 47,949 11,149
Class B unreimbursed expenses (approximately).. 1,100,000 720,000 360,000 320,000 90,000
</TABLE>
At the end of the period, Growth II owned approximately .89% of the Van Kampen
American Capital Small Capitalization Fund ("Small Cap"), an investment company
managed by the Adviser. Small Cap comprised approximately 3% of Growth II's
total net assets. Small Cap's portfolio consisted of the following securities:
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------
<S> <C> <C>
Common Stock
CONSUMER DISTRIBUTION
22,000 Big B, Inc. $ 316,250
22,000 Books-A-Million, Inc. 280,500
11,000 Cardinal Health, Inc. 577,500
3,000 Carson Pirie Scott & Co. 50,625
4,000 CDW Computer Centers, Inc. 195,000
21,000 Circuit City Stores, Inc. 698,250
42,000 Claire's Stores, Inc. 834,750
12,000 CompUSA, Inc. 481,500
14,000 Consolidated Stores Corp. 327,250
1,000 Dole Food, Inc. 38,000
9,800 Eckerd Corp. 390,775
52,000 Fingerhut Companies, Inc. 695,500
46,000 General Nutrition Companies, Inc. 1,115,500
1,000 Great Atlantic & Pacific 20,375
29,000 Gymboree Corp. 659,750
11,000 Health Management, Inc. 126,500
2,000 Hills Stores Co. 15,250
10,000 Lear Seating Corp. 290,000
14,000 MacFrugals Bargains Closeouts 164,500
9,000 Medicine Shoppe International, Inc. 389,250
6,000 Mens Wearhouse, Inc. 235,500
15,000 Micro Wharehouse, Inc. 678,750
38,000 OfficeMax, Inc. 940,500
83,900 Pier 1 Imports, Inc. 818,025
5,000 Proffitts, Inc. 118,750
6,000 Rexel, Inc. 69,000
3,000 Richfood Holdings, Inc. 74,625
7,000 Ross Stores, Inc. 110,250
25,000 Staples, Inc. 668,750
42,800 Stop & Shop Companies, Inc. 877,400
40,000 Sunglass Hut International, Inc. 1,090,000
4,000 Tiffany & Co. 174,500
25,000 Viking Office Products, Inc. 1,109,375
43,000 Waban, Inc. 661,125
6,000 Whole Foods Market, Inc. 72,750
3,000 Younkers, Inc. 66,375
32,000 Zale Corp. 472,000
-----------
15,904,700
-----------
CONSUMER DURABLES
3,000 Borg Warner Automotive, Inc. 86,625
50,000 Breed Technologies, Inc. 925,000
47,000 Brunswick Corp. 922,375
21,000 Champion Enterprises, Inc. 546,000
35,000 Clayton Homes, Inc. 936,250
23,000 Cobra Golf, Inc. 621,000
4,000 Department 56, Inc. 182,500
24,000 Echlin, Inc. 864,000
5,000 Fleetwood Enterprises, Inc. 103,125
14,000 Gencorp, Inc. 148,750
8,400 Harman International Industries, Inc. 389,550
46,000 Leggett & Platt, Inc. 1,115,500
7,000 Lennar Corp. 161,875
14,000 Outboard Marine Corp. 297,500
7,000 Smith (A. O.) Corp. 146,125
6,000 Snap-On Tools, Inc. 254,250
22,000 Toro Co. 632,500
-----------
8,332,925
-----------
CONSUMER NON-DURABLES
1,000 Alberto Culver Co., Class B 31,625
34,000 American Greetings Corp., Class A 1,079,500
29,000 Barefoot, Inc. 337,125
7,000 Fieldcrest Cannon, Inc. 134,750
9,000 Fossil, Inc. 96,750
2,000 Hormel (G. A.) & Co. 46,000
13,000 IBP, Inc. 781,625
41,000 Liz Claiborne, Inc. 1,158,250
23,000 Nautica Enterprises, Inc. 787,750
10,000 Nu-Kote Holdings, Inc., Class A 198,750
11,000 Phillips-Van Heusen Corp. 111,375
3,000 Scotts Co., Class A 60,000
9,000 Smithfield Foods, Inc. 236,250
15,000 Springs Industries, Inc. 643,125
8,000 St. John Knits, Inc. 382,000
21,000 Starbucks Corp. 834,750
56,000 Topps, Inc. 343,000
1,000 Unifi, Inc. 22,750
9,000 Universal Foods Corp. 309,375
18,000 Westpoint Stevens, Inc. 382,500
25,000 Whitman Corp. 534,375
18,000 Wolverine World Wide, Inc. 549,000
-----------
9,060,625
-----------
</TABLE>
F-68
<PAGE> 175
NOTES TO FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES
4,000 Advo, Inc. $ 102,500
10,000 Banta Corp. 427,500
12,000 Belo (A. H.) Corp. 414,000
14,000 Boston Chicken, Inc. 476,000
26,000 Bowne & Co., Inc. 481,000
11,000 Boyd Gaming Corp. 148,500
1,000 Casino America, Inc. 7,000
19,000 Equifax, Inc. 722,000
9,000 HFS, Inc. 559,125
30,000 Kelly Services, Inc. 765,000
25,000 King World Productions, Inc. 865,625
21,000 Lone Star Steakhouse Saloon, Inc. 813,750
9,000 Media General, Inc., Class A 250,875
21,000 Mirage Resorts, Inc. 695,625
19,000 New York Times Co., Class A 529,625
27,760 Ogden Corp. 635,010
16,000 Olsten Corp. 612,000
17,000 Omnicom Group 1,088,000
26,000 Outback Steakhouse, Inc. 809,250
3,000 Papa John's International, Inc. 116,625
13,200 PHH Corp. 580,800
31,500 Players International, Inc. 342,563
1,000 Pulitzer Publishing Co. 45,375
19,000 Regal Cinemas, Inc. 741,000
17,000 Reynolds & Reynolds Co. 603,500
23,000 Rio Hotel & Casino, Inc. 293,250
28,000 Robert Half International, Inc. 1,029,000
26,000 Sbarro, Inc. 549,250
12,500 Scientific Games Holdings Corp. 415,625
6,000 Sonic Corp. 132,000
13,500 Spelling Entertainment Group, Inc. 173,813
24,000 Wendys International, Inc. 480,000
32,000 Westcott Communications, Inc. 444,000
-----------
16,349,186
-----------
ENERGY
17,000 BJ Services Co. 401,625
13,000 Brooklyn United Gas Co. 326,625
24,100 Eastern Enterprises 716,975
38,000 El Paso Natural Gas Co. 1,026,000
25,000 KCS Energy, Inc. 246,875
12,000 K.N. Energy, Inc. 307,500
25,000 Mesa, Inc. 106,250
91,000 Nabors Industries, Inc. 784,875
14,000 NACCO Industries, Inc., Class A 805,000
2,500 National Fuel Gas Co. 75,000
24,000 NICOR, Inc. 648,000
15,000 Nuevo Energy Co. 333,750
16,000 Offshore Logistics, Inc. 198,000
14,400 ONEOK, Inc. 356,400
28,000 Pacific Enterprises 693,000
48,000 Smith International, Inc. 768,000
1,000 Tidewater, Inc. 26,375
25,000 Union Texas Petroleum Holdings, Inc. 459,375
12,000 United Meridian Corp. 202,500
24,000 Valero Energy Corp. 567,000
30,000 Varco International, Inc. 277,500
6,000 Washington Gas & Light Co. 115,500
500 Weatherford Enterra, Inc. 12,250
3,000 Western Atlas, Inc. 133,500
12,400 WICOR, Inc. 370,450
188 Williams Companies 7,285
-----------
9,965,610
-----------
FINANCE
12,000 Advanta Corp., Class A $ 468,000
25,000 Ahmanson (H. F.) & Co. 634,375
15,000 AMBAC, Inc. 643,125
34,000 American Financial Group, Inc. 956,250
25,000 American Re Corp. 956,250
29,000 Bankers Life Holding Corp. 525,625
33,000 Bear Stearns Companies, Inc. 660,000
24,000 California Federal Bank 357,000
4,000 CCB Financial Corp. 196,000
26,000 Charter One Financial, Inc. 737,750
58,000 City National Corp. 783,000
10,000 CMAC Investment Corp. 475,000
23,000 Commercial Federal Corp. 750,375
1,500 Countrywide Credit Industries, Inc. 33,188
23,000 Crestar Financial Corp. 1,319,625
41,000 Edwards (A.G.), Inc. 1,040,375
22,000 Finova Group, Inc. 1,001,000
7,000 First American Corp. 306,250
10,000 First Financial Corp. 210,000
18,000 First Tennessee National Corp. 972,000
13,000 First USA, Inc. 606,125
20,300 Fremont General Corp. 596,313
19,000 GATX Corp. 909,625
49,000 Mercury Financial Co. 943,250
7,300 MGIC Investment Corp. 415,188
9,000 North American Mtg., Co. 185,625
21,000 North Fork Bancorporation 459,375
22,000 Northern Trust Corp. 1,050,500
12,880 Norwest Corp. 388,010
2,000 Ohio Casualty Corp. 71,500
10,000 Penncorp Financial Group, Inc. 238,750
32,000 Peoples Heritage Financial 620,000
25,000 Protective Life Corp. 712,500
18,000 Regions Financial Corp. 720,000
109,000 Reliance Group Holding 803,875
17,000 Reliastar Financial Corp. 716,125
3,000 Roosevelt Financial Group, Inc. 48,375
38,000 Southtrust Corp. 959,500
5,000 Sovereign Bancorp, Inc. 50,000
19,300 Star Banc Corp. 1,061,500
16,000 TCF Financial Corp. 936,000
6,000 TIG Holdings, Inc. 151,500
6,000 Transatlantic Holdings, Inc. 405,750
28,000 Union Planters Corp. 854,000
5,000 Vesta Insurance Group, Inc. 203,125
38,000 Washington Mutual, Inc. 980,875
15,000 Webb Del Corp. 313,125
9,000 Zions Bancorporation 623,250
-----------
29,048,949
-----------
HEALTH CARE
25,000 Amsco International, Inc. 409,375
24,000 Bausch & Lomb, Inc. 840,000
5,000 Bio Rad Labs, Inc., Class A 190,625
19,000 CNS, Inc. 199,500
11,000 Community Health Systems, Inc. 349,250
52,000 Cor Therapeutics, Inc. 533,000
1,000 Cordis Corp. 110,625
4,000 Dentsply International, Inc. 138,000
29,000 Foundation Health Corp. 1,236,125
2,000 HBO & Co. 143,250
20,000 Healthcare Compare Corp. 770,000
8,000 Healthsouth Rehabilitation 211,000
</TABLE>
F-69
<PAGE> 176
NOTES TO FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------
<S> <C> <C>
39,000 Horizon/CMS Healthcare $ 784,875
37,073 ICN Pharmaceuticals, Inc. 759,997
24,000 Integrated Health Services, Inc. 519,000
29,000 Lincare Holdings, Inc. 725,000
3,000 Manor Care, Inc. 98,625
1,000 Maxicare Health Plans 17,625
32,000 Medisense, Inc. 716,000
47,500 Mylan Labs, Inc. 890,625
16,000 Nellcor Puritan Bennett, Inc. 924,000
8,000 North American Biological 65,000
2,000 Orthofix International, NV 19,500
16,000 Oxford Health Plans, Inc. 1,260,000
6,000 Pacific Physician Services 94,500
3,000 Quintiles Transnational Corp. 192,750
17,000 Renal Treatment Centers, Inc. 612,000
6,000 Rexall Sundown, Inc. 90,000
3,000 Target Therapeutics, Inc. 229,500
18,000 Thermo Cardiosystems, Inc. 877,500
2,000 United American Healthcare Corp. 22,250
12,000 Universal Health Services, Inc., Class B 448,500
20,000 Vivra, Inc. 660,000
25,320 Watsons Pharmaceuticals, Inc. 1,145,730
-----------
16,283,727
-----------
PRODUCER MANUFACTURING
16,000 Agco Corp. 754,000
3,000 Alliant Techsystems, Inc. 139,500
5,000 Ametek, Inc. 88,750
14,600 Aptar Group, Inc. 501,875
7,000 Blount, Inc., Class A 305,375
21,000 Briggs & Stratton Corp. 847,875
6,000 Cognex Corp. 363,000
22,000 Cummins Engine Co., Inc. 792,000
26,000 Danaher Corp. 812,500
22,000 Detroit Diesel Corp. 396,000
11,000 Duracraft Corp. 239,250
6,000 Granite Construction, Inc. 171,750
18,500 IDEX Corp. 698,375
7,000 INDRESCO, Inc. 120,750
1,000 Johnson Controls, Inc. 58,500
20,000 Juno Lighting, Inc. 292,500
2,000 Kent Electrics Corp. 97,750
16,000 Kulicke & Sofa Industries, Inc. 560,000
24,000 Mueller Industries, Inc. 561,000
4,000 National Service Industries, Inc. 119,500
9,000 Navistar International Corp. 93,375
19,000 PACCAR, Inc. 798,000
30,000 Southdown, Inc. 495,000
90,000 Sterling Chemicals, Inc. 731,250
11,000 Teledyne, Inc. 275,000
28,300 Thermo Instrument Systems, Inc. 856,075
26,000 Timken Co. 1,036,750
8,000 United Waste Systems, Inc. 316,000
31,000 Varity Corp. 1,108,250
6,000 Watts Industries, Inc., Class A 123,750
32,000 Wellman, Inc. 752,000
9,000 Wolverine Tube, Inc. 319,500
-----------
14,825,200
-----------
RAW MATERIALS/PROCESSING INDUSTRIES
17,000 Cleveland Cliffs, Inc. 641,750
16,000 Cyprus Amax Minerals 428,000
4,000 Cytec Industries, Inc. 218,000
6,000 First Mississippi Corp. 123,750
14,000 Geon Co. 346,500
24,000 Georgia Gulf Corp. 801,000
15,000 Goodrich (B. F.) Co. 990,000
46,000 Handy & Harman 644,000
8,000 Inland Steel Industries, Inc. 186,000
2,000 International Specialty Products, Inc. 17,500
62,000 Jefferson Smurfit Corp. 759,500
40,000 J&L Specialty Steel, Inc. 660,000
44,000 Longview Fibre Co. 643,500
15,000 Lubrizol Corp. 435,000
41,000 Lyondell Petrochemical Co. 881,500
46,000 Magma Copper Co., Class B 770,500
6,000 Medusa Corp. 149,250
3,000 NCH Corp. 163,125
14,000 Olin Corp. 904,750
51,000 Owens-Illinois, Inc. 643,875
12,000 Potlatch Corp. 505,500
3,000 Quanex Corp. 58,875
11,000 Rayonier, Inc. 418,000
69,000 Rexene Corp. 621,000
20,000 Sealed Air Corp. 522,500
5,000 Sigma-Aldrich Corp. 240,000
33,000 Sonoco Products Co. 833,250
43,000 Stone Container Corp. 736,375
46,000 Terra Industries, Inc. 580,750
1,000 Texas Industries, Inc. 52,875
23,000 USG Corp. 669,875
15,000 Vigoro Corp. 652,500
5,000 Vulcan Materials Co. 277,500
43,500 Worthington Industries, Inc. 744,938
-----------
17,321,438
-----------
TECHNOLOGY
6,000 Adaptec, Inc. 264,000
20,000 Alantec Corp. 710,000
4,000 Altera Corp. 244,000
15,000 America Online, Inc. 1,215,000
3,000 Analysts International Corp. 90,000
28,000 Aspect Telecommunications Corp. 973,000
19,000 Atmel Corp. 594,936
1,000 Auspex Systems, Inc. 14,812
27,000 Autodesk, Inc. 911,250
21,400 Avnet, Inc. 1,080,700
10,000 BMC Industries, Inc. 386,250
18,000 BMC Software, Inc. 641,250
56,000 Borland International, Inc. 777,000
36,000 Cadence Design Systems, Inc. 1,174,500
19,000 Cascade Communications 1,344,250
21,000 Cidco, Inc. 588,000
2,000 Computer Network Technology 13,125
60,000 Conner Peripherals, Inc. 1,095,000
22,000 Credence Systems Corp. 825,000
1,000 Dallas Semiconductor Co. 21,250
13,000 Dovatron International, Inc. 399,750
22,000 Dynatech Corp. 335,500
12,000 Electroglas, Inc. 867,000
13,000 Electronics For Imaging, Inc. 1,082,250
4,000 FTP Software, Inc. 108,188
34,000 Gateway 2000, Inc. 1,160,250
9,000 Harris Corp. 525,375
23,000 In Focus Systems, Inc. 730,250
44,000 Integrated Device Technology, Inc. 844,250
22,000 International Rectifier Corp. 1,009,250
37,000 Intervoice, Inc. 689,125
24,000 KLA Instruments Corp. 1,050,000
</TABLE>
F-70
<PAGE> 177
NOTES TO FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
3,000 Komag, Inc.................................. $ 172,875
13,000 Lam Research Corp........................... 809,250
3,000 Littelfuse, Inc............................. 98,625
17,000 McAfee Associates, Inc...................... 998,750
10,000 Microchip Technology, Inc................... 397,500
26,000 Netmanage, Inc.............................. 542,750
14,000 Network Equipment Technologies.............. 465,500
22,000 Network General Corp........................ 907,500
12,500 Novellus Systems, Inc....................... 857,812
8,000 Peoplesoft, Inc............................. 688,000
4,500 Pioneer Standard Electronics, Inc........... 62,438
9,000 Policy Management Systems Corp.............. 426,375
5,000 Quantum Corp................................ 86,250
23,000 Read-Rite Corp.............................. 819,375
4,000 Recoton Corp................................ 89,000
38,000 S3, Inc..................................... 650,750
14,000 Seagate Technology.......................... 638,750
30,000 Sequent Computer Systems, Inc............... 525,000
25,000 Solectron Corp.............................. 1,018,750
9,000 Sterling Software, Inc...................... 416,250
19,000 Symbol Technologies, Inc.................... 665,000
20,000 Teradyne, Inc............................... 670,000
12,000 3Com Corp................................... 582,000
11,474 U.S. Robotics Corp.......................... 1,067,080
19,000 Unitrode Corp............................... 513,000
8,500 Varian Associates, Inc...................... 437,750
27,000 Vishay Intertechnology, Inc................. 972,000
19,000 Wyle Electronics, Inc....................... 814,625
21,000 Xilinx, Inc................................. 1,000,125
------------
39,157,591
------------
TRANSPORTATION
49,000 Arkansas Best Corp.......................... 453,250
32,000 Comair Holdings, Inc........................ 896,000
10,800 Consolidated Freightways, Inc............... 252,450
1,000 Continental Airlines, Inc., Class B......... 35,625
24,000 Fritz Companies, Inc........................ 846,000
26,000 Illinois Central Corp....................... 1,001,000
22,000 MS Carriers, Inc............................ 341,000
12,000 Northwest Airlines, Inc., Class A........... 486,000
19,000 Pittston Company Services Group............. 520,125
6,000 Stolt Nielsen, S.A.......................... 182,250
11,000 TNT Freightways Corp........................ 203,500
------------
5,217,200
------------
UTILITIES
29,000 AES Corp.................................... 572,750
26,000 AT&T Corp................................... 1,040,000
34,100 Boston Edison Co............................ 937,750
4,500 C-Tec Corp.................................. 94,500
12,000 California Energy, Inc...................... 216,000
27,000 Centerior Energy Corp....................... 273,375
4,300 Central Hudson Gas & Electric Corp.......... 131,688
1,000 Colorado Public Service Co.................. 34,000
10,000 Commnet Cellular, Inc....................... 252,500
38,000 Delmarva Power & Light Co................... 845,500
17,000 DQE, Inc.................................... 469,625
8,000 Eastern Utilities Association............... 187,000
4,251 Firstmiss Gold, Inc......................... 77,049
42,000 Frontier Corp............................... 1,139,250
36,000 Illinova Corp............................... 1,026,000
41,000 Long Island Lighting Co..................... 707,250
33,000 New Mexico Public Service Co................ 556,875
24,000 NIPSCO Industries, Inc...................... 879,000
9,500 Oklahoma Gas & Electric Co.................. 380,000
3,000 Orange & Rockland Utilities................. 105,375
27,000 Pinnacle West Capital Corp.................. 742,500
32,000 Portland General Corp....................... 872,000
14,200 Southern New England Telecommunications..... 514,750
23,000 U.S. Cellular Corp.......................... 790,625
1,000 U.S. Long Distance Corp..................... 13,000
------------
12,858,362
------------
TOTAL COMMON STOCK........................ 194,325,513
------------
Convertible Preferred Stock
1,600 FHP International, $1.25, Series A.......... 38,000
------------
<CAPTION>
Principal
Amount
(000)
---------
Repurchase Agreement
$ 5,805 Lehman Government Securities, Inc.,
5.75%, 11/01/95........................... 5,805,000
------------
TOTAL INVESTMENTS........................... 200,168,513
Other assets and liabilities, net........... 176,308
------------
NET ASSETS.................................. $200,344,821
============
</TABLE>
F-71
<PAGE> 178
NOTES TO FINANCIAL STATEMENTS, continued
Note 3--Investment Activity
During the period, the cost of purchases and proceeds from sales and maturities
of investments, excluding short-term investments and forward commitments were:
<TABLE>
<CAPTION>
Growth & Emerging International
Growth II Income II Government II Growth II Equity II
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Purchases............................. $83,144,346 $41,958,082 $23,733,799 $29,403,570 $8,126,934
Sales................................. $50,888,482 $17,696,039 $13,098,839 $ 6,151,590 $ 753,105
</TABLE>
At the end of the period, the Trust held the following futures contracts:
<TABLE>
<CAPTION>
Unrealized
Number of Market Appreciation
Fund Description Contracts Value (Depreciation)
----------------------------- --------------------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Growth II Standard & Poor's 500 Index
expiring 12/95 (long) 16 $4,670,800 $ 76,343
expiring 3/96 (long) 4 1,177,400 (4,650)
---------- ----------
$5,848,200 $ 71,693
========== ==========
Growth & Income II Standard & Poor's 500 Index
expiring 3/96 (long) 2 $ 588,700 $ (5,025)
========== ==========
Government II U.S. Treasury Bond,
expiring 12/95 (short) 6 $ (702,375) $ (1,388)
U.S. Treasury Bond,
expiring 12/95 (long) 23 2,692,438 42,836
U.S. Treasury Note, five years
expiring 12/95 (short) 5 (541,641) (1,970)
U.S. Treasury Note, five years
expiring 12/95 (long) 8 866,625 8,024
U.S. Treasury Note, ten years
expiring 12/95 (long) 10 1,115,313 14,562
U.S. Treasury Bond,
expiring 3/96 (long) 2 233,438 (212)
---------- ----------
$3,663,798 $ 61,852
========== ==========
</TABLE>
At the end of the period, Government II held the following forward commitments
for which delivery is not intended:
<TABLE>
<CAPTION>
Unrealized
Principal Market Appreciation
Amount Security Value (Depreciation)
- --------- ---------------------------------------- -------- --------------
<S> <C> <C> <C>
Government National Mortgage Association
$500,000 7.00%, settling 11/95 (sale)............ $(496,565) $ (2)
600,000 7.00%, settling 11/95 (purchase)........ 595,878 13,315
--------- -------
(Net obligation $86,000).............. $ 99,313 $13,313
========= =======
</TABLE>
F-72
<PAGE> 179
NOTES TO FINANCIAL STATEMENTS, continued
The following table presents the identified cost of investments (and foreign
currency for International Equity II) at the end of the period for federal
income tax purposes and the associated net unrealized appreciation.
<TABLE>
<CAPTION>
Growth Emerging International
Growth II & Income II Government II Growth II Equity II
----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Identified cost................ $51,263,560 $33,845,311 $21,895,632 $25,817,140 $9,054,237
=========== =========== =========== =========== ==========
Gross unrealized appreciation.. $ 4,388,657 $ 2,927,593 $ 418,009 $ 2,782,612 $ 923,978
Gross unrealized depreciation.. (758,483) (607,669) (51,310) (626,049) (317,907)
----------- ----------- ----------- ----------- ----------
Net unrealized appreciation.... $ 3,630,174 $ 2,319,924 $ 366,699 $ 2,156,563 $ 606,071
=========== =========== =========== =========== ==========
</TABLE>
Note 4--Capital
Each Fund offers two classes of shares at their respective net asset values per
share, plus a sales charge which is imposed either at the time of purchase (the
Class A shares) or at the time of redemption on a contingent deferred basis (the
Class B shares). All classes of shares have the same rights, except that Class B
shares bear the cost of distribution fees and certain other class specific
expenses. Class B shares automatically convert to Class A shares six years after
purchase, subject to certain conditions. Realized and unrealized gains or
losses, investment income and expenses (other than class specific expenses) are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class.
The Trust has an unlimited number of each class of shares of $.01 par value
beneficial interest authorized. Transactions in shares of beneficial interest
for the period were as follows:
<TABLE>
<CAPTION>
Growth II Growth & Income II Government II Emerging International
------------------------ ------------------------ ------------------------ Growth II Equity II
Year Ended Period Ended Year Ended Period Ended Year Ended Period Ended --------- -------------
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Feb. 21 1995
1995 1994 1995 1994 1995 1994 through Oct. 31, 1995
---------- ------------ ---------- ------------ ---------- ------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold
Class A............ 1,296,305 373,998 870,371 300,262 545,888 433,958 1,125,630 480,871
Class B............ 1,972,519 497,430 1,317,260 312,434 618,905 253,982 732,333 202,578
--------- ------- --------- --------- --------- --------- --------- -------
3,268,824 871,428 2,187,631 612,696 1,164,793 687,940 1,857,963 683,449
--------- ------- --------- --------- --------- --------- --------- -------
Shares reinvested
Class A............ -- -- 6,227 999 27,873 5,134 -- --
Class B............ -- -- 3,076 584 19,868 1,471 -- --
--------- ------- --------- --------- --------- --------- --------- -------
-- -- 9,303 1,583 47,741 6,605 -- --
--------- ------- --------- --------- --------- --------- --------- -------
Shares redeemed
Class A............ (217,699) (5,414) (202,866) (4,796) (158,374) (44,548) (70,836) (6,846)
Class B............ (146,988) (9,513) (106,128) (1,966) (99,822) (13,568) (14,613) (3,080)
--------- ------- --------- --------- --------- --------- --------- -------
(364,687) (14,927) (308,994) (6,762) (258,196) (58,116) (85,449) (9,926)
--------- ------- --------- --------- --------- --------- --------- -------
Increase in shares
outstanding........ 2,904,137 856,501 1,887,940 607,517 954,338 636,429 1,772,514 673,523
========= ======= ========= ========= ========= ========= ========= =======
</TABLE>
Note 5--Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Trust at
the annual rate of $5,320 plus a fee of $360 per day for the Board meeting
attended.
<TABLE>
<CAPTION>
Growth Emerging International
Growth II & Income II Government II Growth II Equity II
--------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Trustees' fees for the period.. $22,505 $21,775 $21,662 $6,800 $6,460
======= ======= ======= ====== ======
</TABLE>
F-73
<PAGE> 180
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
periods indicated.
<TABLE>
<CAPTION>
Class A(2) Class B(2)
------------------------------------ ------------------------------------
Year May 3, 1994(1) Year May 3, 1994(1)
Ended through Ended through
October 31, 1995 October 31, 1994 October 31, 1995 October 31, 1994
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Growth II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............ $11.89 $11.81 $11.85 $11.81
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .28 .29 .27 .28
Expenses(4).................................... (.37) (.29) (.46) (.32)
------ ------ ------ ------
Net investment income (loss).................... (.09) .00 (.19) (.04)
Net realized and unrealized gain on securities.. 2.77 .08 2.75 .08
------ ------ ------ ------
Total from investment operations................ 2.68 .08 2.56 .04
------ ------ ------ ------
Net asset value, end of period.................. $14.57 $11.89 $14.41 $11.85
====== ====== ====== ======
TOTAL RETURN(3)................................. 22.44% .76% 21.50% .42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............ $ 21.1 $ 4.4 $ 33.3 $ 5.8
Average net assets (millions)................... $ 11.5 $ 2.1 $ 17.6 $ 2.1
Ratios to average net assets (annualized)(4)
Expenses....................................... 2.75% 4.89% 3.50% 5.79%
Expenses, without expense reimbursement........ 2.90% -- 3.65% --
Net investment loss............................ (.68%) (.05%) (1.45%) (.78%)
Net investment loss, without expense
reimbursement................................. (.83%) -- (1.60%) --
Portfolio turnover rate......................... 193% 151% 193% 151%
- -------------------------------------------------------------------------------------------------------------------------------
Growth & Income II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............ $11.71 $11.81 $11.70 $11.81
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .41 .42 .42 .42
Expenses(4).................................... (.31) (.21) (.41) (.25)
------ ------ ------ ------
Net investment income........................... .10 .21 .01 .17
Net realized and unrealized gains or losses on
securities..................................... 2.255 (.26) 2.234 (.251)
------ ------ ------ ------
Total from investment operations................ 2.355 (.05) 2.244 (.081)
------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income.......................... (.10) (.05) (.01) (.029)
Excess of book-basis net investment income..... (.045) -- (.054) --
------ ------ ------ ------
Total distributions............................. (.145) (.05) (.064) (.029)
------ ------ ------ ------
Net asset value, end of period.................. $13.92 $11.71 $13.88 $11.70
====== ====== ====== ======
TOTAL RETURN(3)................................. 20.20% (.42%) 19.19% (.68%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............ $ 13.5 $ 3.5 $ 21.2 $ 3.6
Average net assets (millions)................... $ 7.5 $ 1.9 $ 10.2 $ 1.5
Ratios to average net assets (annualized)(4)
Expenses....................................... 2.44% 3.37% 3.15% 4.42%
Expenses, without expense reimbursement........ 2.59% 3.40% 3.30% 4.45%
Net investment income.......................... .81% 3.38% .05% 3.00%
Net investment income (loss), without expense
reimbursement................................. .66% 3.35% (.10%) 2.97%
Portfolio turnover rate......................... 108% 215% 108% 215%
</TABLE>
(1) Commencement of operations
(2) Based on average shares outstanding
(3) Total return does not consider the effect of sales charges.
(4) See Note 2
See Notes to Financial Statements.
F-74
<PAGE> 181
FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
Class A(2) Class B(2)
---------------------------------- ----------------------------------
Year May 3, 1994(1) Year May 3, 1994(1)
Ended through Ended through
October 31, 1995 October 31, 1994 October 31, 1995 October 31, 1994
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Government II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............. $ 11.54 $11.91 $ 11.54 $11.91
------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................ .93 .38 .93 .38
Expenses......................................... (.32) (.15) (.42) (.18)
------- ------ ------- ------
Net investment income............................ .61 .23 .51 .20
Net realized and unrealized gains or losses on
securities...................................... .6366 (.40) .6523 (.41)
------- ------ ------- ------
Total from investment operations................. 1.2466 (.17) 1.1623 (.21)
LESS DISTRIBUTIONS FROM
Net investment income............................ (.61) (.20) (.51) (.16)
Excess of book-basis net investment income....... (.0366) - (.0523) -
------- ------ ------- ------
Total distributions.............................. (.6466) (.20) (.5623) (.16)
------- ------ ------- ------
Net asset value, end of period................... $ 12.14 $11.54 $ 12.14 $11.54
======= ====== ======= ======
TOTAL RETURN(3).................................. 11.20% (1.53%) 10.42% (1.83%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............. $ 9.8 $ 4.6 $ 9.5 $ 2.8
Average net assets (millions).................... $ 6.4 $ 3.9 $ 5.5 $ 1.1
Ratios to average net assets (annualized)
Expenses........................................ 2.74% 2.32% 3.48% 3.25%
Net investment income........................... 5.11% 3.54% 4.32% 3.49%
Portfolio turnover rate.......................... 113% 155% 113% 155%
</TABLE>
(1) Commencement of operations
(2) Based on average shares outstanding
(3) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-75
<PAGE> 182
FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout the
periods indicated.
<TABLE>
<CAPTION>
Class A(2) Class B(2)
-------------------- --------------------
February 21, 1995(1) February 21, 1995(1)
through through
October 31, 1995 October 31, 1995
-------------------- --------------------
<S> <C> <C>
Emerging Growth II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period....................................... $11.81 $11.81
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................................ .15 .15
Expenses(4).............................................................. (.39) (.50)
------ ------
Net investment loss........................................................ (.24) (.35)
Net realized and unrealized gain on securities............................. 3.55 3.58
------ ------
Total from investment operations........................................... 3.31 3.23
------ ------
Net asset value, end of period............................................. $15.12 $15.04
====== ======
TOTAL RETURN(3)............................................................ 28.11% 27.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................................... $ 15.9 $ 10.8
Average net assets (millions).............................................. $ 6.1 $ 3.7
Ratios to average net assets (annualized)(4)
Expenses.................................................................. 2.75% 3.49%
Expenses, without expense reimbursement................................... 3.37% 4.11%
Net investment loss....................................................... (1.65%) (2.45%)
Net investment loss, without expense reimbursement........................ (2.27%) (3.07%)
Portfolio turnover rate.................................................... 83% 83%
- ----------------------------------------------------------------------------------------------------------------------------
International Equity II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period....................................... $11.81 $11.81
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................................ .19 .19
Expenses(4).............................................................. (.33) (.40)
------ ------
Net investment loss........................................................ (.14) (.21)
Net realized and unrealized gain on securities............................. 2.19 2.19
------ ------
Total from investment operations........................................... 2.05 1.98
------ ------
Net asset value, end of period............................................. $13.86 $13.79
====== ======
TOTAL RETURN(3)............................................................ 16.28%/(5) 15.69%/(5)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................................... $ 6.6 $ 2.7
Average net assets (millions).............................................. $ 3.7 $ 1.0
Ratios to average net assets (annualized)(4)
Expenses.................................................................. 3.64% 4.33%
Expenses, without expense reimbursement................................... 5.97% 6.67%
Net investment loss....................................................... (1.40%) (2.80%)
Net investment loss, without expense reimbursement........................ (3.73%) (5.13%)
Portfolio turnover rate................................................... 17% 17%
/(1)/ Commencement of operations
/(2)/ Based on average shares outstanding
/(3)/ Total return has not been annualized and does not consider the effect of sales charges.
/(4)/ See Note 2
/(5)/ Total return from March 17, 1995 (date the Fund's investment strategy was implemented) through October 31, 1995.
</TABLE>
See Notes to Financial Statements.
F-76
<PAGE> 183
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Common Sense Trust
We have audited the accompanying statements of net assets of Common Sense II
Growth Fund, Common Sense II Growth and Income Fund, Common Sense II Government
Fund, Common Sense II Emerging Growth Fund, and Common Sense II International
Equity Fund, (cumulatively the "Funds"), five of ten portfolios constituting the
series of the Common Sense Trust (the "Trust"), as of October 31, 1995. For
Common Sense II Emerging Growth Fund and Common Sense II International Equity
Fund we have audited the related statements of operations, the statements of
changes in net assets and the financial highlights for the period from inception
(February 21, 1995) through October 31, 1995. For Common Sense II Growth Fund,
Common Sense II Growth and Income Fund and Common Sense II Government Fund we
have audited the related statements of operations, the statements of changes in
net assets and the financial highlights for the period from inception (May 3,
1994) through October 31, 1994 and for the year ended October 31, 1995. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds of the Common Sense Trust listed above at October 31,
1995, the results of their operations, the changes in their net assets, and the
financial highlights for the periods identified above, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 1, 1995
F-77
<PAGE> 184
Appendix B
SUPPLEMENT DATED APRIL 3, 1996
TO THE STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY 8, 1996
OF COMMON SENSE(R) TRUST
Common Sense(R) II Growth Fund
Common Sense(R) II Growth and Income Fund
Common Sense(R) II Government Fund
Common Sense(R) II Emerging Growth Fund
Common Sense(R) II International Equity Fund
The following replaces the first paragraph, in its entirety, under "OTHER
INFORMATION -- Performance Information":
The overall total return for the Growth II Fund, the Growth and Income
II Fund and the Government II Fund (computed in the manner described
in the Prospectus) for Class A shares for the one-year period ended
October 31, 1995 and since inception (May 3, 1994) through October 31,
1995 was 15.73%, 13.60% and 5.97%; and 10.76%, 8.55% and 2.87%,
respectively. The overall total return for the Growth II Fund, the
Growth and Income II Fund and the Government II Fund (computed in the
manner described in the Prospectus) for Class B shares for the
one-year period ended October 31, 1995 and since inception (May 3,
1994) through October 31, 1995 was 16.50%, 14.19% and 6.42%; and
11.68%, 9.37% and 2.91%, respectively. The overall total return for
Emerging Growth II Fund and International Equity II Fund (computed in
the manner described in the Prospectus) for Class A shares for the
period from inception (March 17, 1995 for International Equity II Fund
and February 21, 1995 for Emerging Growth II Fund) through October 31,
1995 was 22.02% and 10.79%, respectively. The overall total return for
Emerging Growth II Fund and International Equity II Fund (computed in
the manner described in the Prospectus) for Class B shares for the
period from inception (March 17, 1995 for International Equity II Fund
and February 21, 1995 for Emerging Growth II Fund) through October 31,
1995 was 21.37% and 10.23%, 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.
<PAGE> 185
SUPPLEMENT DATED FEBRUARY 22, 1996
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
COMMON SENSE(R) TRUST
================================================================================
The date of the Statement of Additional Information of Common Sense(R) II should
be February 8, 1996 rather than February 6, 1996 as stated on the Statement of
Additional Information.
<PAGE> 186
STATEMENT OF ADDITIONAL INFORMATION
COMMON SENSE TRUST
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
FEBRUARY 6, 1996
Common Sense Trust (the "Trust") is a diversified, open-end management
investment company with ten separate Funds, five of which are discussed herein:
the Common Sense II Emerging Growth Fund (the "Emerging Growth II Fund"), the
Common Sense II International Equity Fund (the "International Equity II Fund"),
the Common Sense II Growth Fund (the "Growth II Fund"), the Common Sense Growth
and Income II Fund (the "Growth and Income II Fund") and the Common Sense II
Government Fund (the "Government II Fund"). Each Fund is in effect a separate
fund issuing its own shares.
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus bearing the same date and should be read in conjunction with the
Prospectus. A Prospectus may be obtained without charge by writing PFS
Distributors, Inc., at 3100 Breckinridge Boulevard, Bldg. 200, Duluth, Georgia
30199-0001.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
GOALS AND INVESTMENT POLICIES......................................................... 2
Emerging Growth II Fund............................................................. 3
International Equity II Fund........................................................ 3
Growth II Fund...................................................................... 3
Growth and Income II Fund........................................................... 3
Government II Fund.................................................................. 3
REPURCHASE AGREEMENTS................................................................. 5
REVERSE REPURCHASE AGREEMENTS......................................................... 6
COMMERCIAL BANK OBLIGATIONS........................................................... 6
COMMERCIAL PAPER...................................................................... 6
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS........................................ 7
FORWARD COMMITMENTS................................................................... 13
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY.................................... 13
INTEREST RATE TRANSACTIONS............................................................ 14
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS.......................................... 15
LOANS OF PORTFOLIO SECURITIES......................................................... 16
INVESTMENT RESTRICTIONS............................................................... 16
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 20
INVESTMENT ADVISORY AGREEMENT......................................................... 24
DISTRIBUTOR........................................................................... 26
DISTRIBUTION PLANS.................................................................... 26
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 28
DETERMINATION OF NET ASSET VALUE...................................................... 31
PURCHASE AND REDEMPTION OF SHARES..................................................... 32
EXCHANGE PRIVILEGE.................................................................... 35
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 35
OTHER INFORMATION..................................................................... 37
FINANCIAL STATEMENTS.................................................................. 40
APPENDIX.............................................................................. 41
</TABLE>
<PAGE> 187
GENERAL INFORMATION
Van Kampen American Capital Asset Management, Inc. (the "Adviser") is a
subsidiary of Van Kampen American Capital, Inc. ("VKAC") which is a wholly-owned
subsidiary of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is controlled
by the Clayton & Dubilier Private Equity Fund IV Limited Partnership (the "C&D
L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York private investment firm. The general partner
of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel,
Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than seven
percent of the common stock of VK/AC Holding and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding. The Adviser, together with its predecessors, has been in the
investment advisory business since 1926.
Smith Barney Mutual Funds Management Inc. (the "Subadviser) provides
investment advisory services to the Adviser in connection with the International
Equity II Fund. The Subadviser was incorporated on March 12, 1968 and renders
investment management advice to investment companies with aggregate assets under
management in excess of $65 billion as of December 31, 1995. The Subadviser is
an affiliate of Smith Barney Inc. and a wholly-owned subsidiary of Smith Barney
Holdings Inc. which in turn is a wholly-owned subsidiary of Travelers Group Inc.
("Travelers"). Travelers is engaged primarily in investment services, consumer
finance services and insurance services.
PFS Distributors, Inc. (the "Distributor") is an indirect wholly-owned
subsidiary of Travelers. PFS Shareholder Services (the "Transfer Agent"), is a
subsidiary of PFS Services, Inc., an affiliate of Primerica Financial Services,
Inc. ("Primerica Financial"). PFS Investments Inc. ("PFS Investments") is an
indirect wholly-owned subsidiary of Travelers.
As of January 5, 1996, no person was known to own beneficially or of record
as much as five percent of the outstanding shares of any Fund of the Trust
except as follows:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF OWNERSHIP AT CLASS OF PERCENTAGE
OF HOLDER FUND JANUARY 5, 1996 SHARES OWNERSHIP
------------------ --------------------- -------------------- -------- ----------
<S> <C> <C> <C> <C>
PFS Investments, Inc. II Govt. 233,224.887 shares Class A 37.3%
3100 Breckinridge Blvd. II Govt. 391,765.142 shares Class B 42.6%
Bldg. 200 II Growth 969,684.873 shares Class A 55.5%
Duluth, Georgia 30199-0001 II Growth 1,673,937.987 shares Class B 58.3%
II Growth & Income 573,384.389 shares Class A 52.2%
II Growth & Income 981,066.285 shares Class B 52.8%
II Emerging Growth 788,382.295 shares Class A 60.3%
II Emerging Growth 589,551.621 shares Class B 61.5%
II International Equity 216,947.417 shares Class A 59.9%
II International Equity 150,648.463 shares Class B 59.7%
Communication Workers II Govt. 41,016.566 shares Class A 6.55%
of America
</TABLE>
PFS Investments acts as custodian for certain employee benefit plans and
individual retirement accounts.
GOALS AND INVESTMENT POLICIES
The following disclosures supplement disclosures set forth under an
identical caption in the Prospectus and do not, standing alone, present a
complete and accurate explanation of the matters disclosed. Readers must refer
also to this caption in the Prospectus for a complete presentation of the
matters disclosed below.
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<PAGE> 188
EMERGING GROWTH II FUND
The Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks of small and medium sized
companies considered by the Adviser to be emerging growth companies.
INTERNATIONAL EQUITY II FUND
The Fund seeks total return on its assets from growth of capital and income
by investing at least 65% of its assets in a diversified portfolio of equity
securities of established non-United States issuers.
GROWTH II FUND
The Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks and options on common stocks.
The Fund may also engage in transactions involving stock index futures contracts
and options on such contracts. Any income received on such securities is
incidental to the goal of capital appreciation.
GROWTH AND INCOME II FUND
The Fund seeks reasonable growth and income through investments in equity
securities including common and preferred stocks and securities convertible into
common and preferred stocks.
In general, the Fund intends to invest in securities that have yielded a
dividend or interest return to security holders within the past twelve months;
however, it may invest in non-income producing investments held for anticipated
increase in value. The Fund may also engage in transactions in options, futures
contracts, and options on futures.
GOVERNMENT II FUND
The Fund seeks to provide investors with a high current return consistent
with preservation of capital by investing in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The Fund
may also purchase and sell options and engage in transactions in interest rate
futures contracts and options on such contracts in order to hedge against
changes in interest rates.
The Fund seeks high current return consistent with preservation of capital.
The Fund intends to invest at least 80% of its assets in debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
Repurchase agreements may be entered into with domestic banks or broker-dealers
deemed creditworthy by the Advisers solely for purposes of investing the Fund's
cash reserves or when the Fund is in a temporary defensive posture. The Fund may
write covered or fully collateralized call options on U.S. Government securities
and enter into closing or offsetting purchase transactions with respect to
certain of such options. The Fund may also write secured put options and enter
into closing or offsetting purchase transactions with respect to such options.
The Fund may write both listed and over-the-counter options as described in the
Prospectus.
The Fund seeks to obtain a high current return from the following sources:
- interest paid on the Fund's portfolio securities;
- premiums earned upon the expiration of options written;
- net profits from closing transactions; and
- net gains from the sale of portfolio securities on the exercise of
options or otherwise.
The Fund is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect the
value of and yields on U.S. Government securities. Accordingly, there is no
assurance that the Fund's investment objective will be achieved.
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MORTGAGE RELATED SECURITIES. The Government II Fund may invest in
mortgage-related securities, including those representing an undivided ownership
interest in a pool of mortgage loans, e.g., GNMA, FNMA, FHLMC Certificates.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National Mortgage
Association ("GNMA") is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities backed
by pools of mortgages.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid and owned on the mortgage pool net of fees paid to the
"issuer" and GNMA, regardless of whether or not the mortgagor actually makes the
payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FMHA"), or guaranteed by the Veterans Administration
("VA"). Once a pool of such mortgages is assembled and approved by GNMA, the
GNMA guarantee is backed by the full faith and credit of the U.S. Government.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before maturity of the mortgages in the pool. The Fund normally
will not distribute principal payments (whether regular or prepaid) to its
shareholders. Rather, it will invest such payments in additional mortgage-
related securities of the types described above or other U.S. Government
securities. Interest received by the Fund will, however, be distributed to
shareholders. Foreclosures impose no risk to principal investment because of the
GNMA guarantee.
As prepayment rates of the individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of single-family dwelling mortgages with 25 to 30-year maturities, the type
of mortgages backing the vast majority of GNMA Certificates, is approximately 12
years. Therefore, it is customary to treat GNMA Certificates as 30-year
mortgage-backed securities which prepay fully in the twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than
at par.
2. After issuance, Certificates usually trade in the secondary market at
a premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case
for traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
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4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC") was
created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. FHLMC issues two types of mortgage
pass-through securities, mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. Like GNMA Certificates, PCs are assumed to
be prepaid fully in their twelfth year. FHLMC guarantees timely monthly payment
of interest of PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately 10 years.
FNMA SECURITIES. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages insured by the
FHA. FNMA issues guarantee mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and the full return of principal. Like GNMA Certificates,
FNMA Certificates are assumed to be prepaid fully in their twelfth year.
Risk of foreclosure of the underlying mortgages is greater with FHLMC and
FNMA securities because, unlike GNMA securities, FHLMC and FNMA securities are
not guaranteed by the full faith and credit of the U.S. Government.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with broker-dealers or
domestic banks. The Trustees will review on a continuing basis those
institutions which enter into a repurchase agreement with the Fund. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, usually not more than seven days from
the date of purchase, thereby determining the yield during the purchaser's
holding period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered to be loans under the Investment Company Act of
1940, as amended ("1940 Act") or evidence of book entry transfer to the account
of a custodian or bank acting as agent. The seller under a repurchase agreement
is required to maintain the value of the underlying securities marked to market
daily at not less than the repurchase price. The underlying securities (normally
securities of the U.S. Government, or its agencies and instrumentalities) may
have maturity dates exceeding one year. The Fund does not bear the risk of a
decline in 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
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<PAGE> 191
liquidating the underlying securities and loss including: (a) possible decline
in the value of the underlying security during the period while the Fund seeks
to enforce its rights thereto, (b) possible lack of access to income on the
underlying security during this period, and (c) expenses of enforcing its
rights.
REVERSE REPURCHASE AGREEMENTS
The International Equity II Fund may invest in reverse repurchase
agreements. The International Equity II Fund does not currently intend to commit
more than 5% of its net assets to reverse repurchase agreements. The Fund may
enter into reverse repurchase agreements with broker/dealers and other financial
institutions. Such agreements involve the sale of portfolio securities with an
agreement to repurchase the securities at an agreed-upon price, date and
interest payment and are considered to be borrowings by the International Equity
II Fund and are subject to the borrowing limitations set forth under "Investment
Restrictions." Since the proceeds of reverse repurchase agreements are invested,
this would introduce the speculative factor known as "leverage." The securities
purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally, the effect of such a transaction is that the
International Equity II Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only advantageous
if the Fund has an opportunity to earn a greater rate of interest on the cash
derived from the transaction than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available, and
the Fund intends to use the reverse repurchase technique only when the
Subadviser believes it will be advantageous to the International Equity II Fund.
The use of reverse repurchase agreements may exaggerate any interim increase or
decrease in the value of the Fund's assets. The Fund's custodian bank will
maintain a separate account for the Fund with securities having a value equal to
or greater than such commitments.
COMMERCIAL BANK OBLIGATIONS
For the purposes of the International Equity II Fund's investment policies
with respect to bank obligations, obligations of foreign branches of U.S. banks
and of foreign banks may be general obligations of the parent bank in addition
to the issuing bank, or may be limited by the terms of a specific obligation and
by government regulation. As with investment in foreign securities in general,
investments in the obligations of foreign branches of U.S. banks and of foreign
banks may subject the International Equity II Fund to investment risks that are
different in some respects from those of investments in obligations of domestic
issuers. Although the Fund will typically acquire obligations issued and
supported by the credit of U.S. or foreign banks having total assets at the time
of purchase in excess of U.S. $1 billion (or the equivalent thereof), this U.S.
$1 billion figure is not a fundamental investment policy or restriction of the
International Equity II Fund. For calculation purposes with respect to the U.S.
$1 billion figure, the assets of a bank will be deemed to include the assets of
its U.S. and non-U.S. branches.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. A variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving periodically
fluctuating rates of interest under a letter agreement between a commercial
paper issuer and an institutional lender, such as one of the Funds pursuant to
which the lender may determine to invest varying amounts. Transfer of such notes
is usually restricted by the issuer, and there is no secondary trading market
for such notes. Each Fund therefore, may not invest in a master demand note, if
as a result more than 10% (15% in the case of the Emerging Growth II Fund and
the International Equity II Fund) of the value of the Fund's total assets would
be invested in such notes and other illiquid securities.
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<PAGE> 192
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
SELLING CALL AND PUT OPTIONS
(ALL FUNDS)
PURPOSE. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund's current return can be expected to
fluctuate because premiums earned from writing options and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities also results in a higher
portfolio turnover.
SELLING OPTIONS. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Emerging Growth II
Fund, the International Equity II Fund, the Growth and Income II Fund and the
Growth II Fund sell call options only on a covered basis. The Government II Fund
sells call options either on a covered basis, or for cross-hedging purposes. A
call option is covered if the Fund owns or has the right to acquire the
underlying securities subject to the call option at all times during the option
period. Thus, the Government II Fund may sell options on U.S. Government
securities or forward commitments of such securities. An option is for
cross-hedging purposes (relative to Government II Fund only) to hedge against a
security which the Fund owns or has the right to acquire. In such circumstances,
the Government II Fund maintains in a segregated account with the Fund's
Custodian, cash or U.S. Government securities in an amount not less than the
market value of the underlying security, marked to market daily, while the
option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. A Fund sells put options only on a
secured basis, which means that, at all times during the option period, the Fund
would maintain in a segregated account with its Custodian cash, cash equivalents
or U.S. Government securities in an amount of not less than the exercise price
of the option, or will hold a put on the same underlying security at an equal or
greater exercise price. A Fund generally sells put options when the Adviser
wishes to purchase the underlying security for the Fund's portfolio at a price
lower than the current market price of the security.
CLOSING PURCHASE TRANSACTIONS AND OFFSETTING TRANSACTIONS. In order to
terminate its position as writer of a call or put option, a Fund may enter into
a "closing purchase transaction," which is the purchase of a call (put) on the
same underlying security and having the same exercise price and expiration date
as the call (put) previously sold by the Fund. The Fund will realize a gain
(loss) if the premium plus commission paid in the closing purchase transaction
is less (greater) than the premium it received on the sale of the option. A Fund
would also realize a gain if an option it has sold lapses unexercised.
A Fund may sell options that are listed on an exchange as well as options
that are traded over-the-counter. A Fund may close out its position as writer of
an option only if a liquid secondary market exists for options of that series,
but there is no assurance that such a market will exist, particularly in the
case of over-the-counter options, since they can be closed out only with the
other party to the transaction. Alternatively, a Fund may purchase an offsetting
option, which does not close out its position as a writer, but provides an asset
of equal value to its obligation under the option sold. If a Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
RISKS OF SELLING OPTIONS. By selling a call option, a Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the United States exchanges has established limitations governing
the maximum number of call or put options on the same underlying security
(whether or not covered) that may be written by a single investor, whether
acting alone or in concert with others, regardless of whether such options are
written on one or more accounts or through one or more brokers. An exchange may
order the liquidation of positions found to
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<PAGE> 193
be in violation of those limits, and it may impose other sanctions or
restrictions. These position limits may restrict the number of options the Fund
may be able to write.
PURCHASING CALL AND PUT OPTIONS
(ALL FUNDS)
A Fund may purchase call options to protect (e.g., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options may be purchased for their leverage potential. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, a Fund can benefit from any significant
increase in the price of the underlying security to a greater extent than had it
invested the same amount in the security directly. However, because of the very
high volatility of option premiums, a Fund could bear a significant risk of
losing the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Conversely, put options may be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of a Fund's assets generally. Alternatively, put options may be purchased for
capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options. In any case, the purchase of
options for capital appreciation would increase a Fund's volatility by
increasing the impact of changes in the market price of the underlying
securities on a Fund's net asset value.
The Funds may purchase either listed or over-the-counter options.
OPTIONS ON STOCK INDEXES
(EMERGING GROWTH II FUND, INTERNATIONAL EQUITY II FUND, GROWTH AND INCOME II
FUND AND GROWTH II FUND)
Options on stock indices are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. Options are currently traded on The Chicago Board
Options Exchange, the New York Stock Exchange, the American Stock Exchange and
other exchanges.
Gain or loss to a Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an Exchange, or it
may let the option expire unexercised.
FOREIGN CURRENCY OPTIONS (INTERNATIONAL EQUITY II FUND)
The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than five percent of the Fund's net assets at
any given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the
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<PAGE> 194
Fund from time to time and over-the-counter options may also be purchased, but
only when the Adviser believes that a liquid secondary market exists for such
options, although there can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investment generally. See "Investment Practices and Risks -- Options,
Futures Contracts and Related Options" in the Prospectus.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
FUTURES CONTRACTS
(ALL FUNDS)
The Trust may engage in transactions involving futures contracts and
related options in accordance with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Trust and its Funds is
exempt from registration as a "commodity pool."
TYPES OF CONTRACTS. An interest rate futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of a
specific type of debt security at a specified future time and at a specified
price. A currency futures contract is similar except that the subject of the
contract is a specific currency. Although futures contracts call for delivery of
specified securities (or, in the case of currency futures contracts,
currencies), in most cases the contracts are closed out (by an offsetting
purchase or sale) prior to actual delivery, with the difference between the
contract price and the offsetting price paid in cash.
A stock index futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of cash equal to a specified dollar
amount times the difference between the stock index value at a specified time
and the price at which the futures contract is originally struck. A stock index
fluctuates with changes in the market values of the stocks included. No physical
delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in differences in
correlation of the futures contracts with movements in the value of the
securities being hedged.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto
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<PAGE> 195
Stock Exchange. Futures and futures options on the Nikkei Index are traded on
the CME and United States commodity exchanges may develop futures and futures
options on other indices of foreign securities. Futures and options on United
States devised index of foreign stocks are also being developed. Investments in
securities of foreign entities and securities denominated in foreign currencies
involve risks not typically involved in domestic investments, 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.
The International Equity II Fund may enter into futures contracts for
non-hedging purposes, subject to applicable law.
INITIAL AND VARIATION MARGIN. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, a Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when a Fund purchases a futures contract and the price of the
underlying security or index rises, that position increases in value, and the
Fund receives from the broker a variation margin payment equal to that increase
in value. Conversely, where the Fund purchases a futures contract and the value
of the underlying security or index declines, the position is less valuable, and
the Fund is required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
FUTURES STRATEGIES. When a Fund anticipates a significant market or market
sector advance, the purchase of a futures contract affords a hedge against not
participating in the advance at a time when the Fund is not fully invested
("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. A Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
For example, if the Government II Fund holds long-term U.S. Government
securities, and a rise in long-term interest rates is anticipated, it could, in
lieu of selling its portfolio securities, sell futures contracts for similar
long-term securities. If interest rates increased and the value of the Fund's
securities declined during the period the contracts were outstanding, the value
of the Fund's futures contracts should increase, thereby protecting the Fund by
preventing net asset value from declining as much as it otherwise would have.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
over-the-counter option purchased by the
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Government II Fund, the Fund could experience a loss of all or part of the value
of the option. Transactions are entered into by a Fund only with brokers or
financial institutions deemed creditworthy by the Adviser.
Persons who trade in futures contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, whose business activity involves
investment or other commitment in securities or other obligations, use the
futures market to offset unfavorable changes in value that may occur because of
fluctuations in the value of the securities and obligations held or committed to
be acquired by them or fluctuations in the value of the currency in which the
securities or obligations are denominated. Debtors and other obligors may also
hedge the interest cost of their obligations. The speculator, like the hedger,
generally expects neither to deliver nor to receive the financial instrument
underlying the futures contract, but, unlike the hedger, hopes to profit from
fluctuations in prevailing interest rates or currency exchange rates.
Each Fund's futures transactions will be entered into for traditional
hedging purposes; that is, futures contracts will be sold to protect against a
decline in the price of securities or currencies that the Fund owns, or futures
contracts will be purchased to protect a Fund against an increase in the price
of securities of currencies it has committed to purchase or expects to purchase.
The International Equity II Fund may also enter into futures transactions for
non-hedging purposes, subject to applicable law.
SPECIAL RISKS ASSOCIATED WITH FUTURES TRANSACTIONS. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the portfolio of
securities being hedged diverges from the securities upon which the futures
contract is based. If the price of the futures contract moves less than the
price of the securities being hedged, the hedge will not be fully effective, but
if the price of the securities being hedged moves in an unfavorable direction,
the Fund would be in a better position than if it had not tried to hedge.
However, if the price of the security being hedged moves in a favorable
direction, the hedge will partially offset this advantage. To compensate for the
imperfect correlation of movements of prices of a futures contract and the
securities being hedged, a Fund may buy or sell futures contracts in a greater
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the securities being hedged has been greater than the
historical volatility of the securities underlying the futures contract, or may
buy or sell fewer futures contracts if the historical volatility of the
securities being hedged is less than the historical volatility of the securities
underlying the futures contract. Nevertheless, the price of the futures contract
may move less than the price of the securities which are the subject of the
hedge (or the value of futures contracts and securities held by a Fund may
decline simultaneously), resulting in the hedge not being fully effective.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to initial margin depository and maintenance
requirements. Rather than meet additional margin deposit requirements, investors
may close futures contracts through offsetting transactions, which could distort
the normal relationship between the futures market and the securities underlying
the futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although a Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures
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position and, in the event of adverse price movement, a Fund would continue to
be required to make daily payments of variation margin. Since the securities
being hedged will not be sold until the related futures contract is sold, an
increase, if any, in the price of the securities may to some extent offset
losses on the related futures contract. In such event, the Fund would lose the
benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Advisers' ability
correctly to predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in futures
contracts. In such cases, if the Fund has insufficient cash, it may have to sell
portfolio securities at a time when it is disadvantageous to do so in order to
meet the daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that a Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed 5% of the fair market value of a Fund's assets. The International Equity
II Fund may enter into transactions in futures contracts and options on futures
contract only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes provided the aggregate initial
margin and premiums on such non-hedging positions does not exceed 5% of the
liquidation value of the Fund's assets. Relative to the purchase or sale of
futures contracts by a Fund, an amount of cash, cash equivalents or U.S.
Government securities equal to the market value of the obligation under the
futures contracts (less any related margin deposits) will be maintained in a
segregated account with the Custodian.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS. Each of the Exchanges
has established limitations governing the maximum number of call or put options
on the same underlying security or futures contract (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more accounts or through
one or more brokers). Option positions of all investment companies advised by
the Adviser are combined for purposes of these limits. An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Fund may sell.
Although a Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, there is no guarantee that the price of the
securities being hedged will, in fact, correlate with the price movements in a
futures contract and thus provide an offset to losses on the futures contract.
A Fund pays commissions on futures contracts and options transactions.
OPTIONS ON FUTURES CONTRACTS (ALL FUNDS)
A Fund may also purchase and sell options on futures contracts which are
traded on an Exchange. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the option
period. As a seller of an option on a futures contract, a Fund is subject to
initial margin and maintenance requirements similar to those applicable to
futures contracts. In addition, net option premiums received by a Fund are
required to be included as initial margin deposits. When an option on a futures
contract is exercised, delivery of the futures position is accompanied by
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cash representing the difference between the current market price of the futures
contract and the exercise price of the option. A Fund may purchase put options
on futures contracts in lieu of, and for the same purposes as, the sale of a
futures contract. The purchase of call options on futures contracts is intended
to serve the same purpose as the actual purchase of the futures contract.
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on stock index futures. The Adviser will not
purchase options on stock index futures on any Exchange unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risks in connection with options on futures transactions are no greater than
the risks in connection with stock index futures transactions. Compared to the
use of stock index futures, the purchase of options on stock index futures
involves less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However there may be
circumstances, such as when there is no movement in the level of the index, when
the use of an option on a stock index future would result in a loss to the Fund
when the use of a stock index future would not.
FORWARD COMMITMENTS (GOVERNMENT II FUND ONLY)
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase continues. Since the
market value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of the Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to sell continues. By entering into
a Forward Commitment sale transaction, the Fund forgoes or reduces the potential
for both gain and loss in the security which is being hedged by the Forward
Commitment sale.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY
(INTERNATIONAL EQUITY II FUND)
A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. The Fund may either accept or make delivery of the currency at the
maturity of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. The Fund
engages in forward currency transactions in anticipation of, or to protect
itself against fluctuations in exchange rates. The Fund might sell a particular
foreign currency forward, for example, when it holds bonds denominated in that
currency but anticipates, and seeks to be protected against, decline in the
currency against the U.S. dollar. Similarly, the Fund might sell the U.S. dollar
forward when it holds bonds denominated in U.S. dollars but anticipates, and
seeks to be protected against, a decline in the U.S. dollar relative to other
currencies. Further, the Fund might purchase a currency forward to "lock in" the
price of securities denominated in that currency which it anticipates
purchasing.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset,
that is the subject of the hedge, generally will not be precise. In addition,
the Fund may not always be able to enter into foreign currency forward contracts
at attractive prices and this will limit the Fund's ability to use such contract
to hedge or cross-hedge its assets. Also, with
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regard to the Fund's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying the Fund's cross-hedges and the movements in the exchange rates of
foreign currencies in which the Fund's assets that are the subject of such
cross-hedges are denominated.
Forward contracts are traded in an interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement and is consummated without
payment of any commission. The Fund, however, may enter into forward contracts
with deposit requirements or commissions.
A put option on currency gives the Fund, as purchaser, the right (but not
the obligation) to sell a specified amount of currency at the exercise price
until the expiration of the option. A call option gives the Fund, as purchaser,
the right (but not the obligation) to purchase a specified amount of currency at
the exercise price until its expiration. The Fund might purchase a currency put
option, for example, to protect itself during the contract period against a
decline in the value of a currency in which it holds or anticipates holding
securities. If the currency's value should decline, the loss in currency value
should be offset, in whole or in part, by an increase in the value of the put.
If the value of the currency instead should rise, any gain to the Fund would be
reduced by the premium it had paid for the put option. A currency call option
might be purchased, for example, in anticipation of, or to protect against, a
rise in the value of a currency in which the Fund anticipates purchasing
securities.
The Fund's ability to establish and close out positions in foreign currency
options is subject to the existence of a liquid market. There can be no
assurance that a liquid market will exist for a particular option at any
specific time. In addition, options on foreign currencies are affected by all of
those factors that influence foreign exchange rates and investment generally.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Exchange
markets for options on foreign currencies exist but are relatively new, and the
ability to establish and close out positions on the exchanges is subject to
maintenance of a liquid secondary market. Closing transactions may be effected
with respect to options traded in the over-the-counter ("OTC") markets
(currently the primary markets for options on foreign currencies) only by
negotiating directly with the other party to the option contract or in a
secondary market for the option if such market exists. Although the Fund intends
to purchase only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. In such event, it may not be possible to
effect closing transactions with respect to certain options, with the result
that the Fund would have to exercise those options which it has purchased in
order to realize any profit. The staff of the Securities and Exchange Commission
("SEC") has taken the position that, in general, purchased OTC options and the
underlying securities used to cover written OTC options are illiquid securities.
However, the Fund may treat as liquid the underlying securities used to cover
written OTC options, provided it has arrangements with certain qualified dealers
who agree that the Portfolio may repurchase any option it writes for a maximum
price to be calculated by a predetermined formula. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
INTEREST RATE TRANSACTIONS (INTERNATIONAL EQUITY II FUND)
Among the hedging transactions into which the Fund may enter are interest
rate swaps and the purchase or sale of interest rate caps and floors. The Fund
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as a hedge and not
as a speculative investment. The Fund will not sell interest rate caps or floors
that it does not own. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments. The purchase of
an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a
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predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted but, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as these hedging transactions are entered into for good faith hedging purposes,
the investment adviser and the Fund believe such obligations do not constitute
senior securities and, accordingly will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by a custodian that satisfies the
requirements of the 1940 Act. The Fund will not enter into any interest rate
swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the highest rating
category of at least one nationally recognized rating organization at the time
of entering into such transaction. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing swap documentation. As a result, the
swap market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
New options and futures contracts and various combinations thereof continue
to be developed and the Fund may invest in any such options and contracts as may
be developed to the extent consistent with its investment objective and
regulatory requirements applicable to investment companies.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS (INTERNATIONAL EQUITY II FUND)
Use of many hedging and other strategic transactions including currency and
market index transactions by the Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with its
custodian, or a designated sub-custodian, to the extent the Fund's obligations
are not otherwise "covered" through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by the Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade debt obligations at least equal to the current amount of the obligation
must be segregated with the custodian or sub-custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. A call option on
securities written by the Fund, for example, will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by the
Fund will require the Fund to segregate liquid high grade debt obligations equal
to the exercise price. Except when the Fund enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the Fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency, liquid securities
denominated in that currency equal to the Fund's obligations or to segregate
liquid high grade debt obligations equal to the amount of the Fund's
obligations.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Fund will
not be required to do so. As a result, when the Fund sells these instruments it
will
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segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt or equity securities or other acceptable
assets. The Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap on
a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Hedging and other strategic transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. The
Fund may also enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding obligation in
related options and hedging and other strategic transactions. The Fund could
purchase a put option, for example, if the strike price of that option is the
same or higher than the strike price of a put option sold by the Fund. Moreover,
instead of segregating assets if it holds a futures contract or forward
contract, the Fund could purchase a put option on the same futures contract or
forward contract with a strike price as high or higher than the price of the
contract held. Other hedging and other strategic transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it terminates
prior to that time, assets equal to any remaining obligation would need to be
segregated.
LOANS OF PORTFOLIO SECURITIES
Each of the Funds may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that cash equal to 100% of the
market value of the securities loaned is deposited by the borrower with the
particular Fund and is marked to market daily. While such securities are on
loan, the borrower is required to pay the Fund any income accruing thereon.
Furthermore, the Fund may invest the cash collateral in portfolio securities
thereby increasing the return to the Fund as well as increasing the market risk
to the Fund. A Fund will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its shares are
qualified for sale. However, should the Fund believe that lending securities is
in the best interests of the Fund's shareholders, it would consider withdrawing
its shares from sale in any such state.
Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. Each Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions which may not be changed
with respect to any Fund without the approval of the holders of a majority of
the outstanding shares of such Fund. Such majority (as defined by the 1940 Act)
is the lesser of (i) 67% or more of the voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding voting securities. The percentage limitations need only be
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met at the time the investment is made or after relevant action is taken. These
restrictions provide that a Fund shall not:
1. Make any investment in real estate, commodities or commodities
contracts, except that each Fund may engage in transactions in forward
commitments, futures contracts, foreign currency futures and related
options and may purchase or sell securities which are secured by real
estate or interests therein; or issued by companies; including real estate
investment trusts, which invest in real estate or interests therein; and
the International Equity II Fund may engage in currency transactions;
2. Lend money except by the purchase of bonds or other debt
obligations of types commonly offered publicly or privately and purchased
by financial institutions, including investments in repurchase agreements.
A Fund will not invest in repurchase agreements maturing in more than seven
days (unless subject to a demand feature) if any such investment, together
with any illiquid securities (including securities which are subject to
legal or contractual restrictions on resale) held by the Fund, exceeds 10%
of the market or other fair value of its total net assets (15% in the case
of the Emerging Growth II Fund and the International Equity II Fund);
provided, however, that with respect to the Emerging Growth II Fund, the
International Equity II Fund, the Growth II Fund and the Growth and Income
II Fund, illiquid securities shall exclude shares of other open-end
investment companies owned by the Fund but include the Fund's pro rata
portion of the securities and other assets owned by any such company. See
"Repurchase Agreements";
3. Underwrite securities of other companies, except insofar as a Fund
might be deemed to be an underwriter for purposes of the Securities Act of
1933 in the resale of any securities owned by the Fund;
4. Lend its portfolio securities in excess of 10% (15% in the case of
the Emerging Growth II Fund and the International Equity II Fund) of its
total assets, both taken at market value, provided that any loans shall be
in accordance with the guidelines established for such loans by the
Trustees as described under "Loans of Portfolio Securities," including the
maintenance of collateral from the borrower equal at all times to the
current market value of the securities loaned;
5. With respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer (except obligations of the U.S.
Government, its agencies or instrumentalities and repurchase agreements
secured thereby) or purchase more than 10% of the outstanding voting
securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies by the
Emerging Growth II Fund, the International Equity II Fund, the Growth II
Fund and the Growth and Income II Fund, to the extent permitted by rule or
order of the Securities and Exchange Commission ("SEC") exempting them from
the limitations imposed by Section 12(d)(1) of the 1940 Act;
6. Invest more than 25% of the value of its total assets in securities
of issuers in any particular industry; provided, however, that with respect
to the Emerging Growth II Fund, the International Equity II Fund, the
Growth II Fund and the Growth and Income II Fund, this limitation shall
exclude shares of other open-end investment companies owned by the Fund but
include the Fund's pro rata portion of the securities and other assets
owned by any such company. (This does not restrict any of the Funds from
investing in obligations of the U.S. Government and repurchase agreements
secured thereby);
7. With respect to all Funds other than the Emerging Growth II Fund
and the International Equity II Fund, borrow in excess of 10% of the market
or other fair value of its total assets, or pledge its assets to an extent
greater than 5% of the market or other fair value of its total assets,
provided that so long as any borrowing exceeds 5% of the value of the
Fund's total assets, the Fund shall not purchase portfolio securities. Any
such borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. With respect to
the Emerging Growth II Fund, borrow money except temporarily from banks to
facilitate payment of redemption requests and then only in amounts not
exceeding 33 1/3% of its net assets, or pledge more than 10% of its net
assets in connection with permissible borrowings or purchase additional
securities when money borrowed exceeds 5% of its net assets. With respects
to the International Equity II Fund, borrow money from banks on a secured
or
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unsecured basis, in excess of 25% of the value of its total assets.
Deposits in escrow in connection with the writing of covered call or
secured put options, or in connection with the purchase or sale of forward
contracts, futures contracts, foreign currency futures and related options,
are not deemed to be a pledge or other encumbrance. This restriction shall
not prevent the International Equity II Fund from entering into reverse
repurchase agreements, provided that reverse repurchase agreements and any
transactions constituting borrowing by the Fund may not exceed 33 1/3% of
the Fund's net assets. The International Equity II Fund may not mortgage or
pledge its assets except to secure borrowings permitted under this
restriction; and
8. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit a Fund from (i) making and
collateralizing any permitted borrowings, (ii) making any permitted loans
of its portfolio securities, or (iii) entering into repurchase agreements,
utilizing options, futures contracts and foreign currency futures and
options thereon, forward contracts, forward commitments and other
investment strategies and instruments that would be considered "senior
securities" but for the maintenance by the Fund of a segregated account
with its custodian or some other form of "cover."
The Trust has adopted additional investment restrictions with respect to
the Funds, which may be changed by the Trustees without a vote of shareholders.
These restrictions provide that a Fund shall not:
1. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by a Fund of an initial or
variation margin in connection with forward contracts, futures contracts,
foreign currency futures or related option transactions is not considered
the purchase of a security on margin;
2. Invest in securities of any company if any officer or trustee of
the Trust or of the Adviser owns more than 1/2 of 1% of the outstanding
securities of such company, and such officers and trustees own more than 5%
of the outstanding securities of such issuer;
3. Invest in oil or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Growth II Fund, the
Growth and Income II Fund, the International Equity II Fund and the
Emerging Growth II Fund may invest in the securities of companies which
invest in or sponsor such programs;
4. Invest in companies for the purpose of acquiring control or
management thereof;
5. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except through
purchase in the open market in a transaction involving no commission or
profit to a sponsor or dealer (other than the customary brokers commission)
or as part of a merger, consolidation or other acquisition, except that the
International Equity II Fund, the Emerging Growth II Fund, the Growth II
Fund and the Growth and Income II Fund, may acquire shares of other
open-end investment companies to the extent permitted by rule or order of
the SEC exempting them from the limitations imposed by Section 12(d)(1) of
the 1940 Act;
6. Purchase an illiquid security if, as a result of such purchase,
more than 10% of the Fund's net assets (15% in the case of the Emerging
Growth II Fund and the International Equity II Fund) would be invested in
such securities; provided, however, that with respect to the International
Equity II Fund and the Emerging Growth II Fund, the Growth II Fund and the
Growth and Income II Fund, this limitation shall exclude shares of other
open-end investment companies owned by the Fund but include the Fund's pro
rata portion of the securities and other assets owned by any such company.
Illiquid securities include securities subject to legal or contractual
restrictions on resale, which include repurchase agreements which have a
maturity of longer than seven days. This policy does not apply to
restricted securities eligible for resale pursuant to Rule 144A under the
1933 Act which the Trustees or the Adviser under Board-approved guidelines,
may determine are liquid nor does it apply to other securities for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists;
18
<PAGE> 204
7. Invest more than 5% of its assets in companies having a record
together with predecessors, of less than three years' continuous operation,
except that the International Equity II Fund, the Emerging Growth II Fund,
the Growth II Fund and the Growth and Income II Fund, may acquire shares of
other open-end investment companies to the extent permitted by rule or
order of the SEC exempting them from the limitations imposed by Section
12(d)(1) of the 1940 Act;
8. Except for the International Equity II Fund, purchase any security
issued by any company deriving more than 25% of its gross revenues from the
manufacture of alcohol or tobacco;
9. Make short sales of securities, unless at the time of sale a Fund
owns or has the right to acquire at no additional cost securities identical
to those sold short; provided that this prohibition does not apply to the
writing of options or the sale of forward contracts, futures, foreign
currency futures or related options; and
10. Invest more than 5% of its net assets in warrants or rights valued
at the lower of cost or market, nor more than 2% of its net assets in
warrants or rights (valued on such basis) which are not listed on the New
York or American Stock Exchanges. Warrants or rights acquired in units or
attached to other securities are not subject to the foregoing limitations.
FOREIGN INVESTMENTS FOR FUNDS OTHER THAN THE INTERNATIONAL EQUITY II FUND.
The Growth II Fund, the Growth and Income II Fund and the Emerging Growth II
Fund may not invest in the securities of a foreign issuer if, at the time of
acquisition, more than 20% of the value of the Fund's total assets would be
invested in such securities.
FUTURES CONTRACTS AND OPTIONS. In addition, the Growth and Income II Fund
and the Growth II Fund may not write, purchase or sell puts, calls or
combinations thereof, except that each Fund may (a) write covered call options
with respect to any part or all of its portfolio securities, write secured put
options, or enter into closing purchase transactions with respect to such
options, (b) purchase and sell put options to the extent that the premiums paid
for all such options do not exceed 10% of its total assets and only if the Fund
owns the securities covered by the put option at the time of purchase, and (c)
engage in futures contracts and related options transactions as described
herein. The Emerging Growth II Funds, the International Equity II Fund, the
Growth II Fund and the Growth and Income II Fund may purchase put and call
options which are purchased on an exchange in other markets, or currencies and,
as developed from time to time, various futures contracts on market indices and
other instruments. Purchasing options may increase investment flexibility and
improve total return, but also risks loss of the option premium if an asset the
Fund has the option to buy declines in value.
The Government II Fund may not write, purchase or sell puts, calls or
combinations thereof, except that the Fund may (a) write covered or fully
collateralized call options, write secured put options, and enter into closing
or offsetting purchase transactions with respect to such options, (b) purchase
and sell options to the extent that the premiums paid for all such options owned
at any time do not exceed 10% of its total assets, and (c) engage in futures
contracts and related options transactions as described herein.
The Trust has made an undertaking with certain states that at least 30 days
prior to any change by a Fund in its goal, the Fund will provide written notice
to shareholders of such change and will waive any fee if the shareholder redeems
or exchanges the account. The Trust has made an undertaking with a certain state
that with respect to each Fund, Rule 144A securities will be included as an
illiquid security to meet the 10% limitation on investing in illiquid
securities. The Trust has undertaken with a certain state that each Fund (except
the Government II Fund) limit its investments in restricted securities,
unseasoned issuers and not readily marketable securities to 15% of its total
assets; provided, however that its investments in restricted securities will be
limited to a maximum of 10% of total assets. Each Fund (except the Government II
Fund) has undertaken with a certain state to limit its investments in the
securities of one or more real estate investment trusts to 10% of its total
assets. The Growth II Fund and the Growth and Income II Fund have undertaken not
to invest in the securities of one or more investment companies if by reason
thereof the value of its aggregate investment in such securities would exceed
15% of its total assets.
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<PAGE> 205
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) National
Instruments Corp. and Central and Southwest Corporation.(1)
Age: 58
A. BENTON COCANOUGHER, Trustee. Texas A & M University, 601 Blocker Bldg.,
College Station, Texas 77843-4113. Dean of College of Business Administration
and Graduate School of Business of Texas A & M University; Director of Randall's
Food Markets, Inc.; Director of First American Bank; Director of First American
Savings Bank.(1)
Age: 57
STEPHEN RANDOLPH GROSS, Trustee. 2625 Cumberland Parkway, Suite 400,
Atlanta, Georgia 30339. Managing Partner and Vice President of Gross, Collins &
Cress, P.C. (accounting firm); Director of Charter Bank & Trust.(1)
Age: 48
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), Medical Polymers, Inc. 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), Electrosource, Inc.
(lead storage/battery manufacturer), Carbon Fuels Corp. (coal refinery) and
Vista Chemical Co.(1)(2)
Age: 83
ROBERT D.H. HARVEY, Trustee. Nations Bank, 10 Light Street, P.O. Box 987,
Baltimore, Maryland 21203. Chairman of Maryland Science Center; formerly
Chairman of the Board, Chief Executive Officer, Member of the Advisory Board and
Vice Chairman of the Board of Maryland National Bank, Baltimore, Maryland (bank
holding company).(1)
Age: 75
JEFFREY B. LANE,* Trustee. 1345 Avenue of the Americas, New York, New York
10105. President, Director and Member of the Executive Committee of Smith Barney
International Inc.; Vice Chairman and Director of Smith Barney Inc.; Director of
the Long Island Jewish Medical Center, ICI Mutual Insurance Group and Woodmere
Academy; formerly President and Director of Primerica Holdings, Inc.
Age: 53
ALAN G. MERTEN, Trustee. Johnson Graduate School of Management, 303 Malott
Hall, Cornell University, Ithaca, New York 14853. The Anne and Elmer Lindseth
Dean of Johnson Graduate School of Management of Cornell University; Director of
Comshare, Inc. (information technology), and Tompkins County Trust Company,
Ithaca, New York.(1)
Age: 54
STEVEN MULLER,* Trustee. 1619 Massachusetts Avenue, N.W., Suite 711,
Washington, DC 20036. Chairman of The 21st Century Foundation (public affairs);
President Emeritus of The Johns Hopkins University; Director of Alex. Brown &
Sons, Inc., Beneficial Corporation (bank holding company), and Millipore
Corporation (bio-technology).(1)
Age: 68
20
<PAGE> 206
F. ROBERT PAULSEN, Trustee. 2801 N. Indian Ruins, Tucson, Arizona 85715.
Dean Emeritus and Professor Emeritus of Higher Education of The University of
Arizona; Director of American General Series Portfolio Co. (mutual fund).(1)(2)
Age: 73
R. RICHARDSON PETTIT, Trustee. Department of Finance, College of Business,
University of Houston, 4800 Calhoun, Houston, Texas 77204-6283. Duncan Professor
of Finance of the University of Houston; formerly Hanson Distinguished Professor
of Business of the University of Washington.(1)
Age: 53
DON G. POWELL,* Chairman of the Board, Trustee and President. 2800 Post Oak
Blvd., Houston, Texas 77056. Chairman, Chief Executive Officer and Director of
the Adviser; President, Chief Executive Officer and Director of VKAC and VK/AC
Holding. Director, Trustee or Managing General Partner of each of the Van Kampen
American Capital Funds and other open-end investment companies and closed-end
investment companies advised by the Adviser and its affiliates.(1)(2)(3)
Age: 56
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); Director of Allied Waste Industries (waste
management).(1)(2)
Age: 72
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.(1)(2)
Age: 79
BENJAMIN N. WOODSON, Trustee. 2727 Allen Parkway, Suite 460, Houston, Texas
77019-2115. Consultant; Director of Financial Securities Advisors, Inc.;
Director of Texas Commerce Bank; Director of Mitchell Energy and Development
Corp.; Chairman of the Board and Chief Executive Officer of American General
Corporation and Advisory Director of River Oaks Bank Division.(1)
Age: 87
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Trust by reason of his position with the Adviser. Mr. Lane
is an interested person of the Distributor, the investment subadviser to one
of the Common Sense II Funds, and the Trust by reason of his position with
broker/dealer affiliates of Travelers Group Inc. Mr. Muller is an interested
person of the Trust by reason of his position as director of Alex Brown &
Sons, Inc., a registered broker/dealer.
OFFICERS
GERALD BAXTER, President. 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0062. Vice President, Associate General Counsel and Secretary of
Primerica Financial Services. Formerly, partner with Trotter, Smith & Jacobs.
Age: 44
STEPHEN L. BOYD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President -- Portfolio Manager of the Adviser.(3)
Age: 55
JAMES CONHEADY, Vice President. 388 Greenwich Street, New York, New York
10013. Managing Director of Smith Barney. Formerly, First Vice President of
Drexel Burnham.
Age: 60
21
<PAGE> 207
HUEY P. FALGOUT, JR. Assistant Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Assistant Secretary of the Adviser. Formerly
associate with Johnson and Gibbs.(3)
Age: 32
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Assistant General Counsel and Secretary of the
Adviser.(3)
Age: 42
JAMES A. GILLIGAN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President -- Portfolio Manager of the Adviser. Formerly Security
Analyst of the Adviser.(3)
Age: 37
DAVID C. JOHNSON, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Vice President of the Adviser and an agent of Van Kampen
American Capital Investment Advisory Corp., an affiliate of the Adviser.
Age: 42
GARY M. LEWIS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President -- Portfolio Manager of the Adviser.(3)
Age: 42
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant Controller.(3)
Age: 36
DENNIS J. MCDONNELL, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. President, Chief Operating Officer and a Director of the
Adviser. Director of VK/AC Holding and VKAC.(3)
Age: 53
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(3)
Age: 49
RONALD A. NYBERG, Vice President. One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Executive Vice President, General Counsel and Secretary of VKAC.
Executive Vice President and a Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.(3)
Age: 42
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income and
Director of the Adviser.(3)
Age: 49
GREGORY PITTS, Vice President. 3100 Breckinridge Blvd., Bldg. 200, Duluth,
Georgia 30199-0062. Senior Vice President of PFS Shareholder Services.
Age: 33
JOHN R. REYNOLDSON, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Investment Vice President of the Adviser.(3)
Age: 42
JEFFREY RUSSELL, Vice President. 388 Greenwich Street, New York, New York
10013. Managing Director of Smith Barney. Formerly, Vice President of Drexel
Burnham.
Age: 38
22
<PAGE> 208
ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
the Adviser; Executive Vice President of VKAC.(3)
Age: 53
DAVID R. TROTH, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of the Adviser.(3)
Age: 62
D. RICHARD WILLIAMS, Vice President. 3120 Breckinridge Blvd., Duluth,
Georgia 30199-0001. Chief Executive Officer and General Manager and Executive
Committee Member of the Distributor; President, General Manager, Executive
Committee Member and Chief Executive Officer of the Transfer Agent; President of
CSCS; Chief Financial Officer and Treasurer of Primerica Financial; Director,
Chief Executive Officer and Executive Committee Member of PFS Investments Inc.;
Director and Chief Executive Officer of PFS Distributors, Inc.; President Chief
Executive Officer and Director of PFS Asset Management, Inc. and PFS Services,
Inc.; President and Director of PFS Custodial Services, Inc.; Vice Chairman,
Executive Committee Member, Investment Committee Member, Co-Chief Executive
Officer, Chief Financial Officer and Director of Primerica Life Insurance
Company.
Age: 39
J. DAVID WISE, Assistant Secretary. 2800 Post Oak Blvd., Houston, Texas
77056. Vice President, Associate General Counsel, Compliance Review Officer and
Assistant Secretary of the Adviser.(4)
Age: 52
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; President and Chief Operating
Officer of Van Kampen American Capital Services, Inc.; Executive Vice President
and Chief Operating Officer of Van Kampen American Capital Trust Company;
Executive Vice President of Van Kampen American Capital Shareholder Services,
Inc.(3)
Age: 51
- ---------------
(1) A director of American Capital Bond Fund, Inc., American Capital Convertible
Securities, Inc. and American Capital Income Trust, closed-end investment
companies advised by the Adviser.
(2) Managing General Partner of American Capital Exchange Fund, an open-end
investment company advised by the Adviser.
(3) An officer and/or director/trustee of other investment companies advised by
the Adviser.
The Trustees and officers of the Trust as a group own less than one percent
of the outstanding shares of the Trust. The Trustees who are not affiliated with
the Adviser or Distributor initially will be compensated by the Trust at the
annual rate of $5,320 plus a fee of $360 per day for each Board meeting
attended. During the fiscal period ended October 31, 1995, the Trustees who were
not affiliated with the Adviser received as a group $22,505, $21,775, $21,662,
$6,800, and $6,640 in Trustees' fees from Growth Fund II, Growth and Income Fund
II, Government Fund II, Emerging Growth Fund II and International Equity Fund
II, respectively, in addition to certain out-of-pocket expenses.
23
<PAGE> 209
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL(1)
COMPENSATION
PENSION OR FROM
RETIREMENT REGISTRANT
AGGREGATE COMPENSATION BENEFITS AND
FROM REGISTRANT ACCRUED AS FUND COMPLEX
--------------------------- PART OF FUND PAID TO
NAME OF PERSON EM G G/I GVT INT EXPENSES DIRECTORS
- ------------------------------ ----- ------ ------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Donald M. Carlton......... $ 300 $1,565 $1,525 $1,505 $ 280 N/A $ 36,000
Dr. A. Benton Cocanougher..... 440 1,715 1,665 1,645 420 N/A 39,500
Stephen Randolph Gross........ 460 1,835 1,770 1,750 440 N/A 42,000
Dr. Norman Hackerman.......... 440 1,715 1,665 1,645 420 N/A 40,000
Robert D. H. Harvey........... 460 1,835 1,770 1,750 440 N/A 42,000
Dr. Alan G. Merten............ 380 1,655 1,605 1,585 360 N/A 38,000
Dr. Steven Muller............. 440 1,715 1,665 1,645 420 N/A 40,000
Dr. F. Robert Paulsen......... 520 1,916 1,851 1,831 500 N/A 45,000
Dr. R. Richardson Pettit...... 380 1,655 1,605 1,585 360 N/A 38,000
Alan B. Shepard, Jr........... 460 1,878 1,813 1,792 440 N/A 43,500
Miller Upton.................. 440 1,715 1,665 1,645 420 N/A 39,500
Benjamin N. Woodson........... 380 1,475 1,435 1,415 360 N/A 34,000
</TABLE>
- ---------------
(1) Reflects thirteen investment companies in the fund complex. Amounts
reflected are for the calendar year ended December 31, 1995.
Legend:
<TABLE>
<S> <C>
Em = Emerging Growth II Fund
G = Growth II Fund
G/I = Growth and Income II Fund
GVT = Government II Fund
Int = International Equity II Fund
</TABLE>
INVESTMENT ADVISORY AGREEMENT
The Trust and the Adviser are parties to a separate Investment Advisory
Agreement for each Fund (other than the Emerging Growth II Fund and the
International Equity II Fund), dated December 20, 1994 and for the Emerging
Growth II Fund and the International Equity II Fund, dated February 21, 1995
(each an "Advisory Agreement" and together, the "Advisory Agreements"). Under
each Fund's Advisory Agreement, the Trust retains the Adviser to manage the
investment of the Fund's assets and to place orders for the purchase and sale of
its portfolio securities. The Adviser is responsible for obtaining and
evaluating economic, statistical, and financial data and for formulating and
implementing investment programs in furtherance of each Fund's investment
objectives. The Adviser also furnishes at no cost to the Trust (except as noted
herein) the services of sufficient executive and clerical personnel for the
Trust as are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation materials. In addition,
the Adviser furnishes at no cost to the Trust the services of a President of the
Trust, one or more Vice Presidents as needed, and a Secretary.
Under each Fund's Advisory Agreement, the Trust bears the cost of its
accounting services, which includes maintaining its financial books and records
and calculating the daily net asset value of each Fund. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among all
investment companies advised or subadvised by the Adviser. The Trust also pays
transfer agency fees, distribution fees, service fees, custodian fees, legal
fees, the costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser.
The Trust retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under the
relevant Advisory Agreement, the Trust pays the Adviser an
24
<PAGE> 210
annual fee for the Emerging Growth II Fund, the Growth and Income II Fund and
the Growth II Fund, calculated separately for each Fund, at the rate of 0.65% of
the first $1 billion of the Fund's average daily net assets; 0.60% of the next
$1 billion of the Fund's average daily net assets; 0.55% of the next $1 billion
of the Fund's average daily net assets; 0.50% of the next $1 billion of the
Fund's average daily net assets; and 0.45% of the Fund's average daily net
assets in excess of $4 billion. The Trust pays the Adviser an annual fee for the
International Equity II Fund at the rate of 1.00% of the Fund's average daily
net assets. This fee is higher than that charged by most other mutual funds but
the Trust believes it is justified by the special international nature of the
Fund and is not necessarily higher than the fees charged by certain mutual funds
with investment objectives and policies similar to those of the Fund. The
Adviser has entered into a subadvisory agreement dated February 21, 1995 (the
"Subadvisory Agreement") with the Subadviser to assist it in performing its
investment advisory functions. Pursuant to the Subadvisory Agreement, the
Subadviser receives on an annual basis 50% of the compensation received by the
Adviser from the International Equity II Fund. The Trust pays the Adviser an
annual fee for the Government II Fund at the rate of 0.60% of the first $1
billion of the Fund's average daily net assets; 0.55% of the next $1 billion of
the Fund's average daily net assets; 0.50% of the next $1 billion of the Fund's
average daily net assets; 0.45% of the next $1 billion of the Fund's average
daily net assets; 0.40% of the next $1 billion of the Fund's average daily net
assets; and 0.35% of the Fund's average daily net assets in excess of $5
billion.
The average daily net assets of each Fund are determined by taking the
average of all of the determinations of net asset value of such Fund for each
business day during a given calendar month. Such fee is payable for each
calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any direct
or indirect majority-owned subsidiary of VKAC in connection with the purchase
and sale of portfolio investments of the Trust, less any direct expenses
incurred by such person in connection with the purchase and sale of portfolio
investments of the Trust, less any direct expense incurred by the Adviser or
such person under common control with the Adviser in connection with obtaining
such payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Trust's benefit, and to advise
the Trustees of any other commissions, fees, brokerage or similar payments which
may be possible under applicable laws for the Adviser or any direct or indirect
majority-owned subsidiary of VKAC to receive in connection with the Trust's
portfolio transactions or other arrangements which may benefit the Trust.
The following table shows expenses paid under the relevant investment
advisory agreement during the periods noted below:
<TABLE>
<CAPTION>
GROWTH
AND GOVERNMENT
GROWTH II INCOME II II
--------- --------- ----------
<S> <C> <C> <C>
November 1, 1994 through October 31, 1995............. $ 189,060 $ 115,168 $ 71,599
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING
EQUITY GROWTH
II II
------------- -------
<S> <C> <C>
February 21, 1995 through October 31, 1995........................ $35,227 $47,662
</TABLE>
Each Fund's Advisory Agreement also provides that, in the event the
ordinary business expenses of the Fund, for any fiscal year should exceed the
most restrictive expense limitation applicable in the states where the Trust's
shares are qualified for sale, unless waived, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year. Ordinary business expenses do not include (1) interest and
taxes, (2) brokerage commissions, (3) certain litigation and indemnification
expenses as described in each Advisory Agreement and (4) payments made by a Fund
pursuant to the Distribution Plans. Each Fund's Advisory Agreement also provides
that the Adviser shall not be liable to the Trust for any actions or omissions
if it acted in good faith without negligence or misconduct.
25
<PAGE> 211
Each Advisory Agreement has an initial term of two years and thereafter may
be continued from year to year if specifically approved at least annually (a)(i)
by the Trustees or (ii) by vote of a majority of the Fund's outstanding voting
securities, and (b) by the affirmative vote of a majority of the Trustees who
are not parties to the agreement or interested persons of any such party by
votes cast in person at a meeting called for such purpose. Each Fund's Advisory
Agreement provides that it shall terminate automatically if assigned and that it
may be terminated without penalty by either party on 60 days written notice.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets. The Trust has received from California (the state with the
most restrictive expense limitation) a waiver, which allows each Fund to exclude
shareholder service costs from the calculation of the expense limitation.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of each
Fund of the Trust pursuant to a written agreement, dated May 2, 1994 for the
Growth II Fund, the Growth and Income II Fund and the Government II Fund and
agreements dated February 21, 1995 for the Emerging Growth II Fund and the
International Equity II Fund (each, an "Underwriting Agreement" and together,
the "Underwriting Agreements"). The Distributor has entered into a selling
agreement with PFS Investments giving PFS Investments the exclusive right to
sell shares of each Fund of the Trust on behalf of the Distributor. The
Distributor's obligation is an agency or "best efforts" arrangement under which
the Distributor is required to take and pay only for such shares of each Fund as
may be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Underwriting Agreements are renewable from year to year if
approved (a) by the Trustees or by a vote of a majority of the Trust's
outstanding voting securities, and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Agreement or interested persons of any party
by votes cast in person at a meeting called for such purpose. The Underwriting
Agreements provide that they will terminate if assigned, and that they may be
terminated without penalty by either party on 60 days' written notice.
The following table shows commissions paid, amounts retained by the
Distributor and amounts received by PFS Investments under the relevant
Underwriting Agreement during the period from inception of the Emerging Growth
II Fund and International Equity II Fund (February 21, 1995) through the end of
the Trust's fiscal year end (October 31, 1995). With respect to Growth II Fund,
Growth and Income II Fund and Government II Fund, the amounts set forth below
are for the fiscal year 1995.
<TABLE>
<CAPTION>
GROWTH
AND INTERNATIONAL EMERGING
GROWTH INCOME GOVERNMENT EQUITY GROWTH
II II II II II
-------- -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C>
Total Underwriting Commissions...... $859,217 $492,551 $253,509 $147,459 $569,333
Amount Retained by Distributor...... $115,963 $ 67,581 $ 37,676 $ 11,149 $ 47,949
Amount Received by PFS
Investments....................... $743,254 $424,970 $215,833 $136,310 $521,384
</TABLE>
The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising. The Trust pays all
expenses attributable to the registrations of its shares under federal and state
blue sky laws, including registration and filing fees, the cost of preparation
of the prospectuses, related legal and auditing expenses, and the cost of
printing prospectuses for current shareholders.
DISTRIBUTION PLANS
The Trust has adopted a Class A distribution plan and a Class B
distribution plan (the "Class A Plan" and "Class B Plan," respectively) to
permit each Fund directly or indirectly to pay expenses associated with
servicing shareholders and in the case of the Class B Plan the distribution of
its shares (the Class A Plan and the Class B Plan are sometimes referred to
herein collectively as "Plans" and individually as a "Plan").
With respect to the Class A Plan, each Fund is authorized to pay the
Distributor, as compensation for the Distributor's services, a service fee at an
annual rate of 0.25% of the average daily net assets of the Fund's
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<PAGE> 212
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.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting shares of the
respective class. Any change in any of the Plans that would materially increase
the distribution or service expenses borne by the Trust requires shareholder
approval, voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as the Plan is in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
With respect to each Plan, the Trustees considered all compensation that
the Distributor would receive under the Plan and the Underwriting Agreement,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The Trustees also considered the
benefits that would accrue to the Distributor under each Plan in that the
Distributor would receive service fees and distribution fees and the Adviser
would receive advisory fees which are calculated based upon a percentage of the
average net assets of each Fund, which fees would increase if the Plans were
successful and each Fund attained and maintained significant asset levels.
For the Plan year ended October 31, 1995, the aggregate expenses for Common
Sense II Growth Fund under the Class A Plan were $28,641 or .25%, respectively,
of the Class A shares' average net assets. Such expenses were paid to reimburse
the Distributor for payments made to Service Organizations for servicing Fund
shareholders and for administering the Class A Plan. For the Plan year ended
October 31, 1995, the Fund's aggregate expenses under the Class B Plan were
$176,297 or 1.00% of the Class B shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $132,223 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 $44,074 for
fees paid to Service Organizations for servicing Class B shareholders and
administering the Class B Plan.
For the Plan year ended October 31, 1995, the aggregate expenses for Common
Sense II Growth and Income Fund under the Fund's Class A Plan were $18,742 or
0.25%, respectively, of the Class A shares'
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<PAGE> 213
average net assets. Such expenses were paid to reimburse the Distributor for
payments made to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. For the Plan year ended October 31, 1995, the
Fund's aggregate expenses under the Class B Plan were $102,215 or 1.00% of the
Class B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $76,661 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 $25,554 for fees paid to Service Organizations
for servicing Class B shareholders and administering the Class B Plan.
For the Plan year ended October 31, 1995, the aggregate expenses for Common
Sense II Government Fund under the Fund's Class A Plan were $16,075 or 0.25%,
respectively, of the Class A shares' average net assets. Such expenses were paid
to reimburse the Distributor for payments made to Service Organizations for
servicing Fund shareholders and for administering the Class A Plan. For the Plan
year ended October 31, 1995, the Fund's aggregate expenses under the Class B
Plan were $55,032 or 1.00% of the Class B shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$41,274 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
$13,758 for fees paid to Service Organizations for servicing Class B
shareholders and administering the Class B Plan.
For the Plan period February 21, 1995 through October 31, 1995, the
aggregate expenses for Common Sense II Emerging Growth Fund under the Fund's
Class A Plan were $11,480 or 0.19%, (not annualized) respectively, of the Class
A shares' average net assets. Such expenses were paid to reimburse the
Distributor for payments made to Service Organizations for servicing Fund
shareholders and for administering the Class A Plan. For the Plan period
February 21, 1995 through October 31, 1995, the Fund's aggregate expenses under
the Class B Plan were $27,405 or 0.75% (not annualized) of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $20,554 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 $6,851 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B Plan.
For the Plan period February 21, 1995 through October 31, 1995, the
aggregate expenses for Common Sense II International Equity Fund under the
Fund's Class A Plan were $6,290 or 0.17%, (not annualized) respectively, of the
Class A shares' average net assets. Such expenses were paid to reimburse the
Distributor for payments made to Service Organizations for servicing Fund
shareholders and for administering the Class A Plan. For the Plan period
February 21, 1995 through October 31, 1995, the Fund's aggregate expenses under
the Class B Plan were $7,546 or 0.75% (not annualized) of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $5,660 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 $1,886 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B Plan.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser (and, in the case of the International Equity II Fund, the
Adviser and the Subadviser) are responsible for decisions to buy and sell
securities for the Trust and for the placement of its portfolio business and the
negotiation of any commissions paid on such transactions. It is the policy of
the Advisers to seek the best security price available with respect to each
transaction. In over-the-counter transactions, orders are placed directly with a
principal market maker unless it is believed that a better price and execution
can be obtained by using a broker. Except to the extent that the Trust may pay
higher brokerage commissions for brokerage and research services (as described
below) on a portion of its transactions executed on securities exchanges, the
Adviser (and, in the case of the International Equity II Fund, the Adviser and
the Subadviser) seek the best security price at the most favorable commission
rate. From time to time, the Fund may place brokerage transactions with
affiliated persons of the Adviser and/or the Subadviser. In selecting
broker/dealers and in negotiating commissions, the Adviser (and, in the case of
the International Equity II Fund, the Adviser and the Subadviser) considers the
firm's reliability, the quality of its execution services on a continuing basis
and its financial condition. When more than one firm is believed to meet these
criteria,
28
<PAGE> 214
preference may be given to firms which also provide research services to the
Trust or the Adviser or Subadviser.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody), and (d)
furnishing other products or services that assist the Adviser or the Subadviser
in fulfilling their investment decision-making responsibilities.
Pursuant to provisions of the relevant Advisory Agreement, the Trustees
have authorized the Adviser and, with respect to the International Equity II
Fund, the Subadviser, to cause the Trust to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the Adviser and the Subadviser. The Adviser and the Subadviser are
of the opinion that the continued receipt of supplemental investment research
services from dealers is essential to their provision of high quality portfolio
management services to the Trust. The Adviser and the Subadviser undertake that
such higher commissions will not be paid by the Trust unless (a) the Adviser
(or, with respect to the International Equity II Fund, the Subadviser)
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Adviser's (or
the Subadviser's) overall responsibilities with respect to the accounts as to
which it exercises investment discretion, (b) such payment is made in compliance
with the provisions of Section 28(e) and other applicable state and federal
laws, and (c) in the opinion of the Adviser (or, with respect to the
International Equity II Fund, the Subadviser), the total commissions paid by the
Trust are reasonable in relation to the expected benefits to the Trust over the
long term. The investment advisory fee paid by the Fund under each Fund's
Advisory Agreement is not reduced as a result of the Adviser's (or the
Subadviser's) receipt of research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Trust as a factor in the selection of firms to execute portfolio
transactions for the Trust.
The Adviser and, with respect to the International Equity II Fund, the
Subadviser, place portfolio transactions for other advisory accounts including
other investment companies. Research services furnished by firms through which
the Trust effects its securities transactions may be used by the Adviser and the
Subadviser in servicing all of their accounts; not all of such services may be
used by the Advisers in connection with the Trust. In the opinion of the Adviser
and the Subadviser, the benefits from research services to the Funds of the
Trust and to the accounts managed by the Adviser or the Subadviser cannot be
measured separately. Because the volume and nature of the trading activities of
the accounts are not uniform, the amount of commissions in excess of the lowest
available rate paid by each account for brokerage and research services will
vary. However, in the opinion of the Adviser and the Subadviser, such costs to
the Trust will not be disproportionate to the benefits received by the Trust on
a continuing basis.
The Adviser and the Subadviser will seek to allocate portfolio transactions
equitably whenever concurrent decisions are made to purchase or sell securities
by the Trust and other accounts that the Adviser or the Subadviser may establish
in the future. In some cases, this procedure could have an adverse effect on the
price or the amount of securities available to the Trust. In making such
allocations among the Trust and other advisory accounts, the main factors
considered by the Adviser (or, with respect to the International Equity II Fund,
the Subadviser) are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
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<PAGE> 215
The following table summarizes for each Fund the total brokerage
commissions paid, the amount of commissions paid to brokers selected primarily
on the basis of research services provided to the Adviser (and its former
affiliate Common Sense Investment Advisers) and the value of these specific
transactions.
<TABLE>
<CAPTION>
INCEPTION (MAY 3, 1994) GROWTH AND
THROUGH OCTOBER 31, 1994 GROWTH II INCOME II GOVERNMENT II
---------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Total Broker Commissions...................... $ 27,407 $ 29,637 --
Commissions for Research Services............. $ 16,362 $ 18,911 --
Value of Research Transactions................ $11,333,438 $11,602,644 --
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND
1995 GROWTH II INCOME II GOVERNMENT II
---------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Total Broker Commissions...................... $ 137,243 $ 66,720 $ 4,462
Commissions for Research Services............. $ 45,511 $ 31,621 --
Value of Research Transactions................ $41,384,574 $30,968,512 --
</TABLE>
<TABLE>
<CAPTION>
INCEPTION (FEBRUARY 21, 1995) INTERNATIONAL EMERGING
THROUGH OCTOBER 31, 1995 EQUITY II GROWTH II
---------------------------------------------------------- ------------- ----------
<S> <C> <C>
Total Broker Commissions.................................. $51,642 $ 33,144
Commissions for Research Services......................... $ -- $ 27,920
Value of Research Transactions............................ $ -- $24,893,286
</TABLE>
Each Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Subadviser, including Smith
Barney and Robinson Humphrey. The negotiated commission paid to an affiliated
broker on any transaction would be comparable to that payable to a non-
affiliated broker in a similar transaction.
The Funds paid the following commissions to these affiliated brokers during
the period May 3, 1994 (Inception) through October 31, 1994;
<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON HUMPHREY
------------ -----------------
<S> <C> <C>
COMMISSIONS PAID
Growth II Fund...................................... $198 $ 560
Growth and Income II Fund........................... $801 $ 364
Government II Fund.................................. -- --
COMMISSIONS WITH AFFILIATES TO TOTAL COMMISSIONS
Growth II Fund...................................... .72% 2.04%
Growth and Income II Fund........................... 2.7% 1.23%
Government II Fund.................................. -- --
VALUE OF TRANSACTIONS WITH AFFILIATES TO TOTAL
TRANSACTIONS
Growth II Fund...................................... 2.93% 1.06%
Growth and Income II Fund........................... 1.69% .75%
Government II Fund.................................. -- --
</TABLE>
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<PAGE> 216
The Funds paid the following commissions to these affiliated brokers during
the fiscal year ending October 31, 1995:
<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON HUMPHREY
------------ -----------------
<S> <C> <C>
COMMISSIONS PAID
Growth II Fund...................................... $2,307 $ 91
Growth and Income II Fund........................... $2,573 $ --
Government II Fund.................................. 792 --
COMMISSIONS WITH AFFILIATES TO TOTAL COMMISSIONS
Growth II Fund...................................... 1.68% .07%
Growth and Income II Fund........................... 3.86% --%
Government II Fund.................................. 17.75 --
VALUE OF TRANSACTIONS WITH AFFILIATES TO TOTAL
TRANSACTIONS
Growth II Fund...................................... 2.93% .04%
Growth and Income II Fund........................... 3.22% --
Government II Fund.................................. -- 16.29%
</TABLE>
For Emerging Growth II Fund and International Equity II Fund, the Funds
paid the following commissions during the period February 21, 1995 (inception)
through October 31, 1995:
<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON HUMPHREY
------------ -----------------
<S> <C> <C>
COMMISSIONS PAID
Emerging Growth II Fund............................. $ 310 $ --
International Equity II Fund........................ $1,077 $ --
COMMISSIONS WITH AFFILIATES TO TOTAL COMMISSIONS
Emerging Growth II Fund............................. .94% --%
International Equity II Fund........................ 2.1% --%
VALUE OF TRANSACTIONS WITH AFFILIATES TO TOTAL
TRANSACTIONS
Emerging Growth II Fund............................. % %
International Equity II Fund........................ % %
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined each day the
New York Stock Exchange (the "Exchange") is open (currently 4:00 p.m., New York
time). The Exchange is currently closed on weekends and on the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern trading generally or in a particular country
or countries may not take place on all business days in New York. Furthermore,
trading takes place on all business days in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days in
New York and on which the Funds' net asset values are not calculated and on
which the Trust does not effect sales, redemptions and repurchases of its
shares. There may be significant variations in the net asset value of Fund
shares on days when net asset value is not calculated and on which shareholders
cannot redeem on account of changes in prices of stocks traded in foreign stock
markets.
EMERGING GROWTH II FUND, INTERNATIONAL EQUITY II FUND, GROWTH II FUND AND GROWTH
AND INCOME II FUND NET ASSET VALUATION
The net asset value of each Fund is computed by (i) valuing securities
listed or traded on a national securities exchange at the last reported sales
price, or if there has been no sale that day at the last reported bid
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<PAGE> 217
price, using prices as of the close of trading on the Exchange, (ii) valuing
unlisted securities for which over-the-counter market quotations are readily
available at the most recent bid price as supplied by the National Association
of Securities Dealers Automated Quotations (NASDAQ) or by broker-dealers, and
(iii) valuing any securities for which market quotations are not readily
available, and any other assets at fair value as determined in good faith by the
Trustees. Options on stocks, options on stock indexes and stock index futures
contracts and options thereon, which are traded on exchanges, are valued at
their last sales or settlement price as of the close of such exchanges, or, if
no sales are reported, at the mean between the last reported bid and asked
prices. Debt securities with a remaining maturity of 60 days or less are valued
on an amortized cost basis which approximates market value.
Foreign securities trading may not take place on all days on which the New
York Stock Exchange ("NYSE") is open. Further, trading takes place in various
foreign markets on days on which the NYSE is not open. Accordingly, the
determination of the net asset value of a Fund may not take place
contemporaneously with the determination of the prices of investments held by
such Fund. Events affecting the values of investments that occur between the
time their prices are determined and 4:00 p.m. on each day that the NYSE is open
will not be reflected in a Fund's net asset value unless the Adviser or
Subadviser, under the supervision of the Board of Trustees, determines that the
particular event would materially affect net asset value. As a result, a Fund's
net asset value may be significantly affected by such trading on days when a
shareholder has no access to the Funds.
GOVERNMENT II FUND NET ASSET VALUATION
U.S. Government securities are traded in the over-the-counter market and
are valued at the last available bid price. Such valuations are based on
quotations of one of more dealers that make markets in the securities as
obtained from such dealers or from a pricing service. Options and interest rate
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sales or settlement price as of the close of such exchanges, or,
if no sales are reported, at the mean between the last reported bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees. Such
valuations and procedures will be reviewed periodically by the Trustees.
GENERAL
The assets belonging to the Class A shares and the Class B shares of each
Fund will be invested together in a single portfolio. The net asset value of
each class will be determined separately by subtracting the expenses and
liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the SEC.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Funds'
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of each Fund are sold in a continuous offering and may be purchased
on any business day through PFS Investments.
MULTIPLE PRICING SYSTEM
Each Fund issues two classes of shares: Class A shares are subject to an
initial sales charge and Class B shares are sold at net asset value and are
subject to a contingent deferred sales charge. The two classes of shares each
represent interests in the same Fund's portfolio of investments, have the same
rights and are identical in all respects, except that Class B shares bear the
expenses of the deferred sales arrangements, distribution fees, and any expenses
(including any incremental transfer agency costs) resulting from such sales
32
<PAGE> 218
arrangements, and have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the distribution fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times PFS Investments may be deemed to be an
underwriter for purposes of the 1933 Act.
INVESTMENTS BY MAIL
A Shareholder Investment Account may be opened by completing the
application included in the Prospectus and forwarding the application, through
PFS Investments to the Transfer Agent at 3100 Breckinridge Boulevard, Bldg. 200,
Duluth, Georgia 30199-0062. The account is opened only upon acceptance of the
application by the Transfer Agent. The minimum initial investment of $250 or
more in the form of a check payable to the Trust, must accompany the
application. This minimum may be waived by the Distributor for plans involving
continuing investments. Subsequent investments of $25 or more may be mailed
directly to the Transfer Agent. All such investments are made at the public
offering price of the Fund's shares next computed following receipt of payment
by the Transfer Agent. Confirmations of the opening of an account and of all
subsequent transactions in the account are forwarded by the Transfer Agent to
the shareholder.
In processing applications and investments, the Transfer Agent acts as
agent for the investor and for PFS Investments and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If the Transfer
Agent ceases to act as such, a successor company named by the Trust will act in
the same capacity so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales load reflected in the sales charge table as shown in the
Prospectus applies to purchases of Class A shares of Emerging Growth II Fund's,
International Equity II Fund's, Growth II Fund's and Growth and Income II Fund's
shares where the aggregate investment is $50,000 or more and to purchases of
Government II Fund's shares where the aggregate investment is $100,000 or more.
An aggregate investment includes all shares of all of the above Funds and shares
of other Common Sense Funds (except Common Sense Money Market Fund) previously
purchased and still owned, plus the shares being purchased. The current offering
price is used to determine the value of all such shares. If, for example, any
purchaser has previously purchased and still holds shares of one of the above
Funds having a current value of $25,000, and that person purchases $30,000 of
additional shares of Growth II Fund, Growth and Income II Fund, International
Equity II Fund or Emerging Growth II Fund, the sales charge applicable to the
$30,000 purchase would be 4.75% of the offering price. The same reduction is
applicable to purchases under a Letter of Intent as described in the next
paragraph. PFS Investments must notify the Distributor at the time an order is
placed for a purchase which would qualify for the reduced charge on the basis of
previous purchases. Similar notification must be given in writing when such an
order is placed by mail. The reduced sales charge will not be applied if such
notification is not furnished at the time of the order. The reduced sales charge
will also not be applied unless the records of the Distributor or the Transfer
Agent confirm the investor's representations concerning his or her holdings.
LETTER OF INTENT
A Letter of Intent applies to purchases of Class A shares of all Funds.
When an investor submits a Letter of Intent to attain an investment goal within
a 13-month period, the Transfer Agent escrows shares totaling five percent of
the dollar amount of the Letter of Intent in the name of the investor. The
Letter of Intent does not obligate the investor to purchase the indicated
amount. In the event the Letter of Intent goal is not achieved within the
13-month period, the investor is required to pay the difference between the
sales charge otherwise applicable to the purchases made during this period and
the sales charge actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrow
shares to obtain such difference. If the goal is exceeded in an amount which
qualifies for a lower sales charge, a price adjustment is made at the end of the
13-month period by refunding to the investor the amount of excess sales
commissions, if any, paid during the 13-month period.
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<PAGE> 219
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.
(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
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<PAGE> 220
allowed a specified period of time to purchase additional shares to bring the
account up to the required minimum balance. Any involuntary redemption may only
occur if the shareholder account is less than the amount specified in the
Prospectus due to shareholder redemptions. The Trust may waive the CDSC upon
such involuntary redemption.
(e) Redemption by Adviser
The Trust may waive the CDSC when a total or partial redemption is made by
the Adviser with respect to its investments in a Fund.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Trust
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Trust to fairly determine the value of its net assets; or
(d) the SEC, by order, so permits.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Exchange Privilege" in the
Prospectus:
By use of the exchange privilege, the investor authorizes PFS Shareholder
Services (the "Transfer Agent") to act on written exchange instructions from any
person representing himself to be the investor or the agent of the investor and
believed by the Transfer Agent to be genuine. The Transfer Agent's records of
such instructions are binding.
For purposes of determining the sales charge rate previously paid on Class
A shares of a Fund, all sales charges paid on the exchanged security and on any
security previously exchanged for such security or for any of its predecessors
shall be included. If the exchanged security was acquired through reinvestment,
that security is deemed to have been sold with a sales charge rate equal to the
rate previously paid on the security on which the dividend or distribution was
paid. If a shareholder exchanges less than all of his securities, the security
upon which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of a
Fund involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in a fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the Funds involved in the request are priced will be processed on the
next business day in the manner described above.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Growth II Fund, the International Equity II Fund and the Emerging
Growth II Fund distribute dividends and capital gains annually; the Growth and
Income II Fund declares and pays dividends quarterly. The Government II Fund
declares dividends each business day and distributes monthly substantially all
of its net investment income to shareholders. The daily dividends of the
Government II Fund are a fixed amount determined for each class at least
monthly. The per share dividends on Class B shares of each Fund will be lower
than the per share dividends on Class A shares as a result of the distribution
fees and incremental transfer agency fees, if any, applicable to the Class B
shares. Each Fund intends similarly to distribute to shareholders any taxable
net realized capital gains. Taxable net realized capital gains are the excess,
if any, of the Fund's total profits on the sale of securities during the year
over its total losses on the sale of securities, including capital losses
carried forward from prior years in accordance with the tax laws. Such capital
gains, if
35
<PAGE> 221
any, are distributed at least once a year. All income dividends and capital
gains distributions are reinvested in shares of a Fund at net asset value
without sales charge on the record date, except that any shareholder may
otherwise instruct the shareholder service agent in writing and receive cash.
Shareholders are informed as to the sources of distributions at the time of
payment.
Each Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders and meet certain diversification and other requirements. By
qualifying as a regulated investment company, the Fund is not subject to federal
income taxes to the extent it distributes its taxable net investment income and
taxable net realized capital gains. If for any taxable year the Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders). Each Fund expects to be treated as a separate
entity for purposes of determining federal tax treatment.
Each Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least (1) 98% of its
ordinary net investment income for the twelve months ended December 31, plus (2)
98% of its capital gains net income for the twelve months ended October 31 of
such calendar year. Each Fund intends to distribute sufficient amounts to avoid
liability for the excise tax.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income paid by Emerging Growth II Fund,
International Equity II Fund, Growth II Fund and Growth and Income II Fund
qualify for the 70% dividends received deduction for corporations. To qualify
for the dividends received deduction, a corporate shareholder must hold the
shares on which the dividend is paid for more than 45 days.
Dividends and distributions declared and payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year
are considered taxable income to shareholders on December 31 even though paid in
the next year.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such dividends and distributions from short-term capital gains are not
eligible for the dividends received deduction referred to above. Any loss on the
sale of Fund shares held for less than six months is treated as a long-term
capital loss to the extent of any long-term capital gain distribution paid on
such shares, subject to any exception that may be provided by IRS regulations
for losses incurred under certain systematic withdrawal plans. All dividends and
distributions are taxable to the shareholder whether or not reinvested in
shares. Shareholders are notified annually by the Fund as to the federal tax
status of dividends and distributions paid by the Fund.
If shares of each Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under an applicable
treaty. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING. The Trust is required to withhold and remit to the
United States Treasury 31% of (i) reportable taxable dividends and distributions
and (ii) the proceeds of any redemptions of Trust shares with respect to any
shareholder who is not exempt from withholding and who fails to furnish the
Trust with a
36
<PAGE> 222
correct taxpayer identification number, who fails to report fully dividend or
interest income or who fails to certify to the Trust that he has provided a
correct taxpayer identification number and that he is not subject to
withholding. (An individual's taxpayer identification number is his or her
social security number.) The 31% "Back-up withholding tax" is not an additional
tax and may be credited against a taxpayer's regular federal income tax
liability.
The Code includes special rules applicable to certain listed options
(excluding equity options as defined in the Code), futures contracts, and
options on futures contracts which the Funds may write, purchase or sell. Such
options and contracts are classified as Section 1256 contracts under the Code.
The character of gain or loss resulting from the sale, disposition, closing out,
expiration or other termination of Section 1256 contracts is generally treated
as long-term capital gain or loss to the extent of 60 percent thereof and
short-term capital gain or loss to the extent of 40 percent thereof ("60/40 gain
or loss"). Such contracts, when held by the Fund at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for federal income tax purposes ("marked-to-market").
Over-the-counter options are not classified as Section 1256 contracts and are
not subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Government II Fund from transactions in
over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by the Government II Fund are exercised, the gain or loss
realized on the sale of the underlying securities may be either short-term or
long-term, depending on the holding period of the securities. In determining the
amount of gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.
Certain of the Funds' transactions in options, futures contracts, and
options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle in which at least one (but not
all) of the positions are Section 1256 contracts is a "mixed straddle" under the
Code if certain conditions are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
OTHER INFORMATION
PERFORMANCE INFORMATION
The overall total return for the Growth II Fund, the Growth and Income II
Fund and the Government II Fund (computed in the manner described in the
Prospectus) for Class A shares for the one-year-and-18-months periods ended
October 31, 1995 was 12.42%, 11.70% and 3.57%, respectively. The overall total
return for the Growth II Fund, the Growth and Income II Fund and the Government
II Fund (computed in the manner described in the Prospectus) for Class B shares
for the one-year-and-18-months periods ended October 31, 1995 was 13.36%, 12.59%
and 3.59%, respectively. The overall total return for Emerging Growth II Fund
and International Equity II Fund (computed in the manner described in the
Prospectus) for Class A shares for the period from inception (March 17, 1995)
through October 31, 1995 was 34.85% and
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<PAGE> 223
15.88%, respectively. The overall total return for Emerging Growth II Fund and
International Equity Fund (computed in the manner described in the Prospectus)
for Class B shares for the period from inception (March 17, 1995) through
October 31, 1995 was 33.95% and 34.85%, respectively. These results are based on
historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objectives and policies as well as the risks incurred in
the Fund's investment practices.
The Government II Fund's annualized current yield (non-subsidized) for
Class A shares and Class B shares for the 30 day period ending October 31, 1995
was 3.48% and 2.88%, respectively. The yield for Class A and Class B shares is
not fixed and will fluctuate in response to prevailing interest rates and the
market value of portfolio securities, and as a function of the type of
securities owned by the Fund, portfolio maturity and the Fund's expenses.
Yield and total return for the Government II Fund are computed separately
for Class A and Class B shares.
The Funds may illustrate in advertising materials the use of a Payroll
Deduction Plan as a convenient way for business owners to help their employees
set up either IRA or voluntary mutual fund accounts. The Funds may illustrate in
advertising materials retirement planning through employee contributions and/or
salary reductions. Such advertising material will illustrate that employees may
have the opportunity to save for retirement and reduce taxes by electing to
defer a portion of their salary into a special mutual fund IRA account. The
Funds may illustrate in advertising materials that Uniform Gift to Minors Act
accounts may be used as a vehicle for saving for a child's financial future.
Such illustrations will include statements to the effect that upon reaching the
age of majority, such custodial accounts become the child's property.
SHAREHOLDER SERVICES
UNIFORM GIFTS TO MINORS ACT. The Trust recognizes the importance to a child
of establishing a savings and investment plan early in life for education and
other purposes when the child becomes older. The advantages of regular
investment with interest or earnings compounding over a number of years are
great. In addition, taxes on these earnings are assessed against the income of
the child rather than the donor, usually at a lower bracket.
Investors wishing to establish a UGMA account should call the Trust for an
application. Individuals desiring to open an account under UGMA are also advised
to consult with a tax adviser before establishing the account.
INDIVIDUAL RETIREMENT ACCOUNT. Any individual who has compensation or
earned income from employment or self-employment and who is under age 70 1/2 may
establish an IRA. The limitation on the maximum annual contribution to an IRA is
the lesser of 100% of compensation or $2,000. An IRA may also be established for
a spouse who has no compensation (or who elects to be treated as having no
compensation), and the limitation on the maximum annual contributions to the two
IRAs is the lesser of 100% of compensation or $2,250.
Under the Tax Reform Act of 1986, whether contributions to an IRA are
deductible for federal income tax purposes depends on whether an individual (or
his/her spouse) is a participant in an employer-sponsored plan and on the
adjusted gross income of the individual.
In the case of an individual who is a participant in an employer-sponsored
plan, no deduction is available for IRA contributions if his or her adjusted
gross income reaches certain levels ($35,000 for a single individual, $50,000
for married individuals filing jointly and $10,000 for married individuals
filing separately) and the deduction is phased out ratably if his or her
adjusted gross income falls within certain ranges ($25,000 - $35,000 for a
single individual, $40,000 - $50,000 for married individuals filing jointly and
$0 - $10,000 for married individuals filing separately). IRA contributions, up
to the annual limit, remain fully deductible for all single individuals with
less than $25,000 of annual adjusted gross income and all married individuals
with less than $40,000 of annual adjusted gross income. Individuals who are
disqualified from
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<PAGE> 224
making deductible IRA contributions can make non-deductible contributions to
their IRAs, subject to the same limitation on maximum annual contribution
discussed above.
In addition, any individual, regardless of age, may establish a rollover
IRA to receive an eligible rollover distribution from an employer-sponsored
plan.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP) AND SALARY REDUCTION SIMPLIFIED
EMPLOYEE PENSION PLAN (SARSEP). A SEP/SARSEP is a means for an employer to
provide retirement contributions to IRAs for all employees, without the
complicated reporting and record keeping involved in a qualified plan. Employees
covered by a SEP/SARSEP can use the same IRA to receive their own allowable IRA
contribution.
SECTION 403(B)(7) PLAN. Employees of certain exempt organizations and
schools can have a portion of their compensation set aside, and income taxes
attributable to such portion deferred, in a Section 403(b)(7) plan. Teachers,
school administrators, ministers, employees of hospitals, libraries, community
chests, funds, foundations, and many others may be eligible. The employer must
be an organization described in Section 501(c)(3) of the Internal Revenue Code
and must be exempt from tax under Section 501(a) of the Code. In addition, any
employee of most public educational institutions is eligible if his employer is
a state or a political subdivision of a state, or any agency or instrumentality
of either. The employee is not taxed on the amount set aside or the earnings
thereon until the funds are withdrawn, normally at retirement.
CUSTODY OF ASSETS
All securities owned by the Trust and all cash, including proceeds from the
sale of shares of the Trust and of securities in the Trust's investment
portfolio, are held by State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, as Custodian.
SHAREHOLDER REPORTS
Semi-annual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants whose selection is
ratified annually by shareholders or the Trustees.
INDEPENDENT AUDITORS
Ernst & Young LLP, 1221 McKinney, Suite 2400, Houston, Texas 77010, the
independent auditors for the Trust, perform annual examinations of the Trust's
financial statements.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY
Under the laws of certain states, including Massachusetts, where the Trust
was organized, and Texas, where the Trust's principal office is located,
shareholders of a Massachusetts business trust may, under certain circumstances,
be held personally liable as partners for the obligations of the Trust. However,
the risk of a shareholder incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. The Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Trust or Trustees. The
Declaration of Trust provides for indemnification out of Trust property to any
shareholder held personally liable for the obligations of the Trust and also
provides for the Trust to reimburse such shareholder for all legal and other
expenses reasonably incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees or Officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust will
provide indemnification to its Trustees and Officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
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FINANCIAL STATEMENTS
The attached financial statements, in the form of the Annual Report to
Shareholders including the related report of Independent Auditors on such
financial statements are hereby included in the Statement of Additional
Information.
GROWTH II FUND
<TABLE>
<CAPTION>
OCTOBER 31,
1995
----------
<S> <C>
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)............................... $14.57
Offering price per share (100/94.5 of per share net asset value)........... $15.41
GROWTH AND INCOME II FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)............................... $13.92
Offering price per share (100/94.5 of per share net asset value)........... $14.73
GOVERNMENT II FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)............................... $12.14
Offering price per share (100/95.25 of per share)
(Net asset value)........................................................ $12.75
EMERGING GROWTH II FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)............................... 15.12
Offering price per share (100/94.5 of per share net asset value)........... 16.00
INTERNATIONAL EQUITY II FUND
Net Asset Value and redemption price per Class A share
(Net assets divided by shares outstanding)............................... 13.86
Offering price per share (100/94.5 of per share)
(Net asset value)........................................................ 14.67
</TABLE>
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APPENDIX
(Commercial Paper, Bond and Other Short- and Long-Term Ratings)
Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's"), Fitch Investors Service, Inc. ("Fitch"),
Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc. ("IBCA").
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily well established industries,
high rates of return of funds employed, conservative well established
industries, high rates of return of funds employed, conservative capitalization
structures with moderate reliance on debt and ample asset protection, broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a strong
capacity for repayment of short-term promissory obligations. This ordinarily
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest and, in the majority of instances, differ only in small
degrees from issues rated AAA.
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2
and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in the higher
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end of this rating category, the modifier 2 indicates a mid-range ranking, and
the modifier 3 indicates a ranking in the lower end of the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds
rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Rating and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.
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GROWTH II FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
Common Stock 86.5%
CONSUMER DISTRIBUTION 5.3%
3,000 Dayton Hudson Corp.............................. $ 206,250
*9,500 Eckerd Corp..................................... 376,437
8,000 Gap, Inc........................................ 315,000
*3,000 Kohl's Corp..................................... 136,125
*16,000 Kroger Co....................................... 534,000
8,000 May Department Stores Co........................ 314,000
6,000 Nordstrom, Inc.................................. 222,375
*9,500 OfficeMax, Inc.................................. 235,125
15,000 Sears, Roebuck & Co............................. 510,000
----------
2,849,312
----------
CONSUMER DURABLES 1.4%
2,500 Chrysler Corp................................... 129,062
8,000 Echlin, Inc..................................... 286,000
8,000 General Motors Corp............................. 350,000
----------
765,062
----------
CONSUMER NON-DURABLES 8.9%
9,500 ConAgra, Inc.................................... 366,937
4,000 CPC International, Inc.......................... 265,500
9,700 Duracell International, Inc..................... 508,037
6,000 General Mills, Inc.............................. 344,250
6,000 Gillette Co..................................... 290,250
5,500 Heinz (H. J.) Co................................ 255,750
17,000 Nabisco Holdings Corp., Class A................. 456,875
14,000 PepsiCo, Inc.................................... 738,500
8,000 Procter & Gamble Co............................. 648,000
10,000 Ralston Purina Group............................ 593,750
13,000 Sara Lee Corp................................... 381,875
----------
4,849,724
----------
CONSUMER SERVICES 4.2%
2,400 Capital Cities ABC, Inc......................... 284,700
*8,000 Cox Communications, Inc......................... 150,000
4,000 Disney (Walt) Co................................ 230,500
6,600 Marriott International, Inc..................... 243,375
12,500 Service Corp. International..................... 501,563
*10,000 Tele-Communications International, Class A...... 226,250
7,000 Time Warner, Inc................................ 255,500
3,300 Tribune Co...................................... 208,313
*4,000 Viacom, Inc., Class B........................... 200,000
----------
2,300,201
----------
</TABLE>
F-1
<PAGE> 229
GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 6.5%
13,500 Coastal Corp........................................................ $ 437,062
7,500 Exxon Corp.......................................................... 572,812
5,500 Mobil Corp.......................................................... 554,125
17,500 Panhandle Eastern Corp.............................................. 441,875
6,000 Repsol SA, ADR...................................................... 177,750
4,000 Schlumberger, Ltd................................................... 249,000
7,500 Texaco, Inc......................................................... 510,938
10,500 USX-Marathon Group.................................................. 186,375
11,000 Williams Companies.................................................. 424,875
----------
3,554,812
----------
FINANCE 14.7%
10,000 Ahmanson (H.F.) & Co................................................ 250,000
6,500 American Express Co................................................. 264,062
3,500 American International Group, Inc................................... 295,312
14,300 Bank Of Boston Corp................................................. 636,350
5,700 Bank of New York, Inc............................................... 239,400
4,300 BankAmerica Corp.................................................... 247,250
8,500 Bankers Trust New York Corp......................................... 541,875
7,500 BayBanks, Inc....................................................... 607,500
3,000 Chase Manhattan Corp................................................ 171,000
3,000 Chemical Banking Corp............................................... 170,625
7,000 CoreStates Financial Corp........................................... 254,625
*900 Donaldson, Lufkin & Jenrette, Inc................................... 26,775
7,000 Federal National Mortgage Association............................... 734,125
13,000 Greenpoint Financial Corp........................................... 351,000
18,000 Green Tree Financial Corp........................................... 479,250
5,000 Merrill Lynch & Co., Inc............................................ 277,500
2,500 Morgan Stanley Group, Inc........................................... 217,500
5,700 Morgan (J.P.) & Co., Inc............................................ 439,613
147,311 Van Kampen American Capital Small Capitalization Fund (see Note 2).. 1,792,776
----------
7,996,538
----------
HEALTH CARE 11.7%
3,000 American Home Products Corp......................................... 265,875
*4,800 Amgen, Inc.......................................................... 230,400
5,500 Astra, AB, Series A, ADR............................................ 202,125
4,500 Baxter International, Inc........................................... 173,812
3,500 Becton Dickinson & Co............................................... 227,500
15,000 Caremark International, Inc......................................... 309,375
*1,500 Cordis Corp......................................................... 165,750
*10,000 Genzyme Corp........................................................ 582,500
4,300 Lilly (Eli) & Co.................................................... 415,488
5,000 Mallinckrodt Group, Inc............................................. 173,750
6,000 Medtronic, Inc...................................................... 346,500
4,600 Merck & Co., Inc.................................................... 264,500
*3,000 Nellcor Puritan Bennett, Inc........................................ 172,500
10,000 Pfizer, Inc......................................................... 573,750
</TABLE>
F-2
<PAGE> 230
GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE-continued
12,000 Schering-Plough Corp........................... $ 643,500
12,500 SmithKline Beecham, ADR........................ 648,438
1,600 St. Jude Medical, Inc.......................... 85,200
10,000 U. S. Healthcare, Inc.......................... 385,000
5,500 Warner Lambert Co.............................. 468,188
----------
6,334,151
----------
PRODUCER MANUFACTURING 6.0%
3,200 Fluor Corp..................................... 180,800
5,500 General Electric Co............................ 347,875
8,000 Honeywell, Inc................................. 336,000
3,000 Illinois Tool Works, Inc....................... 174,375
6,000 ITT Corp....................................... 735,000
3,300 Rockwell International Corp.................... 146,850
*12,000 Thermo Fibertek, Inc........................... 189,000
2,000 TRW, Inc....................................... 131,500
9,000 United Technologies Corp....................... 798,750
7,000 WMX Technologies, Inc.......................... 196,875
----------
3,237,025
----------
RAW MATERIALS/PROCESSING INDUSTRIES 3.1%
4,200 Champion International Corp.................... 224,700
5,800 Freeport-McMoRan, Copper Gold, Series B........ 131,950
4,200 Grace (W.R.) & Co.............................. 234,150
18,000 James River Corp............................... 578,250
5,000 Monsanto Co.................................... 523,750
----------
1,692,800
----------
TECHNOLOGY 17.3%
3,000 Adobe Systems, Inc............................. 171,000
*6,000 Bay Networks, Inc.............................. 397,500
5,000 Boeing Co...................................... 328,125
*8,000 Cisco Systems, Inc............................. 620,000
*11,500 Compaq Computer Corp........................... 641,125
12,000 Computer Associates International, Inc......... 660,000
*12,700 Dell Computer Corp............................. 592,138
*11,500 Digital Equipment Corp......................... 622,437
3,200 DST Systems, Inc............................... 67,200
7,000 General Motors Corp., Class H.................. 294,000
6,000 Hewlett-Packard Co............................. 555,750
10,000 Intel Corp..................................... 698,750
7,000 International Business Machines Corp........... 680,750
9,000 Loral Corp..................................... 266,625
*6,000 LSI Logic Corp................................. 282,750
3,500 McDonnell Douglas Corp......................... 286,125
*5,000 Microsoft Corp................................. 500,000
2,500 Motorola, Inc.................................. 164,063
*4,000 National Semiconductor Corp.................... 97,500
3,000 Northrop Grumman Corp.......................... 171,750
</TABLE>
F-3
<PAGE> 231
GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-continued
*3,000 Oracle System Corp.................................................................... $ 130,875
*1,200 Parametric Technology Corp............................................................ 80,400
*8,500 Symantec Corp......................................................................... 206,656
3,800 Texas Instruments, Inc................................................................ 259,350
*11,000 3Com Corp............................................................................. 517,000
2,800 Varian Associates, Inc................................................................ 143,850
-----------
9,435,719
-----------
TRANSPORTATION 1.5%
3,000 Burlington Northern Santa Fe, Inc..................................................... 251,625
8,000 Conrail, Inc.......................................................................... 550,000
-----------
801,625
-----------
UTILITIES 5.9%
3,000 Ameritech Corp........................................................................ 162,000
10,000 AT&T Corp............................................................................. 640,000
*10,000 Cellular Communications, Inc., Class A................................................ 536,250
14,000 Frontier Corp......................................................................... 378,000
26,000 MCI Communications Corp............................................................... 648,375
3,000 SBC Communications, Inc............................................................... 167,625
*21,000 WorldCom, Inc......................................................................... 685,125
-----------
3,217,375
-----------
TOTAL COMMON STOCK (Cost $43,295,733)............................................... 47,034,344
-----------
Principal
Amount Short-Term Investments 14.4%
- -------------
REPURCHASE AGREEMENT 11.7%
**$6,380,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%, due 11/01/95 (Collateralized by
U.S. Government obligations in a pooled cash account)
repurchase proceeds $6,381,040...................................................... 6,380,000
-----------
UNITED STATES GOVERNMENT OBLIGATIONS 2.7%
**1,500,000 United States Treasury Bills, 5.46%, 2/1/96........................................... 1,479,390
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $7,859,326)...................................... 7,859,390
-----------
TOTAL INVESTMENTS (Cost $51,155,059) 100.9%.......................................... 54,893,734
Other assets and liabilities, net (0.9)%............................................. (469,946)
-----------
NET ASSETS, equivalent to $14.57 per share for Class A
and $14.41 per share for Class B shares 100%....................................... $54,423,788
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 1,447,190 Class A and 2,313,448 Class B shares outstanding... $ 37,606
Capital surplus..................................................................................... 47,981,929
Undistributed net realized gain on securities....................................................... 2,593,885
Net unrealized appreciation of securities
Investments....................................................................................... 3,738,675
Futures contracts................................................................................. 71,693
-----------
NET ASSETS.......................................................................................... $54,423,788
===========
</TABLE>
* Non-income producing security
**Securities with a market value of approximately $5.9 million were placed as
collateral for futures contracts (see Note 1D)
See Notes to Financial Statements.
F-4
<PAGE> 232
GROWTH II FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations Year Ended
October 31, 1995
----------------
<S> <C>
INVESTMENT INCOME
Dividends.................................................... $ 391,376
Interest..................................................... 206,534
----------
Investment income.......................................... 597,910
----------
EXPENSES
Advisory fees................................................ 189,060
Shareholder service agent's fees and expenses................ 376,333
Accounting services.......................................... 47,314
Service fees--Class A........................................ 28,641
Distribution and service fees--Class B....................... 176,297
Trustees' fees and expenses.................................. 24,084
Audit fees................................................... 11,883
Legal fees................................................... 1,364
Reports to shareholders...................................... 28,200
Registration and filing fees................................. 90,032
Miscellaneous................................................ 1,344
Expense reimbursement........................................ (42,461)
----------
Total expenses............................................. 932,091
----------
Net investment loss........................................ (334,181)
---------
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities
Investments................................................ 2,897,521
Futures contracts.......................................... 226,423
Net unrealized appreciation of securities during the period
Investments................................................ 3,467,222
Futures contracts.......................................... 55,205
----------
Net realized and unrealized gain on securities............... 6,646,371
----------
Increase in net assets resulting from operations............. $6,312,190
==========
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets
May 3, 1994*
Year Ended through
October 31, 1995 October 31, 1994
---------------- ----------------
<S> <C> <C>
NET ASSETS, beginning of period.............................. $10,163,636 $ 200
----------- -----------
OPERATIONS
Net investment loss........................................ (334,181) (8,840)
Net realized gain (loss) on securities..................... 3,123,944 (195,878)
Net unrealized appreciation of securities during the period 3,522,427 287,941
----------- ----------
Increase in net assets resulting from operations.......... 6,312,190 83,223
----------- ----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A.................................................. 17,139,771 4,406,808
Class B.................................................. 25,723,932 5,848,735
----------- -----------
42,863,703 10,255,543
----------- -----------
Cost of shares redeemed
Class A.................................................. (2,973,033) (63,815)
Class B.................................................. (1,942,708) (111,515)
----------- -----------
(4,915,741) (175,330)
----------- -----------
Increase in net assets resulting from capital transactions. 37,947,962 10,080,213
----------- -----------
INCREASE IN NET ASSETS....................................... 44,260,152 10,163,436
----------- -----------
NET ASSETS, end of period.................................... $54,423,788 $10,163,636
=========== ===========
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-5
<PAGE> 233
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------
<S> <C> <C>
Common Stock 87.3%
CONSUMER DISTRIBUTION 5.3%
*3,500 Ann Taylor Stores, Inc............ $ 38,500
2,300 Dayton Hudson Corp................ 158,125
*11,500 Federated Department Stores, Inc.. 291,812
3,900 Fleming Companies, Inc............ 88,238
3,900 Gap, Inc.......................... 153,563
900 Interstate Bakeries Co............ 19,238
11,000 May Department Stores Co.......... 431,750
*3,200 Nine West Group, Inc.............. 142,400
5,300 Nordstrom, Inc.................... 196,431
8,900 Sears, Roebuck & Co............... 302,600
----------
1,822,657
----------
CONSUMER DURABLES 1.3%
3,200 Eastman Kodak Co.................. 200,399
3,300 General Motors Corp............... 144,375
6,300 Sunbeam-Oster, Inc................ 94,500
----------
439,274
----------
CONSUMER NON-DURABLES 8.1%
4,900 Coca-Cola Co...................... 352,187
3,300 CPC International, Inc............ 219,038
2,500 General Mills, Inc................ 143,438
5,500 Gillette Co....................... 266,062
2,000 Kellogg Co........................ 144,500
16,800 Nabisco Holdings Corp., Class A... 451,500
2,200 Nike, Inc., Class B............... 124,850
5,900 Procter & Gamble Co............... 477,900
5,900 Quaker Oats Co.................... 201,337
7,500 Ralston Purina Group.............. 445,313
----------
2,826,125
----------
CONSUMER SERVICES 4.3%
2,200 Capital Cities ABC, Inc........... 260,974
4,800 Disney (Walt) Co.................. 276,600
6,700 McDonald's Corp................... 274,700
3,100 Omnicom Group, Inc................ 198,013
*5,700 Viacom, Inc., Class B............. 285,000
9,100 Wendy's International, Inc........ 180,863
----------
1,476,150
----------
</TABLE>
F-6
<PAGE> 234
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 9.0%
3,700 British Petroleum Co., PLC, ADR.......................... $ 326,525
9,300 Exxon Corp............................................... 710,288
4,900 Mobil Corp............................................... 493,675
15,400 Pacific Enterprises...................................... 381,150
5,400 Panhandle Eastern Corp................................... 136,350
5,700 Royal Dutch Petroleum Co., ADR........................... 700,387
5,600 Texaco, Inc.............................................. 381,500
----------
3,129,875
----------
FINANCE 14.4%
2,800 Ahmanson (H.F.) & Co..................................... 70,000
3,450 American International Group, Inc........................ 291,094
6,400 Banc One Corp............................................ 216,000
4,800 Bank Of Boston Corp...................................... 213,600
8,000 Bankers Trust New York Corp.............................. 510,000
3,300 BayBanks, Inc............................................ 267,300
2,300 Beacon Properties Corp................................... 50,025
5,200 Chemical Banking Corp.................................... 295,750
3,100 Chubb Corp............................................... 278,613
6,900 CoreStates Financial Corp................................ 250,988
5,500 Debartolo Realty Corp.................................... 71,500
1,300 Duke Realty Investments, Inc............................. 39,812
7,700 Federal National Mortgage Association.................... 807,538
1,200 Health Care Property Investors, Inc...................... 40,650
8,400 Horace Mann Educators Corp............................... 223,649
6,500 Morgan (J.P.) & Co., Inc................................. 501,312
14,100 Prudential Reinsurance Holdings.......................... 287,288
3,500 St. Paul Companies, Inc.................................. 177,625
9,400 State Street Boston Corp................................. 365,425
300 Vornado Realty Trust..................................... 10,763
1,100 Weingarten Realty Investors.............................. 37,950
----------
5,006,882
----------
HEALTH CARE 11.4%
5,200 Abbott Laboratories, Inc................................. 206,700
4,300 American Home Products Corp.............................. 381,087
*7,800 Amgen, Inc............................................... 374,400
4,000 Astra, AB, Series A, ADR................................. 147,000
6,000 Baxter International, Inc................................ 231,750
*9,000 Charter Medical Corp..................................... 162,000
5,300 Mallinckrodt Group, Inc.................................. 184,175
9,900 Merck & Co., Inc......................................... 569,250
6,200 Pfizer, Inc.............................................. 355,725
7,200 Pharmacia Aktiebolag, ADR................................ 252,000
9,100 Schering-Plough Corp..................................... 487,988
9,200 Tenet Healthcare Corp.................................... 164,450
3,600 Teva Pharmaceutical, Ltd., ADR........................... 141,300
*4,600 Vencor, Inc.............................................. 127,650
3,100 Zeneca Group PLC, ADR.................................... 174,763
----------
3,960,238
----------
</TABLE>
F-7
<PAGE> 235
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ----------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING 6.1%
7,800 Allied-Signal, Inc....................... $ 331,500
7,100 Fluor Corp............................... 401,150
5,000 General Electric Co...................... 316,250
10,600 Honeywell, Inc........................... 445,200
4,800 Illinois Tool Works, Inc................. 279,000
4,300 Stewart & Stevenson Services, Inc........ 97,825
8,200 WMX Technologies, Inc.................... 230,625
----------
2,101,550
----------
RAW MATERIALS/PROCESSING INDUSTRIES 6.2%
3,700 Air Products & Chemicals, Inc........... 191,013
4,400 Aluminum Co. of America................. 224,400
8,100 Bemis, Inc.............................. 210,600
4,800 Champion International Corp............. 256,800
4,400 Grace (W.R.) & Co....................... 245,300
5,400 James River Corp........................ 173,475
4,400 Monsanto Co............................. 460,900
4,400 Scott Paper Co.......................... 234,300
3,100 Sigma-Aldrich Corp...................... 147,250
----------
2,144,038
----------
TECHNOLOGY 10.5%
3,600 Adobe Systems, Inc....................... 205,200
4,800 Alcatel Alsthom, ADR..................... 81,000
4,600 Boeing Co................................ 301,875
*5,400 Compaq Computer Corp..................... 301,050
8,000 Computer Associates International, Inc... 440,000
*5,000 Digital Equipment Corp................... 270,625
3,000 Hewlett-Packard Co....................... 277,874
1,300 International Business Machines Corp..... 126,425
9,700 Loral Corp............................... 287,362
3,100 McDonnell Douglas Corp................... 253,425
*2,200 Microsoft Corp........................... 220,000
1,100 Motorola, Inc............................ 72,187
1,700 Nokia Corp., ADS......................... 94,775
3,200 Northrop Grumman Corp.................... 183,200
*4,300 Symantec Corp............................ 104,544
3,300 Xerox Corp............................... 428,175
----------
3,647,717
----------
TRANSPORTATION 0.9%
4,800 Union Pacific Corp...................... 313,800
----------
UTILITIES 9.8%
4,300 Ameritech Corp.......................... 232,200
8,000 AT&T Corp............................... 512,000
6,900 Cincinnati Bell, Inc.................... 202,688
6,400 Duke Power Co........................... 286,400
</TABLE>
F-8
<PAGE> 236
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------------
<S> <C> <C>
UTILITIES--continued
14,100 Frontier Corp................................... $ 380,700
18,000 MCI Communications Corp......................... 448,875
7,100 National Power, PLC, ADR........................ 88,750
19,000 Pacificorp...................................... 358,624
4,400 Peco Energy Co.................................. 128,700
6,500 PowerGen, PLC, ADR.............................. 108,062
5,100 Southern New England Telecommunications Corp.... 184,238
11,500 Telefonos de Mexico, S.A., ADR.................. 316,250
2,800 U. S. West, Inc................................. 133,350
----------
3,380,837
----------
TOTAL COMMON STOCK (Cost $28,102,546)......... 30,249,143
----------
Convertible Preferred Stock 2.9%
5,000 Browning-Ferris, ACES, $7.25.................... 164,375
3,000 Corning Glassworks, MIPS, 6%.................... 135,000
5,800 James River Corp., DECS, $1.55.................. 176,900
2,000 SCI Finance, NV, LLC, 6.25%..................... 141,000
4,500 Time Warner, Inc., $1.24, PERCS................. 144,000
3,700 Williams Companies, Inc. $3.50.................. 251,600
----------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost $950,093)............................. 1,012,875
----------
Principal
Amount
- --------- Convertible Corporate Obligations 4.8%
CONSUMER DISTRIBUTION 0.6%
$145,000 Federated Department Stores, Inc., 5.00%,
10/01/03...................................... 140,650
160,000 Rite Aid Corp., LYON, Zero Coupon, 7/24/06...... 79,600
----------
220,250
----------
CONSUMER SERVICES 1.7%
600,000 ADT Operations, Inc., LYON, Zero Coupon,
7/06/10........................................ 270,000
300,000 News America Holdings, Inc., LYON, Zero Coupon,
3/11/13........................................ 133,500
Time Warner, Inc.
54,850 8.75%, 1/10/15................................. 57,113
300,000 LYON, Zero Coupon, 6/22/13..................... 120,000
----------
580,613
----------
HEALTH CARE 1.6%
100,000 Ciba-Geigy, 6.25%, 3/15/16....................... 100,000
500,000 Roche Holdings, Inc., LYON, Zero Coupon, 4/20/10. 206,250
90,000 Sandoz, Ltd. 2.00%, 10/06/02..................... 78,975
150,000 United Technologies Corp., PEN, Zero Coupon,
9/08/97........................................ 178,500
----------
563,725
----------
UTILITIES 0.9%
4,000 Sprint Corp., DECS, 8.25%, 3/30/00............... 145,104
500,000 U. S. Cellular Corp., LYON, Zero Coupon, 6/15/15. 170,000
----------
315,104
----------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $1,551,702).............................. 1,679,692
----------
</TABLE>
F-9
<PAGE> 237
GROWTH & INCOME II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Investments 9.3%
REPURCHASE AGREEMENT 9.0%
**$ 3,125,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%, due
11/1/95 (Collateralized by U.S. Government obligations
in a pooled cash account) repurchase proceeds $3,125,510. $ 3,125,000
-----------
UNITED STATES GOVERNMENT OBLIGATIONS 0.3%
**100,000 United States Treasury Bills, 5.33%, 2/8/96................ 98,525
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,223,550)............. 3,223,525
-----------
TOTAL INVESTMENTS (Cost $33,827,891) 104.3%................ 36,165,235
Other assets and liabilities, net (4.3%)................... (1,498,311)
-----------
NET ASSETS, equivalent to $13.92 per share for
Class A and $13.88 per share for Class B shares 100%...... $34,666,924
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 970,197 Class A and 1,525,260 Class B
shares outstanding..................................................................... $ 24,955
Capital surplus......................................................................... 31,524,800
Undistributed net realized gain on securities........................................... 784,850
Net unrealized appreciation (depreciation) of securities
Investments........................................................................... 2,337,344
Futures contracts..................................................................... (5,025)
----------
NET ASSETS.............................................................................. $34,666,924
===========
</TABLE>
*Non-income producing security.
**Securities with a market value of approximately $600,000 were placed as
collateral for futures contracts (see Note 1D)
ACES--Automatically convertible equity stock
DECS--Dividend enhanced convertible stock
LYON--Liquid yield option note, zero coupon
MIPS--Monthly income paying security
PEN--Pharmaceutical exchange note
PERCS--Preferred equity redeemable cumulative stock
See Notes to Financial Statements.
F-10
<PAGE> 238
GROWTH AND INCOME II FUND STATEMENT OF OPERATIONS
Year Ended October 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends........................................................................................................... $ 390,874
Interest............................................................................................................ 179,223
----------
Investment income................................................................................................. 570,097
----------
EXPENSES
Advisory fees...................................................................................................... 115,168
Shareholder service agent's fees and expenses...................................................................... 111,024
Accounting services................................................................................................ 46,448
Service fees--Class A.............................................................................................. 18,742
Distribution and service fees--Class B............................................................................. 102,215
Trustees' fees and expenses........................................................................................ 23,354
Audit fees......................................................................................................... 12,633
Legal fees......................................................................................................... 1,119
Reports to shareholders............................................................................................ 12,870
Registration and filing fees....................................................................................... 86,375
Miscellaneous...................................................................................................... 873
Expense reimbursement.............................................................................................. (26,000)
----------
Total expenses................................................................................................... 504,821
----------
Net investment income............................................................................................ 65,276
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities
Investments..................................................................................................... 794,752
Futures contracts............................................................................................... 127,864
Net unrealized appreciation (depreciation) of securities during the period
Investments..................................................................................................... 2,256,207
Futures contracts............................................................................................... (900)
----------
Net realized and unrealized gain on securities.................................................................... 3,177,923
----------
Increase in net assets resulting from operations.................................................................. $3,243,199
==========
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE> 239
GROWTH AND INCOME II FUND STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
May 3, 1994*
Year Ended through
October 31, 1995 October 31, 1994
---------------- ----------------
<S> <C> <C>
NET ASSETS, beginning of period................................... $ 7,111,500 $ 200
----------- ----------
Operations
Net investment income........................................... 65,276 54,709
Net realized gain (loss) on securities.......................... 922,616 (121,393)
Net unrealized appreciation of securities during the period..... 2,255,307 77,012
----------- ----------
Increase in net assets resulting from operations.............. 3,243,199 10,328
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM (see Note 1H)
Net investment income
Class A....................................................... (60,588) (11,970)
Class B....................................................... (4,688) (6,840)
----------- ----------
(65,276) (18,810)
----------- ----------
Excess of book-basis net investment income
Class A....................................................... (19,387) --
Class B....................................................... (32,885) --
----------- ----------
(52,272) --
----------- ----------
Total distributions........................................... (117,548) (18,810)
----------- ----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A....................................................... 11,271,055 3,526,516
Class B....................................................... 17,102,298 3,654,518
----------- ----------
28,373,353 7,181,034
----------- ----------
Proceeds from shares issued for distributions reinvested
Class A....................................................... 78,007 11,544
Class B....................................................... 37,331 6,749
----------- ----------
115,338 18,293
----------- ----------
Cost of shares redeemed
Class A....................................................... (2,680,200) (56,689)
Class B....................................................... (1,378,718) (22,856)
----------- ----------
(4,058,918) (79,545)
----------- ----------
Increase in net assets resulting from capital transactions.... 24,429,773 7,119,782
----------- ----------
INCREASE IN NET ASSETS............................................ 27,555,424 7,111,300
----------- ----------
NET ASSETS, end of period......................................... $34,666,924 $7,111,500
=========== ==========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-12
<PAGE> 240
GOVERNMENT II FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
United States Treasury Notes 54.2%
$ 800,000 6.50%, 8/15/97............................................................ $ 811,504
**400,000 7.25%, 11/15/96........................................................... 406,376
400,000 7.50%, 12/31/96........................................................... 408,312
600,000 7.75%, 12/31/99........................................................... 642,468
800,000 7.875%, 7/31/96........................................................... 812,752
**1,200,000 7.875%, 1/15/98........................................................... 1,254,000
**1,900,000 8.50%, 11/15/95........................................................... 1,901,482
**3,280,000 8.875%, 2/15/96........................................................... 3,308,700
400,000 9.00%, 5/15/98............................................................ 430,752
**500,000 9.25%, 1/15/96............................................................ 503,440
-----------
TOTAL UNITED STATES TREASURY NOTES (Cost $10,514,718)................... 10,479,786
-----------
United States Government Agencies 39.7%
Federal Home Loan Mortgage Corp.
184,606 7.00%, pool, 10/01/24..................................................... 183,164
737,647 7.50%, pools, 7/01/24 to 6/01/25.......................................... 745,946
957,996 8.00%, pools, 4/01/23 to 10/01/25......................................... 981,352
Federal National Mortgage Association
385,582 7.00%, pool, 5/01/24...................................................... 382,328
712,679 7.50%, pools, 8/01/24 to 11/01/24......................................... 720,027
793,750 8.00%, pools, 8/01/24 to 8/01/25.......................................... 813,102
Government National Mortgage Association
170,969 7.00%, pool, 6/15/22...................................................... 169,795
2,144,680 7.50%, pools, 10/15/22 to 6/15/24......................................... 2,172,839
1,453,332 8.00%, pools, 2/15/23 to 6/15/25.......................................... 1,495,115
-----------
TOTAL UNITED STATES GOVERNMENT AGENCIES (Cost $7,275,810)............... 7,663,668
-----------
Forward Purchase Commitments 19.6%
*100,000 Federal Home Loan Mortgage Corp., 7.50%, settling 1/96...................... 100,838
Federal National Mortgage Association
*600,000 7.50%, settling 12/95..................................................... 605,304
*200,000 7.50%, settling 1/96...................................................... 201,484
Government National Mortgage Association
*2,500,000 7.00%, settling 1/96...................................................... 2,476,575
*400,000 7.50%, settling 12/95..................................................... 404,676
-----------
TOTAL FORWARD PURCHASE COMMITMENTS (Cost $3,770,500).................... 3,788,877
-----------
Repurchase Agreement 1.7%
330,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%, due 11/1/95
(collateralized by U.S. Government obligations in a pooled cash account)
repurchase proceeds $330,054 (Cost $330,000)............................. 330,000
-----------
TOTAL INVESTMENTS (Cost $21,891,028) 115.2%............................... 22,262,331
Other assets and liabilities, net 4.7%.................................... 913,372
Receivable for investments sold 2.6%...................................... 496,563
Payable for investments purchased (22.5%)................................. (4,353,063)
-----------
NET ASSETS, equivalent to $12.14 per share for Class A
and $12.14 per share for Class B shares 100%............................ $19,319,203
===========
</TABLE>
F-13
<PAGE> 241
GOVERNMENT II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
<S> <C>
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 809,931 Class A and 780,836 Class B shares outstanding...... $ 15,908
Capital surplus.................................................................................... 18,879,404
Accumulated net realized loss on securities........................................................ (22,577)
Net unrealized appreciation of securities:
Investments...................................................................................... 371,303
Forward commitments.............................................................................. 13,313
Futures contracts................................................................................ 61,852
-----------
NET ASSETS......................................................................................... $19,319,203
===========
</TABLE>
*Non-income producing security
**Securities with a market value of approximately $7.6 million were placed as
collateral for forwards commitments and futures contracts (see Note 1D)
See Notes to Financial Statements.
F-14
<PAGE> 242
GOVERNMENT II FUND STATEMENT OF OPERATIONS
Year Ended October 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest...................................................... $ 933,882
----------
EXPENSES
Advisory fees................................................. 71,599
Shareholder service agent's fees and expenses................. 39,267
Accounting services........................................... 50,709
Service fees--Class A......................................... 16,075
Distribution and service fees--Class B........................ 55,032
Trustees' fees and expenses................................... 23,241
Audit fees.................................................... 14,883
Legal fees.................................................... 1,165
Reports to shareholders....................................... 7,212
Registration and filing fees.................................. 87,812
Miscellaneous................................................. 683
----------
Total expenses.............................................. 367,678
----------
Net investment income....................................... 566,204
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments................................................. 42,159
Forward commitments......................................... 17,172
Futures contracts........................................... (33,004)
Net unrealized appreciation of securities during the period
Investments................................................. 518,081
Forward commitments......................................... 13,313
Futures contracts........................................... 61,852
----------
Net realized and unrealized gain on securities................ 619,573
----------
Increase in net assets resulting from operations.............. $1,185,777
==========
</TABLE>
See Notes to Financial Statements.
F-15
<PAGE> 243
GOVERNMENT II FUND STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended May 3, 1994*
October 31, through October 31,
1995 1994
------------- -------------------
<S> <C> <C>
NET ASSETS, beginning of period.............................................. $ 7,342,156 $ 200
----------- -----------
OPERATIONS
Net investment income....................................................... 566,204 89,214
Net realized gain (loss) on securities...................................... 26,327 (35,179)
Net unrealized appreciation (depreciation) of securities during the period.. 593,246 (146,778)
----------- -----------
Increase (decrease) in net assets resulting from operations............... 1,185,777 (92,743)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM (see Note 1H)
Net investment income
Class A.................................................................... (328,298) (66,280)
Class B.................................................................... (237,906) (17,949)
----------- -----------
(566,204) (84,229)
----------- -----------
Excess of book-basis net investment income
Class A.................................................................... (10,291) --
Class B.................................................................... (8,419) --
----------- -----------
(18,710) --
----------- -----------
Total distributions...................................................... (584,914) (84,229)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A.................................................................... 6,491,908 5,138,916
Class B.................................................................... 7,373,364 2,976,454
----------- -----------
13,865,272 8,115,370
----------- -----------
Proceeds from shares issued for distributions reinvested
Class A.................................................................... 331,815 60,050
Class B.................................................................... 237,404 17,072
----------- -----------
569,219 77,122
----------- -----------
Cost of shares redeemed
Class A.................................................................... (1,866,580) (516,794)
Class B.................................................................... (1,191,727) (156,770)
----------- -----------
(3,058,307) (673,564)
----------- -----------
Increase in net assets resulting from capital transactions................. 11,376,184 7,518,928
----------- -----------
INCREASE IN NET ASSETS....................................................... 11,977,047 7,341,956
----------- -----------
NET ASSETS, end of period.................................................... $19,319,203 $ 7,342,156
=========== ===========
</TABLE>
*Commencement of operations
See Notes to Financial Statements
F-16
<PAGE> 244
EMERGING GROWTH II FUND Statement of Net Assets
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 94.9%
CONSUMER DISTRIBUTION 7.4%
2,500 Alco Standard Corp...................................... $ 221,250
*1,000 Baby Superstore, Inc.................................... 47,250
*1,000 Boise Cascade Office Products Corp...................... 36,125
3,500 Casey's General Stores, Inc............................. 80,500
*1,500 CDW Computer Centers, Inc............................... 72,750
*5,000 CompUSA, Inc............................................ 191,250
*4,000 Consolidated Stores Corp................................ 92,500
*4,000 Corporate Express, Inc.................................. 104,500
*1,000 Creative Computer, Inc.................................. 29,000
3,000 Fastenal Co............................................. 104,437
*2,000 Garden Ridge Corp....................................... 71,500
*6,000 General Nutrition Companies, Inc........................ 149,250
2,500 Just For Feet, Inc...................................... 59,062
*4,000 Kroger Co............................................... 133,500
*2,000 Micro Warehouse, Inc.................................... 89,000
*1,000 Petco Animal Supplies................................... 28,000
2,500 Richfood Holdings, Inc.................................. 62,500
*2,500 Safeway, Inc............................................ 118,125
*3,500 Staples Inc............................................. 93,188
*7,500 Sunglass Hut International, Inc......................... 204,375
----------
1,988,062
----------
CONSUMER DURABLES 1.3%
2,000 Black & Decker Corp..................................... 67,750
2,500 Clayton Homes, Inc...................................... 65,625
2,000 Harman International Industries, Inc.................... 92,250
*4,000 Toll Brothers, Inc...................................... 71,500
*500 TransPro, Inc........................................... 5,500
*2,000 Ultralife Batteries, Inc................................ 40,500
----------
343,125
----------
CONSUMER NON-DURABLES 3.3%
2,000 Coca-Cola Enterprises, Inc.............................. 53,250
2,000 Fila Holdings, ADR...................................... 86,250
2,500 First Brands Corp....................................... 114,375
*3,000 Nu-Kote Holding, Inc., Class A.......................... 62,250
*2,500 Quiksilver, Inc......................................... 77,500
2,000 St. John Knits, Inc..................................... 95,750
2,000 Starbucks Corp.......................................... 78,500
*5,500 Tommy Hilfiger Corp..................................... 209,688
*500 USA Detergents, Inc..................................... 12,750
3,500 Wolverine World Wide, Inc............................... 105,000
----------
895,313
----------
CONSUMER SERVICES 8.8%
*2,000 Alternative Resources Corp.............................. 62,000
2,000 American Radio Systems Corp............................. 45,000
3,500 Applebees International, Inc............................ 98,437
*4,000 Boston Chicken, Inc..................................... 135,250
</TABLE>
F-17
<PAGE> 245
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES--continued
*2,000 Clear Channel Communications, Inc......................... $ 164,000
*3,500 Corrections Corp. of America.............................. 190,750
3,500 Equifax, Inc.............................................. 136,500
*2,500 Evergreen Media Corp., Class A............................ 68,125
*2,500 Gartner Group, Inc........................................ 109,062
2,000 Hospitality Franchise System, Inc......................... 122,500
*4,000 Infinity Broadcasting Corp................................ 130,000
2,000 Interpublic Group Companies, Inc.......................... 77,500
4,000 La Quinta Inns, Inc....................................... 103,000
*3,500 Lone Star Steakhouse & Saloon, Inc........................ 135,187
3,000 Meredith Corp............................................. 107,250
*5,000 Mirage Resorts, Inc....................................... 163,750
3,000 National Data Corp........................................ 79,500
*700 Outback Steakhouse, Inc................................... 21,963
*2,000 Regal Cinemas, Inc........................................ 78,500
3,000 Reynolds & Reynolds Co.................................... 106,875
*2,000 Scientific Games Holdings Corp............................ 65,500
*1,500 Sinclair Broadcast Group, Class A......................... 31,125
3,000 V-Tel Corp................................................ 54,000
1,000 Wallace Computer Services, Inc............................ 56,375
500 Wendy's International, Inc................................ 9,938
----------
2,352,087
----------
ENERGY 4.5%
2,000 Apache Corp............................................... 51,000
*3,448 BJ Services Co. (includes 60 warrants, expiring 4/13/00).. 79,888
*1,500 Cairn Energy USA, Inc..................................... 18,000
2,000 Camco International, Inc.................................. 45,750
*3,000 Chesapeake Energy Corp.................................... 87,750
*2,000 Diamond Offshore Drilling................................. 49,750
500 Enron Oil & Gas Co........................................ 10,000
*7,500 Global Marine, Inc........................................ 48,750
*4,000 Input/Output, Inc......................................... 149,500
2,500 Kerr McGee Corp........................................... 137,813
*2,500 Newfield Exploration Co................................... 73,750
1,000 Phoenix Resource Co....................................... 17,750
4,500 Pogo Producing Co......................................... 90,563
*6,500 Pride Petroleum Services, Inc............................. 56,875
*4,500 Smith International, Inc.................................. 72,000
4,500 Sonat Offshore Drilling, Inc.............................. 142,875
2,500 Tidewater, Inc............................................ 65,938
1,000 Varco International, Inc.................................. 9,125
----------
1,207,077
----------
FINANCE 10.3%
2,000 AAMES Financial Corp...................................... 50,000
4,000 Bank of New York, Inc..................................... 168,000
6,500 Bank of Boston Corp....................................... 289,250
2,500 BayBanks, Inc............................................. 202,500
3,000 City National Corp........................................ 39,750
1,200 CMAC Investment Corp...................................... 57,000
</TABLE>
F-18
<PAGE> 246
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------
<S> <C> <C>
FINANCE--continued
*2,500 Credit Acceptance Corp............................... $ 58,750
2,500 Cullen Frost Bankers, Inc............................ 127,500
2,500 EXEL Limited......................................... 133,750
3,000 FINOVA Group, Inc.................................... 135,750
2,500 First American Corp.................................. 109,687
2,000 First Bank System, Inc............................... 99,500
7,000 Green Tree Financial Corp............................ 186,375
1,000 Household International, Inc......................... 56,250
2,000 MBNA Corp............................................ 73,750
2,500 Mercantile Bancorporation, Inc....................... 110,000
3,500 Mercury Financial Co................................. 67,375
2,500 Mercury General Corp................................. 105,000
1,500 Meridian Bancorp, Inc................................ 64,125
2,000 Money Store, Inc..................................... 80,000
*3,500 Oxford Resources Corp., Class A...................... 91,875
2,000 Peoples Heritage Financial Group, Inc................ 38,000
1,500 Star Banc Corp....................................... 83,063
3,000 TCF Financial Corp................................... 176,250
3,500 United Companies Financial Corp...................... 98,875
1,500 Vesta Insurance Group, Inc........................... 60,563
----------
2,762,938
----------
HEALTH CARE 15.2%
*500 American Oncology Resources.......................... 17,500
*3,500 AMSCO International, Inc............................. 56,000
*5,000 Boston Scientific Corp............................... 210,625
*1,000 Coherent, Inc........................................ 28,250
*1,200 Community Health Systems, Inc........................ 38,100
*2,000 CompDent, Corp....................................... 62,250
*2,500 Cycare System, Inc................................... 77,500
*4,000 Dura Pharmaceuticals, Inc............................ 117,000
*1,500 Genzyme Corp......................................... 87,375
5,000 Guidant Corp......................................... 160,000
*2,500 Gulf South Medical Supply, Inc....................... 51,875
6,000 HBO & Co............................................. 424,500
*8,000 Health Management Associates, Inc., Class A.......... 172,000
*1,500 Health Management Systems, Inc....................... 48,000
*3,500 Healthsouth Rehabilitation........................... 91,438
*1,000 HPR, Inc............................................. 26,000
4,000 Invacare Corp........................................ 101,000
*1,500 Medaphis Corp........................................ 47,625
*2,000 Medpartners, Inc..................................... 56,000
7,000 Medtronic, Inc....................................... 404,250
4,000 Mentor Corp.......................................... 88,000
*2,000 Nellcor Puritan Bennett, Inc......................... 115,000
*3,000 OccuSystems, Inc..................................... 62,062
5,000 OmniCare, Inc........................................ 181,250
*1,500 Oxford Health Plans, Inc............................. 117,375
*7,000 Phycor, Inc.......................................... 257,250
*1,500 Physician Reliance Network........................... 49,875
</TABLE>
F-19
<PAGE> 247
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE--continued
*4,500 Physician Sales & Service, Inc.................. $ 73,125
*1,000 Quintiles Transnational Corp.................... 64,250
*2,000 Renal Treatment Centers, Inc.................... 72,000
*2,500 Research Industries Corp........................ 68,750
1,500 Respironics, Inc................................ 32,712
2,000 St. Jude Medical, Inc........................... 106,500
*3,000 Steris Corp..................................... 101,250
*1,500 Sybron Corp..................................... 63,750
*1,000 Target Therapeutics, Inc........................ 77,500
*2,000 Thermedics, Inc................................. 36,750
*1,500 United Dental Care, Inc......................... 45,750
*467 Vencor, Inc..................................... 12,959
*3,500 Watsons Pharmaceuticals, Inc.................... 156,625
----------
4,060,021
----------
PRODUCER MANUFACTURING 6.2%
2,500 BMC Industries, Inc............................. 96,563
2,500 Case Corp....................................... 95,312
*1,500 Cognex Corp..................................... 89,625
4,500 Danaher Corp.................................... 139,500
2,500 Dover Corp...................................... 98,750
2,500 Duriron, Inc.................................... 66,875
*1,000 FMC Corp........................................ 71,625
*4,500 Glenayre Technologies........................... 289,125
2,000 Greenfield Industries, Inc...................... 60,000
1,000 Helix Technology Corp........................... 37,500
*1,500 Kent Electronics Corp........................... 73,125
3,000 Measurex Corp................................... 92,250
*2,500 Mueller Industries, Inc......................... 58,750
1,500 Precision Castparts Co.......................... 53,625
*3,000 Robotic Vision Systems, Inc..................... 68,625
*3,500 Sanifill, Inc................................... 110,250
*3,000 United Waste Systems, Inc....................... 118,500
*2,000 USA Waste Services, Inc......................... 42,000
----------
1,662,000
----------
RAW MATERIALS/PROCESSING INDUSTRIES 4.5%
5,000 Albemarle Corp.................................. 93,125
1,150 Eastman Chemical Co............................. 68,425
1,500 Goodrich B. F. Co............................... 98,813
1,500 Hercules, Inc................................... 80,062
3,500 IMC Global, Inc................................. 245,000
2,500 Millipore Corp.................................. 88,437
3,000 Mineral Technologies, Inc....................... 119,625
3,000 Potash Corp. Sask, Inc.......................... 208,875
1,500 Rayonier, Inc................................... 56,250
*2,000 Sealed Air Corp................................. 52,750
2,000 Sonoco Products Co.............................. 49,500
*1,500 UCAR International, Inc......................... 42,750
----------
1,203,612
----------
</TABLE>
F-20
<PAGE> 248
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ----------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 28.4%
2,000 Allen Group, Inc................................ $ 49,000
*5,500 Altera Corp..................................... 332,750
1,500 America Online, Inc............................. 120,000
*5,000 Analog Devices, Inc............................. 180,625
*3,000 Applied Materials, Inc.......................... 150,375
*7,000 Ascend Communications, Inc...................... 455,000
*1,500 Aspect Telecommunications Corp.................. 51,562
*1,500 Aspen Technology, Inc........................... 41,250
*9,000 Atmel Corp...................................... 281,250
*3,000 Bay Networks, Inc............................... 198,750
*500 C P Clare Corp.................................. 12,938
*2,500 Cabletron Systems, Inc.......................... 196,562
*7,250 Cadence Design Systems, Inc..................... 233,812
*1,500 Cambridge Technology Partners, Inc.............. 85,125
*2,000 C-Cube Microsystems, Inc........................ 138,250
3,000 Ceridian Corp................................... 130,500
*2,000 Credence Systems Corp........................... 74,750
*2,000 Cyberoptics Corp................................ 66,000
*5,500 Dell Computer Corp.............................. 256,438
*6,000 Informix Corp................................... 174,750
*3,000 International Rectifier Corp.................... 135,375
*4,000 Kemet Corp...................................... 138,000
*3,500 KLA Instruments Corp............................ 149,625
*2,000 Komag, Inc...................................... 114,000
*1,500 Kronos, Inc..................................... 69,000
7,000 Linear Technology Corp.......................... 306,250
*5,500 LSI Logic Corp.................................. 259,187
*2,500 Macromedia, Inc................................. 92,500
*2,500 McAfee Associations, Inc........................ 145,625
*4,000 Medic Computer Systems, Inc..................... 213,000
2,000 Micron Technology, Inc.......................... 141,250
*2,500 Mylex Corp...................................... 46,563
*3,000 National Semiconductor Corp..................... 73,125
*2,500 Network General Corp............................ 103,750
*2,000 Parametric Technology Corp...................... 134,000
*1,500 Peoplesoft, Inc................................. 129,000
*2,000 PRI Automation.................................. 74,000
1,500 Project Software & Development, Inc............. 39,750
*5,000 SCI Systems, Inc................................ 175,625
*2,000 Sierra On-Line, Inc............................. 74,500
*4,000 Sierra Semiconductor Corp....................... 71,500
2,000 Sundstrand Corp................................. 122,500
*3,000 Sunguard Data Systems, Inc...................... 82,500
1,500 Tektronix, Inc.................................. 88,875
*2,000 Tencor Instruments.............................. 85,250
*1,000 Teradyne, Inc................................... 33,375
*500 Thermolase Corp................................. 10,188
*500 Thermospectra Corp.............................. 8,125
*7,000 3Com Corp....................................... 329,000
*4,500 U.S. Robotics Corp.............................. 416,250
*5,000 Ultratech Stepper, Inc.......................... 200,000
*4,500 Vicor Corp...................................... 91,969
</TABLE>
F-21
<PAGE> 249
EMERGING GROWTH II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY--continued
*3,000 Vishay Intertechnology, Inc........................................................... $ 105,750
2,000 Watkins Johnson Co.................................................................... 96,250
-----------
7,585,344
-----------
TRANSPORTATION 3.0%
2,500 Airborne Freight Corp................................................................. 65,625
4,000 Comair Holdings, Inc.................................................................. 112,250
2,000 Conrail, Inc.......................................................................... 137,500
*2,500 Continental Airlines, Inc., Class B................................................... 89,062
*2,000 Fritz Companies, Inc.................................................................. 70,000
*3,500 Northwest Airlines, Inc., Class A..................................................... 140,437
*1,000 UAL Corp.............................................................................. 175,875
-----------
790,749
-----------
UTILITIES 2.0%
2,500 AT&T Capital Corp..................................................................... 100,000
*1,000 Cellular Communications Inc., Class A................................................. 53,625
4,000 Cincinnati Bell, Inc.................................................................. 117,500
4,500 Frontier Corp......................................................................... 121,500
*6,000 LCI International, Inc................................................................ 108,000
*1,000 Midcom Communications, Inc............................................................ 15,000
*1,000 Palmer Wireless, Inc.................................................................. 22,750
-----------
538,375
-----------
TOTAL COMMON STOCK (Cost $23,221,938)............................................... 25,388,703
-----------
<CAPTION>
Principal
Amount Repurchase Agreement 9.7%
- ----------
$2,585,000 SBC Capital Markets, Inc., dated 10/31/95, 5.87%, due 11/1/95
(collateralized by U.S. Government obligations in a pooled
cash account) repurchase proceeds $2,585,421 (Cost $2,585,000)....................... 2,585,000
-----------
TOTAL INVESTMENTS (Cost $25,806,938) 104.6%.......................................... 27,973,703
Other assets and liabilities, net (4.6%) (1,230,130)
-----------
NET ASSETS, equivalent to $15.12 per share for Class A and
$15.04 per share for Class B shares 100%............................................ $26,743,573
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 1,054,794 Class A and 717,720 Class B shares outstanding.. $ 17,725
Capital surplus.................................................................................. 24,589,075
Accumulated net realized loss on securities...................................................... (29,992)
Net unrealized appreciation of securities........................................................ 2,166,765
-----------
NET ASSETS ...................................................................................... $26,743,573
===========
</TABLE>
*Non-income producing security.
See Notes to Financial Statements.
F-22
<PAGE> 250
EMERGING GROWTH II FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations February 21, 1995*
through
October 31, 1995
------------------
<S> <C>
INVESTMENT INCOME
Dividends...................................................... $ 35,352
Interest....................................................... 44,084
----------
Investment income............................................ 79,436
----------
EXPENSES
Advisory fees.................................................. 47,662
Shareholder service agent's fees and expenses.................. 104,742
Accounting services............................................ 6,365
Service fees--Class A.......................................... 11,480
Distribution and service fees--Class B......................... 27,405
Trustees' fees and expenses.................................... 7,196
Audit fees..................................................... 10,300
Legal fees..................................................... 1,336
Reports to shareholders........................................ 4,434
Registration and filing fees................................... 43,600
Organization................................................... 2,805
Miscellaneous.................................................. 369
Expense reimbursement.......................................... (45,493)
----------
Total expenses............................................... 222,201
----------
Net investment loss.......................................... (142,765)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities................................ (29,992)
Net unrealized appreciation of securities during the period.... 2,166,765
----------
Net realized and unrealized gain on securities............... 2,136,773
----------
Increase in net assets resulting from operations............. $1,994,008
==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
February 21, 1995*
through
October 31, 1995
------------------
<S> <C>
NET ASSETS, beginning of period................................ $ 200
-----------
OPERATIONS
Net investment loss.......................................... (142,765)
Net realized loss on securities.............................. (29,992)
Net unrealized appreciation of securities during the period.. 2,166,765
-----------
Increase in net assets resulting from operations........... 1,994,008
-----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A.................................................... 15,664,882
Class B.................................................... 10,338,125
-----------
26,003,007
-----------
Cost of shares redeemed
Class A.................................................... (1,038,319)
Class B.................................................... (215,323)
-----------
(1,253,642)
-----------
Increase in net assets resulting from capital transactions... 24,749,365
-----------
INCREASE IN NET ASSETS......................................... 26,743,373
-----------
NET ASSETS, end of period...................................... $26,743,573
===========
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-23
<PAGE> 251
INTERNATIONAL EQUITY II FUND STATEMENT OF NET ASSETS
October 31, 1995
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 85.7%
AUSTRALIA 2.3%
10,000 Burns Philp & Co...................................... $ 22,395
25,000 Coca-Cola Amatil...................................... 193,480
--------
215,875
--------
AUSTRIA 6.0%
1,500 Austria Micro System.................................. 277,988
1,200 Baumax, AG............................................ 48,841
1,500 Burgenland Holding.................................... 60,900
*1,000 Va Stahl, AG.......................................... 30,601
1,200 Va Technologie, AG.................................... 139,130
--------
557,460
--------
CANADA 2.1%
2,500 Loewen Group, Inc..................................... 100,295
*18,000 Wescam, Inc........................................... 92,364
--------
192,659
--------
CHILE 1.7%
2,500 Embotelladora Andina, ADR............................. 83,125
3,000 Madeco, SA, ADR....................................... 74,625
--------
157,750
--------
DENMARK 3.4%
2,000 Kobenhavn Lufthave.................................... 150,073
*7,000 Scandinav Mobility.................................... 166,545
--------
316,618
--------
FINLAND 1.2%
1,600 Nokia (AB) OY, Series A............................... 91,534
400 Nokia (AB) OY, Series K............................... 23,354
--------
114,888
--------
FRANCE 4.5%
1,214 Castorama Dubois...................................... 108,321
1,000 Ecco, SA.............................................. 155,007
440 Sidel, SA............................................. 152,782
--------
416,110
--------
GERMANY 4.1%
200 Bayer Motoren Werk.................................... 107,275
2,000 Fielmann, AG.......................................... 110,117
2,500 SGL Carbon............................................ 163,931
--------
381,323
--------
</TABLE>
F-24
<PAGE> 252
INTERNATIONAL EQUITY II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
HONG KONG 3.4%
40,000 Hong Kong Electric................................... $136,063
20,000 Hutchison Whampoa.................................... 110,196
10,000 Swire Pacific........................................ 75,016
--------
321,275
--------
IRELAND 4.9%
30,248 Bank of Ireland...................................... 201,751
12,000 CRH.................................................. 79,262
30,000 Independent News..................................... 179,699
--------
460,712
--------
ISRAEL 0.7%
*3,000 Gilat Satellite Networks, Ltd........................ 66,750
--------
ITALY 6.3%
5,000 Alleanza Assicuraz................................... 34,661
*10,000 De Rigo, ADS......................................... 206,250
*5,000 Gucci Group, NV...................................... 150,000
50,000 Telecom Italia....................................... 75,910
70,000 Telecom Italia, Mobile............................... 117,472
--------
584,293
--------
JAPAN 7.3%
3,000 Bunkyodo Co.......................................... 67,745
10,000 Hitachi.............................................. 102,644
1,000 Kyocera Corp......................................... 81,920
2,000 Mabuchi Motor Co..................................... 121,023
4,000 Ohmoto Gumi Co....................................... 89,936
5,000 Sato Corp............................................ 102,645
2,000 Trans Cosmos, Inc.................................... 111,051
--------
676,964
--------
MALAYSIA 3.6%
20,000 Gamuda Berhad........................................ 83,432
20,000 Leader Univ Holdings................................. 53,916
20,000 Sungei Way Holdings.................................. 67,295
25,000 Sunway Building Tech................................. 66,903
25,000 UMW Holding Berhad................................... 59,524
--------
331,070
--------
MEXICO 4.2%
60,000 Cifra SA, DE CV...................................... 61,137
30,400 Gruma................................................ 89,600
*15,000 Grupo Carso.......................................... 78,526
7,000 Kimberly Clark, Mexico............................... 91,369
2,500 Telefonos de Mexico, SA, ADR......................... 68,750
--------
389,382
--------
</TABLE>
F-25
<PAGE> 253
INTERNATIONAL EQUITY II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS 6.7%
3,500 Getronics, NV.......................................... $167,036
500 Heineken, NV........................................... 88,731
4,000 IHC Caland, NV......................................... 113,829
2,000 Philips Electronics, NV................................ 77,250
4,000 Randstad Holdings...................................... 180,505
--------
627,351
--------
NEW ZEALAND 0.7%
1,000 Telecom Corp of New Zealand, ADR....................... 66,375
--------
NORWAY 2.6%
3,000 Petroleum Geo Service.................................. 56,849
30,000 Tomra Systems, AS...................................... 189,337
--------
246,186
--------
PHILIPPINES 1.3%
*300,000 Bankard, Inc........................................... 123,991
--------
SINGAPORE 4.8%
10,000 Cerebos Pacific........................................ 62,279
6,000 Fraser & Neave......................................... 70,913
75,000 QAF.................................................... 90,764
15,000 Sembawang Maritime..................................... 50,743
100,000 Steamers Maritime...................................... 74,310
20,000 Van Der Horst.......................................... 102,619
--------
451,628
--------
SWEDEN 5.7%
2,500 Astra, AB, Series A.................................... 91,859
1,500 Autoliv, AB............................................ 86,061
400 Ericsson (LM) Telephone................................ 8,493
4,000 Ericsson (LM) Telephone, Series B...................... 84,932
1,000 Hennes & Mauritz....................................... 65,356
5,000 Hoganas, AG............................................ 134,777
2,000 Kinnerik Investment, Series B.......................... 55,417
--------
526,895
--------
SWITZERLAND 2.3%
20 Roche Holdings, AG..................................... 145,336
1,000 Roche Holdings, Ltd, ADR............................... 71,875
--------
217,211
--------
THAILAND 1.5%
20,000 Quality Houses Co...................................... 88,218
4,000 UTD Communications Industries.......................... 50,546
--------
138,764
--------
</TABLE>
F-26
<PAGE> 254
INTERNATIONAL EQUITY II FUND STATEMENT OF NET ASSETS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM 4.4%
15,000 British Biotech.................................................................... $ 211,541
5,000 Carlton Communications............................................................. 76,166
25,000 Rentokil Group..................................................................... 124,506
----------
412,213
----------
TOTAL COMMON STOCKS (Cost $7,387,128)............................................ 7,993,743
----------
<CAPTION>
Principal
Amount Repurchase Agreement 14.0%
- -----------
$1,303,000 State Street Bank & Trust Co., dated 10/31/95, 4.50%, due 11/01/95
(collateralized by U.S. Government Bond, 8.75%, 5/15/17)
repurchase proceeds $1,303,163 (Cost $1,303,000).................................. 1,303,000
----------
TOTAL INVESTMENTS (Cost $8,690,128) 99.7%......................................... 9,296,743
Foreign currency (Cost $364,109) 3.9%............................................. 363,565
Other assets and liabilities, net (3.6%).......................................... (338,579)
----------
NET ASSETS, equivalent to $13.86 per share for Class A and $13.79
per share for Class B shares 100%................................................ $9,321,729
==========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 474,025 Class A, 199,498 Class B shares outstanding...... $ 6,735
Capital surplus................................................................................. 8,709,504
Net unrealized appreciation (depreciation) of securities
Investments................................................................................... 606,615
Foreign currency.............................................................................. (544)
Other foreign denominated assets and liabilities.............................................. (581)
----------
NET ASSETS...................................................................................... $9,321,729
==========
</TABLE>
*Non-income producing security
See Notes to Financial Statements.
F-27
<PAGE> 255
INTERNATIONAL EQUITY II FUND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Operations
February 21, 1995*
through
October 31, 1995
------------------
<S> <C>
INVESTMENT INCOME
Dividends (net of $7,178 of foreign taxes withheld at source)......................... $ 51,723
Interest.............................................................................. 21,913
----------
Investment Income.................................................................. 73,636
----------
EXPENSES
Advisory fees......................................................................... 35,227
Shareholder service agent's fees and expenses......................................... 28,604
Accounting services................................................................... 4,807
Service fees--Class A................................................................. 6,920
Distribution and service fees--Class B................................................ 7,546
Trustees' fees and expenses........................................................... 6,987
Audit fees............................................................................ 17,300
Custodian fees........................................................................ 66,374
Legal fees............................................................................ 1,260
Reports to shareholders............................................................... 2,932
Registration and filing fees.......................................................... 34,696
Organization.......................................................................... 2,805
Miscellaneous......................................................................... 226
Expense reimbursement................................................................. (82,201)
----------
Total expenses..................................................................... 133,483
----------
Net investment loss................................................................ (59,847)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments........................................................................ 13,300
Foreign currency................................................................... (75)
Net unrealized appreciation (depreciation) of securities during the period
Investments........................................................................ 606,615
Foreign currency................................................................... (544)
Other foreign denominated assets and liabilities................................... (581)
----------
Net realized and unrealized gain on securities........................................ 618,715
----------
Increase in net assets resulting from operations...................................... $ 558,868
==========
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets
February 21, 1995*
through
October 31, 1995
------------------
<S> <C>
NET ASSETS, beginning of period....................................................... $ 200
----------
OPERATIONS
Net investment loss.................................................................. (59,847)
Net realized gain on securities...................................................... 13,225
Net unrealized appreciation of securities during the period.......................... 605,490
----------
Increase in net assets resulting from operations.................................... 558,868
----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A.............................................................................. 6,176,592
Class B.............................................................................. 2,722,626
----------
8,899,218
----------
Cost of shares redeemed
Class A.............................................................................. (94,421)
Class B.............................................................................. (42,136)
----------
(136,557)
----------
Increase in net assets resulting from capital transactions........................... 8,762,661
----------
Increase in Net Assets................................................................ 9,321,529
----------
NET ASSETS, end of period............................................................. $9,321,729
==========
</TABLE>
*Commencement of operations
See Notes to Financial Statements
F-28
<PAGE> 256
NOTES TO FINANCIAL STATEMENTS
Note 1--Significant Accounting Policies
Common Sense Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as a diversified open-end management investment company
which offers shares in ten separate portfolios, five of which are described in
this report: Common Sense II Growth Fund ("Growth II"), Common Sense II Growth
and Income Fund ("Growth and Income II"), Common Sense II Government Fund
("Government II"), Common Sense II Emerging Growth Fund ("Emerging Growth II")
and Common Sense II International Equity Fund ("International Equity II"). Each
Fund is accounted for as a separate entity. Investments in foreign securities
involve certain risks not ordinarily associated with investments in securities
of domestic issuers, including fluctuations in foreign exchange rates, future
political and economical developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. The following is a
summary of significant accounting policies consistently followed by the Trust in
the preparation of its financial statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which the
last sale price is not available are valued at the most recent bid price.
U.S. Government securities are valued at the last reported bid price.
Securities for which market quotations are not readily available are valued
at fair value under a method approved by the Board of Trustees.
Short-term investments with a maturity of more than 60 days when purchased
are valued based on market quotations until the remaining days to maturity
become less than 61 days. From such time, until maturity, the investments are
valued at amortized cost.
B. Foreign Currency Translation
The market values of foreign securities, forward currency exchange contracts
and other assets and liabilities stated in foreign currency are translated
into U.S. dollars based on quoted exchange rates as of Noon Eastern Time. The
cost of securities is determined using historical exchange rates. Income and
expenses are translated at prevailing exchange rates when accrued or
incurred. Gains and losses on the sale of securities are not segregated for
financial reporting purposes between amounts arising from changes in exchange
rates and amounts arising from changes in the market prices of securities.
Realized gain and loss on foreign currency includes the net realized amount
from the sale of currency and the amount realized between trade date and
settlement date on security transactions.
C. Forward Currency Exchange Contracts
International Equity II enters into forward currency exchange contracts in
order to hedge its exposure to changes in foreign currency exchange rates on
its foreign portfolio holdings or settle transactions. A forward currency
exchange contract is a commitment to buy or sell a foreign security at a set
price on a future date. Changes in the value of the contract are recognized
by marking the contract to market on a daily basis to reflect current
currency translation rates. The Fund realizes gains or losses at the time the
forward currency exchange contract is closed. Risks may arise as a result of
the potential inability of the counterparties to meet the terms of their
contracts, and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
D. Futures Contracts and Forward Commitments
General--Transactions in futures contracts and forward commitments are
utilized in strategies to manage the market risk of the Trust's investments.
The purchase of a futures contract or forward commitments increases the
impact on net asset value of changes in the market price of investments.
Forward commitments have a risk of loss due to non performance of
counterparties. There is also a risk that the market movement of such
instruments may not be in the direction forecasted. Note 3--Investment
Activity contains additional information.
Futures Contracts--Upon entering into futures contracts, the Trust maintains
in a segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is held
as collateral in an account in the name of the broker, the Trust's agent in
acquiring the futures position. During the period the futures contract is
open, changes in the value of the contract ("variation margin") are
recognized by marking the contract to market on a daily basis. As unrealized
gains or losses are incurred, variation margin payments are received from or
made to the broker. Upon the closing or cash settlement of a contract, gains
and losses are realized. The cost of securities acquired through delivery
under a contract is adjusted by the unrealized gain or loss on the contract.
F-29
<PAGE> 257
NOTES TO FINANCIAL STATEMENTS, continued
Forward Commitments--The Trust trades certain securities under the terms of
forward commitments, whereby the settlement for payment and delivery occurs
at a specified future date. Forward commitments are privately negotiated
transactions between the Trust and dealers. Upon executing a forward
commitment and during the period of obligation, the Trust maintains
collateral of cash or securities in a segregated account with its custodian
in an amount sufficient to relieve the obligation. If the intent of the Trust
is to accept delivery of a security traded under a forward purchase
commitment, the commitment is recorded as a long-term purchase. For forward
purchase commitments which security settlement is not intended by the Trust
and all forward sales commitments, changes in the value of the commitment are
recognized by marking the commitment to market on a daily basis. During the
commitment, the Trust may either resell or repurchase the forward commitment
and enter into a new forward commitment, the effect of which is to extend the
settlement date. In addition, the Trust may occasionally close such forward
commitments prior to delivery. Gains and losses are realized upon the
ultimate closing or cash settlement of forward commitments.
E. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Trust acquires
ownership of a debt security and the seller agrees to repurchase the security
at a future time and specified price. The Trust may invest independently in
repurchase agreements, or transfer uninvested cash balances into a pooled
cash account along with other investment companies advised by Van Kampen
American Capital Asset Management, Inc. (the "Adviser"), the daily aggregate
of which is invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Trust will make payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the repurchase
proceeds due the Trust.
F. Federal Income Taxes
No provision for federal income taxes is required because each Fund intends
to elect to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all taxable net investment income and taxable net realized
capital gains to shareholders. It is anticipated that no distributions of
capital gains will be made until tax basis capital loss carryovers, if any,
expire or are offset by net realized capital gains.
At the end of the period, Emerging Growth II had a net realized capital loss
carryforward of approximately $20,000 for federal income tax purposes and may
be utilized to offset future capital gains until expiration in 2003.
G. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily.
Under the applicable foreign tax laws, a tax may be imposed on interest,
dividends, and realized gains generated from foreign investments. Such taxes
are generally reflected on the Statement of Operations as a reduction of the
related income or gains.
H. Dividends and Distributions
The Trust declares annual distributions from net capital gains. Dividends
from net investment income are declared daily for Government II, quarterly
for Growth and Income II and annually for Growth II, Emerging Growth II, and
International Equity II. Dividends and distributions to shareholders are
recorded on the record date.
The Trust distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ from
generally accepted accounting principles. Such dividends or distributions may
exceed financial statement earnings.
I. Debt Discount or Premium
The Trust accounts for debt discounts and premiums on the same basis as is
used for federal income tax reporting. Accordingly, original issue discounts
on debt securities purchased are amortized over the life of the security.
Premiums on debt securities are not amortized. Market discounts are
recognized at the time of sale as realized gains for book purposes, and
ordinary income for tax purposes.
F-30
<PAGE> 258
NOTES TO FINANCIAL STATEMENTS, continued
Note 2--Advisory Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Trust. Advisory fees to Adviser
are paid monthly, based on the average daily net assets of each Fund at an
annual rate as indicated by the following graduated fee schedules:
<TABLE>
<CAPTION>
Emerging Growth II, Growth II
& Growth and Income II Government II
----------------------------- --------------------------
Average Daily Annual Average Daily Annual
Net Assets Rate Net Assets Rate
---------------- ------ ---------------- ------
<S> <C> <C> <C>
First $1 billion .65% First $1 billion .60%
Next $1 billion .60% Next $1 billion .55%
Next $1 billion .55% Next $1 billion .50%
Next $1 billion .50% Next $1 billion .45%
Over $4 billion .45% Next $1 billion .40%
Over $5 billion .35%
</TABLE>
The Adviser has entered into a subadvisory agreement with Smith Barney Mutual
Funds Management, Inc. (the "Subadviser"), who provides advisory services to the
International Equity II Fund and the Adviser with respect to its investments in
foreign securities. Advisory fees for the International Equity II Fund are
calculated monthly, based on the average daily net assets of the Fund at the
annual rate of 1.00%. The Adviser pays 50% of its advisory fee to the
Subadviser.
The Adviser has agreed that it will reimburse the Trust for any expenses
(including the advisory fee, but excluding interest, brokerage commissions,
distribution and service fees, and other extraordinary expenses) in excess of
the most restrictive limitation imposed by state securities commissions. The
most restrictive expense limitation is presently believed to be 2.5% of the
Fund's average daily net assets up to $30 million, 2.0% of the next $70 million
of such net assets and 1.5% of the Fund's net assets in excess of $100 million.
The Trust received from California a waiver which allows each Fund to exclude
shareholder service costs from the calculation of the expense limitation. The
Adviser and, in the case of the International Equity II Fund, the Subadviser
may, from time to time, agree to waive their respective investment advisory fees
or any portion thereof or elect to reimburse a Fund for ordinary business
expenses in excess of an agreed upon amount. For the period, the entire expense
reduction amount for Growth II, Growth & Income II, and Emerging Growth II was
voluntary. For International Equity II, $26,302 of the expense reduction was
voluntary and $55,899 was reimbursed due to the contractual expense limitation.
The Adviser prepaid the Trust's initial registration and filing expenses. The
Trust amortized such expenses over a ten month period ended April 1995 for
Growth II, Growth and Income II, and Government II and ending in December 1995
for Emerging Growth II and International Equity II, respectively.
At the end of the period, the Adviser owned approximately 17.9% of International
Equity II's Class A outstanding shares.
Accounting services include the salaries and overhead expenses of the Trust's
Treasurer and the personnel operating under his direction. Charges are allocated
among investment companies advised by the Adviser. These charges include the
employee costs attributable to the Trust's accounting officers. A portion of the
accounting services expense was paid to the Adviser in reimbursement of
personnel, facilities and equipment costs attributable to the provision of
accounting services. The services provided by the Adviser are at cost.
PFS Distributors (the "Distributor"), a wholly owned subsidiary of Travelers
Group, Inc., serves as Distributor of the Trust's shares. The Distributor has an
exclusive selling agreement with PFS Investments, Inc. to sell shares of the
Trust. During the period, the Trust paid brokerage commissions of $406,044 to
companies which are deemed affiliates of the Distributor's parent because it
owns more than 5% of the companies' outstanding voting securities. Certain
officers and trustees of the Trust are officers and trustees of the Adviser or
its affiliates.
Under the Distribution Plans, each class of shares pays .25% per annum of its
average daily net assets to the Distributor as a service fee. The service fee is
intended to cover personal services provided to the shareholders by
representatives of PFS Investments, Inc. Class B shares pay an additional fee of
.75% per annum of their average daily net assets to reimburse the Distributor
for its distribution costs. Actual distribution expenses incurred by the
Distributor for Class B shares may exceed the amounts reimbursed to the
Distributor by the Fund. At the end of the period, the unreimbursed expenses
incurred by the Distributor under the Class B plan are as shown in the following
table and may be carried forward and reimbursed through either the collection of
the contingent deferred sales charges from share redemptions or, subject to the
annual renewal of the plans, future Trust reimbursements of distribution fees.
F-31
<PAGE> 259
NOTES TO FINANCIAL STATEMENTS, continued
Amounts paid by the affiliates during the period were as follows:
<TABLE>
<CAPTION>
Growth & Emerging International
Growth II Income II Government II Growth II Equity II
---------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Accounting services............................ $ 5,674 $ 5,525 $ 5,450 $ 687 $ --
Sales of Fund shares, Distributor commissions.. 115,963 67,581 37,676 47,949 11,149
Class B unreimbursed expenses (approximately).. 1,100,000 720,000 360,000 320,000 90,000
</TABLE>
At the end of the period, Growth II owned approximately .89% of the Van Kampen
American Capital Small Capitalization Fund ("Small Cap"), an investment company
managed by the Adviser. Small Cap comprised approximately 3% of Growth II's
total net assets. Small Cap's portfolio consisted of the following securities:
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------
<S> <C> <C>
Common Stock
CONSUMER DISTRIBUTION
22,000 Big B, Inc. $ 316,250
22,000 Books-A-Million, Inc. 280,500
11,000 Cardinal Health, Inc. 577,500
3,000 Carson Pirie Scott & Co. 50,625
4,000 CDW Computer Centers, Inc. 195,000
21,000 Circuit City Stores, Inc. 698,250
42,000 Claire's Stores, Inc. 834,750
12,000 CompUSA, Inc. 481,500
14,000 Consolidated Stores Corp. 327,250
1,000 Dole Food, Inc. 38,000
9,800 Eckerd Corp. 390,775
52,000 Fingerhut Companies, Inc. 695,500
46,000 General Nutrition Companies, Inc. 1,115,500
1,000 Great Atlantic & Pacific 20,375
29,000 Gymboree Corp. 659,750
11,000 Health Management, Inc. 126,500
2,000 Hills Stores Co. 15,250
10,000 Lear Seating Corp. 290,000
14,000 MacFrugals Bargains Closeouts 164,500
9,000 Medicine Shoppe International, Inc. 389,250
6,000 Mens Wearhouse, Inc. 235,500
15,000 Micro Wharehouse, Inc. 678,750
38,000 OfficeMax, Inc. 940,500
83,900 Pier 1 Imports, Inc. 818,025
5,000 Proffitts, Inc. 118,750
6,000 Rexel, Inc. 69,000
3,000 Richfood Holdings, Inc. 74,625
7,000 Ross Stores, Inc. 110,250
25,000 Staples, Inc. 668,750
42,800 Stop & Shop Companies, Inc. 877,400
40,000 Sunglass Hut International, Inc. 1,090,000
4,000 Tiffany & Co. 174,500
25,000 Viking Office Products, Inc. 1,109,375
43,000 Waban, Inc. 661,125
6,000 Whole Foods Market, Inc. 72,750
3,000 Younkers, Inc. 66,375
32,000 Zale Corp. 472,000
-----------
15,904,700
-----------
CONSUMER DURABLES
3,000 Borg Warner Automotive, Inc. 86,625
50,000 Breed Technologies, Inc. 925,000
47,000 Brunswick Corp. 922,375
21,000 Champion Enterprises, Inc. 546,000
35,000 Clayton Homes, Inc. 936,250
23,000 Cobra Golf, Inc. 621,000
4,000 Department 56, Inc. 182,500
24,000 Echlin, Inc. 864,000
5,000 Fleetwood Enterprises, Inc. 103,125
14,000 Gencorp, Inc. 148,750
8,400 Harman International Industries, Inc. 389,550
46,000 Leggett & Platt, Inc. 1,115,500
7,000 Lennar Corp. 161,875
14,000 Outboard Marine Corp. 297,500
7,000 Smith (A. O.) Corp. 146,125
6,000 Snap-On Tools, Inc. 254,250
22,000 Toro Co. 632,500
-----------
8,332,925
-----------
CONSUMER NON-DURABLES
1,000 Alberto Culver Co., Class B 31,625
34,000 American Greetings Corp., Class A 1,079,500
29,000 Barefoot, Inc. 337,125
7,000 Fieldcrest Cannon, Inc. 134,750
9,000 Fossil, Inc. 96,750
2,000 Hormel (G. A.) & Co. 46,000
13,000 IBP, Inc. 781,625
41,000 Liz Claiborne, Inc. 1,158,250
23,000 Nautica Enterprises, Inc. 787,750
10,000 Nu-Kote Holdings, Inc., Class A 198,750
11,000 Phillips-Van Heusen Corp. 111,375
3,000 Scotts Co., Class A 60,000
9,000 Smithfield Foods, Inc. 236,250
15,000 Springs Industries, Inc. 643,125
8,000 St. John Knits, Inc. 382,000
21,000 Starbucks Corp. 834,750
56,000 Topps, Inc. 343,000
1,000 Unifi, Inc. 22,750
9,000 Universal Foods Corp. 309,375
18,000 Westpoint Stevens, Inc. 382,500
25,000 Whitman Corp. 534,375
18,000 Wolverine World Wide, Inc. 549,000
-----------
9,060,625
-----------
</TABLE>
F-32
<PAGE> 260
NOTES TO FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- -----------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES
4,000 Advo, Inc. $ 102,500
10,000 Banta Corp. 427,500
12,000 Belo (A. H.) Corp. 414,000
14,000 Boston Chicken, Inc. 476,000
26,000 Bowne & Co., Inc. 481,000
11,000 Boyd Gaming Corp. 148,500
1,000 Casino America, Inc. 7,000
19,000 Equifax, Inc. 722,000
9,000 HFS, Inc. 559,125
30,000 Kelly Services, Inc. 765,000
25,000 King World Productions, Inc. 865,625
21,000 Lone Star Steakhouse Saloon, Inc. 813,750
9,000 Media General, Inc., Class A 250,875
21,000 Mirage Resorts, Inc. 695,625
19,000 New York Times Co., Class A 529,625
27,760 Ogden Corp. 635,010
16,000 Olsten Corp. 612,000
17,000 Omnicom Group 1,088,000
26,000 Outback Steakhouse, Inc. 809,250
3,000 Papa John's International, Inc. 116,625
13,200 PHH Corp. 580,800
31,500 Players International, Inc. 342,563
1,000 Pulitzer Publishing Co. 45,375
19,000 Regal Cinemas, Inc. 741,000
17,000 Reynolds & Reynolds Co. 603,500
23,000 Rio Hotel & Casino, Inc. 293,250
28,000 Robert Half International, Inc. 1,029,000
26,000 Sbarro, Inc. 549,250
12,500 Scientific Games Holdings Corp. 415,625
6,000 Sonic Corp. 132,000
13,500 Spelling Entertainment Group, Inc. 173,813
24,000 Wendys International, Inc. 480,000
32,000 Westcott Communications, Inc. 444,000
-----------
16,349,186
-----------
ENERGY
17,000 BJ Services Co. 401,625
13,000 Brooklyn United Gas Co. 326,625
24,100 Eastern Enterprises 716,975
38,000 El Paso Natural Gas Co. 1,026,000
25,000 KCS Energy, Inc. 246,875
12,000 K.N. Energy, Inc. 307,500
25,000 Mesa, Inc. 106,250
91,000 Nabors Industries, Inc. 784,875
14,000 NACCO Industries, Inc., Class A 805,000
2,500 National Fuel Gas Co. 75,000
24,000 NICOR, Inc. 648,000
15,000 Nuevo Energy Co. 333,750
16,000 Offshore Logistics, Inc. 198,000
14,400 ONEOK, Inc. 356,400
28,000 Pacific Enterprises 693,000
48,000 Smith International, Inc. 768,000
1,000 Tidewater, Inc. 26,375
25,000 Union Texas Petroleum Holdings, Inc. 459,375
12,000 United Meridian Corp. 202,500
24,000 Valero Energy Corp. 567,000
30,000 Varco International, Inc. 277,500
6,000 Washington Gas & Light Co. 115,500
500 Weatherford Enterra, Inc. 12,250
3,000 Western Atlas, Inc. 133,500
12,400 WICOR, Inc. 370,450
188 Williams Companies 7,285
-----------
9,965,610
-----------
FINANCE
12,000 Advanta Corp., Class A $ 468,000
25,000 Ahmanson (H. F.) & Co. 634,375
15,000 AMBAC, Inc. 643,125
34,000 American Financial Group, Inc. 956,250
25,000 American Re Corp. 956,250
29,000 Bankers Life Holding Corp. 525,625
33,000 Bear Stearns Companies, Inc. 660,000
24,000 California Federal Bank 357,000
4,000 CCB Financial Corp. 196,000
26,000 Charter One Financial, Inc. 737,750
58,000 City National Corp. 783,000
10,000 CMAC Investment Corp. 475,000
23,000 Commercial Federal Corp. 750,375
1,500 Countrywide Credit Industries, Inc. 33,188
23,000 Crestar Financial Corp. 1,319,625
41,000 Edwards (A.G.), Inc. 1,040,375
22,000 Finova Group, Inc. 1,001,000
7,000 First American Corp. 306,250
10,000 First Financial Corp. 210,000
18,000 First Tennessee National Corp. 972,000
13,000 First USA, Inc. 606,125
20,300 Fremont General Corp. 596,313
19,000 GATX Corp. 909,625
49,000 Mercury Financial Co. 943,250
7,300 MGIC Investment Corp. 415,188
9,000 North American Mtg., Co. 185,625
21,000 North Fork Bancorporation 459,375
22,000 Northern Trust Corp. 1,050,500
12,880 Norwest Corp. 388,010
2,000 Ohio Casualty Corp. 71,500
10,000 Penncorp Financial Group, Inc. 238,750
32,000 Peoples Heritage Financial 620,000
25,000 Protective Life Corp. 712,500
18,000 Regions Financial Corp. 720,000
109,000 Reliance Group Holding 803,875
17,000 Reliastar Financial Corp. 716,125
3,000 Roosevelt Financial Group, Inc. 48,375
38,000 Southtrust Corp. 959,500
5,000 Sovereign Bancorp, Inc. 50,000
19,300 Star Banc Corp. 1,061,500
16,000 TCF Financial Corp. 936,000
6,000 TIG Holdings, Inc. 151,500
6,000 Transatlantic Holdings, Inc. 405,750
28,000 Union Planters Corp. 854,000
5,000 Vesta Insurance Group, Inc. 203,125
38,000 Washington Mutual, Inc. 980,875
15,000 Webb Del Corp. 313,125
9,000 Zions Bancorporation 623,250
-----------
29,048,949
-----------
HEALTH CARE
25,000 Amsco International, Inc. 409,375
24,000 Bausch & Lomb, Inc. 840,000
5,000 Bio Rad Labs, Inc., Class A 190,625
19,000 CNS, Inc. 199,500
11,000 Community Health Systems, Inc. 349,250
52,000 Cor Therapeutics, Inc. 533,000
1,000 Cordis Corp. 110,625
4,000 Dentsply International, Inc. 138,000
29,000 Foundation Health Corp. 1,236,125
2,000 HBO & Co. 143,250
20,000 Healthcare Compare Corp. 770,000
8,000 Healthsouth Rehabilitation 211,000
</TABLE>
F-33
<PAGE> 261
NOTES TO FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- --------------------------------------------------------------------
<S> <C> <C>
39,000 Horizon/CMS Healthcare $ 784,875
37,073 ICN Pharmaceuticals, Inc. 759,997
24,000 Integrated Health Services, Inc. 519,000
29,000 Lincare Holdings, Inc. 725,000
3,000 Manor Care, Inc. 98,625
1,000 Maxicare Health Plans 17,625
32,000 Medisense, Inc. 716,000
47,500 Mylan Labs, Inc. 890,625
16,000 Nellcor Puritan Bennett, Inc. 924,000
8,000 North American Biological 65,000
2,000 Orthofix International, NV 19,500
16,000 Oxford Health Plans, Inc. 1,260,000
6,000 Pacific Physician Services 94,500
3,000 Quintiles Transnational Corp. 192,750
17,000 Renal Treatment Centers, Inc. 612,000
6,000 Rexall Sundown, Inc. 90,000
3,000 Target Therapeutics, Inc. 229,500
18,000 Thermo Cardiosystems, Inc. 877,500
2,000 United American Healthcare Corp. 22,250
12,000 Universal Health Services, Inc., Class B 448,500
20,000 Vivra, Inc. 660,000
25,320 Watsons Pharmaceuticals, Inc. 1,145,730
-----------
16,283,727
-----------
PRODUCER MANUFACTURING
16,000 Agco Corp. 754,000
3,000 Alliant Techsystems, Inc. 139,500
5,000 Ametek, Inc. 88,750
14,600 Aptar Group, Inc. 501,875
7,000 Blount, Inc., Class A 305,375
21,000 Briggs & Stratton Corp. 847,875
6,000 Cognex Corp. 363,000
22,000 Cummins Engine Co., Inc. 792,000
26,000 Danaher Corp. 812,500
22,000 Detroit Diesel Corp. 396,000
11,000 Duracraft Corp. 239,250
6,000 Granite Construction, Inc. 171,750
18,500 IDEX Corp. 698,375
7,000 INDRESCO, Inc. 120,750
1,000 Johnson Controls, Inc. 58,500
20,000 Juno Lighting, Inc. 292,500
2,000 Kent Electrics Corp. 97,750
16,000 Kulicke & Sofa Industries, Inc. 560,000
24,000 Mueller Industries, Inc. 561,000
4,000 National Service Industries, Inc. 119,500
9,000 Navistar International Corp. 93,375
19,000 PACCAR, Inc. 798,000
30,000 Southdown, Inc. 495,000
90,000 Sterling Chemicals, Inc. 731,250
11,000 Teledyne, Inc. 275,000
28,300 Thermo Instrument Systems, Inc. 856,075
26,000 Timken Co. 1,036,750
8,000 United Waste Systems, Inc. 316,000
31,000 Varity Corp. 1,108,250
6,000 Watts Industries, Inc., Class A 123,750
32,000 Wellman, Inc. 752,000
9,000 Wolverine Tube, Inc. 319,500
-----------
14,825,200
-----------
RAW MATERIALS/PROCESSING INDUSTRIES
17,000 Cleveland Cliffs, Inc. 641,750
16,000 Cyprus Amax Minerals 428,000
4,000 Cytec Industries, Inc. 218,000
6,000 First Mississippi Corp. 123,750
14,000 Geon Co. 346,500
24,000 Georgia Gulf Corp. 801,000
15,000 Goodrich (B. F.) Co. 990,000
46,000 Handy & Harman 644,000
8,000 Inland Steel Industries, Inc. 186,000
2,000 International Specialty Products, Inc. 17,500
62,000 Jefferson Smurfit Corp. 759,500
40,000 J&L Specialty Steel, Inc. 660,000
44,000 Longview Fibre Co. 643,500
15,000 Lubrizol Corp. 435,000
41,000 Lyondell Petrochemical Co. 881,500
46,000 Magma Copper Co., Class B 770,500
6,000 Medusa Corp. 149,250
3,000 NCH Corp. 163,125
14,000 Olin Corp. 904,750
51,000 Owens-Illinois, Inc. 643,875
12,000 Potlatch Corp. 505,500
3,000 Quanex Corp. 58,875
11,000 Rayonier, Inc. 418,000
69,000 Rexene Corp. 621,000
20,000 Sealed Air Corp. 522,500
5,000 Sigma-Aldrich Corp. 240,000
33,000 Sonoco Products Co. 833,250
43,000 Stone Container Corp. 736,375
46,000 Terra Industries, Inc. 580,750
1,000 Texas Industries, Inc. 52,875
23,000 USG Corp. 669,875
15,000 Vigoro Corp. 652,500
5,000 Vulcan Materials Co. 277,500
43,500 Worthington Industries, Inc. 744,938
-----------
17,321,438
-----------
TECHNOLOGY
6,000 Adaptec, Inc. 264,000
20,000 Alantec Corp. 710,000
4,000 Altera Corp. 244,000
15,000 America Online, Inc. 1,215,000
3,000 Analysts International Corp. 90,000
28,000 Aspect Telecommunications Corp. 973,000
19,000 Atmel Corp. 594,936
1,000 Auspex Systems, Inc. 14,812
27,000 Autodesk, Inc. 911,250
21,400 Avnet, Inc. 1,080,700
10,000 BMC Industries, Inc. 386,250
18,000 BMC Software, Inc. 641,250
56,000 Borland International, Inc. 777,000
36,000 Cadence Design Systems, Inc. 1,174,500
19,000 Cascade Communications 1,344,250
21,000 Cidco, Inc. 588,000
2,000 Computer Network Technology 13,125
60,000 Conner Peripherals, Inc. 1,095,000
22,000 Credence Systems Corp. 825,000
1,000 Dallas Semiconductor Co. 21,250
13,000 Dovatron International, Inc. 399,750
22,000 Dynatech Corp. 335,500
12,000 Electroglas, Inc. 867,000
13,000 Electronics For Imaging, Inc. 1,082,250
4,000 FTP Software, Inc. 108,188
34,000 Gateway 2000, Inc. 1,160,250
9,000 Harris Corp. 525,375
23,000 In Focus Systems, Inc. 730,250
44,000 Integrated Device Technology, Inc. 844,250
22,000 International Rectifier Corp. 1,009,250
37,000 Intervoice, Inc. 689,125
24,000 KLA Instruments Corp. 1,050,000
</TABLE>
F-34
<PAGE> 262
NOTES TO FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
3,000 Komag, Inc.................................. $ 172,875
13,000 Lam Research Corp........................... 809,250
3,000 Littelfuse, Inc............................. 98,625
17,000 McAfee Associates, Inc...................... 998,750
10,000 Microchip Technology, Inc................... 397,500
26,000 Netmanage, Inc.............................. 542,750
14,000 Network Equipment Technologies.............. 465,500
22,000 Network General Corp........................ 907,500
12,500 Novellus Systems, Inc....................... 857,812
8,000 Peoplesoft, Inc............................. 688,000
4,500 Pioneer Standard Electronics, Inc........... 62,438
9,000 Policy Management Systems Corp.............. 426,375
5,000 Quantum Corp................................ 86,250
23,000 Read-Rite Corp.............................. 819,375
4,000 Recoton Corp................................ 89,000
38,000 S3, Inc..................................... 650,750
14,000 Seagate Technology.......................... 638,750
30,000 Sequent Computer Systems, Inc............... 525,000
25,000 Solectron Corp.............................. 1,018,750
9,000 Sterling Software, Inc...................... 416,250
19,000 Symbol Technologies, Inc.................... 665,000
20,000 Teradyne, Inc............................... 670,000
12,000 3Com Corp................................... 582,000
11,474 U.S. Robotics Corp.......................... 1,067,080
19,000 Unitrode Corp............................... 513,000
8,500 Varian Associates, Inc...................... 437,750
27,000 Vishay Intertechnology, Inc................. 972,000
19,000 Wyle Electronics, Inc....................... 814,625
21,000 Xilinx, Inc................................. 1,000,125
------------
39,157,591
------------
TRANSPORTATION
49,000 Arkansas Best Corp.......................... 453,250
32,000 Comair Holdings, Inc........................ 896,000
10,800 Consolidated Freightways, Inc............... 252,450
1,000 Continental Airlines, Inc., Class B......... 35,625
24,000 Fritz Companies, Inc........................ 846,000
26,000 Illinois Central Corp....................... 1,001,000
22,000 MS Carriers, Inc............................ 341,000
12,000 Northwest Airlines, Inc., Class A........... 486,000
19,000 Pittston Company Services Group............. 520,125
6,000 Stolt Nielsen, S.A.......................... 182,250
11,000 TNT Freightways Corp........................ 203,500
------------
5,217,200
------------
UTILITIES
29,000 AES Corp.................................... 572,750
26,000 AT&T Corp................................... 1,040,000
34,100 Boston Edison Co............................ 937,750
4,500 C-Tec Corp.................................. 94,500
12,000 California Energy, Inc...................... 216,000
27,000 Centerior Energy Corp....................... 273,375
4,300 Central Hudson Gas & Electric Corp.......... 131,688
1,000 Colorado Public Service Co.................. 34,000
10,000 Commnet Cellular, Inc....................... 252,500
38,000 Delmarva Power & Light Co................... 845,500
17,000 DQE, Inc.................................... 469,625
8,000 Eastern Utilities Association............... 187,000
4,251 Firstmiss Gold, Inc......................... 77,049
42,000 Frontier Corp............................... 1,139,250
36,000 Illinova Corp............................... 1,026,000
41,000 Long Island Lighting Co..................... 707,250
33,000 New Mexico Public Service Co................ 556,875
24,000 NIPSCO Industries, Inc...................... 879,000
9,500 Oklahoma Gas & Electric Co.................. 380,000
3,000 Orange & Rockland Utilities................. 105,375
27,000 Pinnacle West Capital Corp.................. 742,500
32,000 Portland General Corp....................... 872,000
14,200 Southern New England Telecommunications..... 514,750
23,000 U.S. Cellular Corp.......................... 790,625
1,000 U.S. Long Distance Corp..................... 13,000
------------
12,858,362
------------
TOTAL COMMON STOCK........................ 194,325,513
------------
Convertible Preferred Stock
1,600 FHP International, $1.25, Series A.......... 38,000
------------
<CAPTION>
Principal
Amount
(000)
---------
Repurchase Agreement
$ 5,805 Lehman Government Securities, Inc.,
5.75%, 11/01/95........................... 5,805,000
------------
TOTAL INVESTMENTS........................... 200,168,513
Other assets and liabilities, net........... 176,308
------------
NET ASSETS.................................. $200,344,821
============
</TABLE>
F-35
<PAGE> 263
NOTES TO FINANCIAL STATEMENTS, continued
Note 3--Investment Activity
During the period, the cost of purchases and proceeds from sales and maturities
of investments, excluding short-term investments and forward commitments were:
<TABLE>
<CAPTION>
Growth & Emerging International
Growth II Income II Government II Growth II Equity II
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Purchases............................. $83,144,346 $41,958,082 $23,733,799 $29,403,570 $8,126,934
Sales................................. $50,888,482 $17,696,039 $13,098,839 $ 6,151,590 $ 753,105
</TABLE>
At the end of the period, the Trust held the following futures contracts:
<TABLE>
<CAPTION>
Unrealized
Number of Market Appreciation
Fund Description Contracts Value (Depreciation)
----------------------------- --------------------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Growth II Standard & Poor's 500 Index
expiring 12/95 (long) 16 $4,670,800 $ 76,343
expiring 3/96 (long) 4 1,177,400 (4,650)
---------- ----------
$5,848,200 $ 71,693
========== ==========
Growth & Income II Standard & Poor's 500 Index
expiring 3/96 (long) 2 $ 588,700 $ (5,025)
========== ==========
Government II U.S. Treasury Bond,
expiring 12/95 (short) 6 $ (702,375) $ (1,388)
U.S. Treasury Bond,
expiring 12/95 (long) 23 2,692,438 42,836
U.S. Treasury Note, five years
expiring 12/95 (short) 5 (541,641) (1,970)
U.S. Treasury Note, five years
expiring 12/95 (long) 8 866,625 8,024
U.S. Treasury Note, ten years
expiring 12/95 (long) 10 1,115,313 14,562
U.S. Treasury Bond,
expiring 3/96 (long) 2 233,438 (212)
---------- ----------
$3,663,798 $ 61,852
========== ==========
</TABLE>
At the end of the period, Government II held the following forward commitments
for which delivery is not intended:
<TABLE>
<CAPTION>
Unrealized
Principal Market Appreciation
Amount Security Value (Depreciation)
- --------- ---------------------------------------- -------- --------------
<S> <C> <C> <C>
Government National Mortgage Association
$500,000 7.00%, settling 11/95 (sale)............ $(496,565) $ (2)
600,000 7.00%, settling 11/95 (purchase)........ 595,878 13,315
--------- -------
(Net obligation $86,000).............. $ 99,313 $13,313
========= =======
</TABLE>
F-36
<PAGE> 264
NOTES TO FINANCIAL STATEMENTS, continued
The following table presents the identified cost of investments (and foreign
currency for International Equity II) at the end of the period for federal
income tax purposes and the associated net unrealized appreciation.
<TABLE>
<CAPTION>
Growth Emerging International
Growth II & Income II Government II Growth II Equity II
----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Identified cost................ $51,263,560 $33,845,311 $21,895,632 $25,817,140 $9,054,237
=========== =========== =========== =========== ==========
Gross unrealized appreciation.. $ 4,388,657 $ 2,927,593 $ 418,009 $ 2,782,612 $ 923,978
Gross unrealized depreciation.. (758,483) (607,669) (51,310) (626,049) (317,907)
----------- ----------- ----------- ----------- ----------
Net unrealized appreciation.... $ 3,630,174 $ 2,319,924 $ 366,699 $ 2,156,563 $ 606,071
=========== =========== =========== =========== ==========
</TABLE>
Note 4--Capital
Each Fund offers two classes of shares at their respective net asset values per
share, plus a sales charge which is imposed either at the time of purchase (the
Class A shares) or at the time of redemption on a contingent deferred basis (the
Class B shares). All classes of shares have the same rights, except that Class B
shares bear the cost of distribution fees and certain other class specific
expenses. Class B shares automatically convert to Class A shares six years after
purchase, subject to certain conditions. Realized and unrealized gains or
losses, investment income and expenses (other than class specific expenses) are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class.
The Trust has an unlimited number of each class of shares of $.01 par value
beneficial interest authorized. Transactions in shares of beneficial interest
for the period were as follows:
<TABLE>
<CAPTION>
Growth II Growth & Income II Government II Emerging International
------------------------ ------------------------ ------------------------ Growth II Equity II
Year Ended Period Ended Year Ended Period Ended Year Ended Period Ended --------- -------------
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Feb. 21 1995
1995 1994 1995 1994 1995 1994 through Oct. 31, 1995
---------- ------------ ---------- ------------ ---------- ------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold
Class A............ 1,296,305 373,998 870,371 300,262 545,888 433,958 1,125,630 480,871
Class B............ 1,972,519 497,430 1,317,260 312,434 618,905 253,982 732,333 202,578
--------- ------- --------- --------- --------- --------- --------- -------
3,268,824 871,428 2,187,631 612,696 1,164,793 687,940 1,857,963 683,449
--------- ------- --------- --------- --------- --------- --------- -------
Shares reinvested
Class A............ -- -- 6,227 999 27,873 5,134 -- --
Class B............ -- -- 3,076 584 19,868 1,471 -- --
--------- ------- --------- --------- --------- --------- --------- -------
-- -- 9,303 1,583 47,741 6,605 -- --
--------- ------- --------- --------- --------- --------- --------- -------
Shares redeemed
Class A............ (217,699) (5,414) (202,866) (4,796) (158,374) (44,548) (70,836) (6,846)
Class B............ (146,988) (9,513) (106,128) (1,966) (99,822) (13,568) (14,613) (3,080)
--------- ------- --------- --------- --------- --------- --------- -------
(364,687) (14,927) (308,994) (6,762) (258,196) (58,116) (85,449) (9,926)
--------- ------- --------- --------- --------- --------- --------- -------
Increase in shares
outstanding........ 2,904,137 856,501 1,887,940 607,517 954,338 636,429 1,772,514 673,523
========= ======= ========= ========= ========= ========= ========= =======
</TABLE>
Note 5--Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Trust at
the annual rate of $5,320 plus a fee of $360 per day for the Board meeting
attended.
<TABLE>
<CAPTION>
Growth Emerging International
Growth II & Income II Government II Growth II Equity II
--------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Trustees' fees for the period.. $22,505 $21,775 $21,662 $6,800 $6,460
======= ======= ======= ====== ======
</TABLE>
F-37
<PAGE> 265
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
periods indicated.
<TABLE>
<CAPTION>
Class A(2) Class B(2)
------------------------------------ ------------------------------------
Year May 3, 1994(1) Year May 3, 1994(1)
Ended through Ended through
October 31, 1995 October 31, 1994 October 31, 1995 October 31, 1994
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Growth II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............ $11.89 $11.81 $11.85 $11.81
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .28 .29 .27 .28
Expenses(4).................................... (.37) (.29) (.46) (.32)
------ ------ ------ ------
Net investment income (loss).................... (.09) .00 (.19) (.04)
Net realized and unrealized gain on securities.. 2.77 .08 2.75 .08
------ ------ ------ ------
Total from investment operations................ 2.68 .08 2.56 .04
------ ------ ------ ------
Net asset value, end of period.................. $14.57 $11.89 $14.41 $11.85
====== ====== ====== ======
TOTAL RETURN(3)................................. 22.44% .76% 21.50% .42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............ $ 21.1 $ 4.4 $ 33.3 $ 5.8
Average net assets (millions)................... $ 11.5 $ 2.1 $ 17.6 $ 2.1
Ratios to average net assets (annualized)(4)
Expenses....................................... 2.75% 4.89% 3.50% 5.79%
Expenses, without expense reimbursement........ 2.90% -- 3.65% --
Net investment loss............................ (.68%) (.05%) (1.45%) (.78%)
Net investment loss, without expense
reimbursement................................. (.83%) -- (1.60%) --
Portfolio turnover rate......................... 193% 151% 193% 151%
- -------------------------------------------------------------------------------------------------------------------------------
Growth & Income II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............ $11.71 $11.81 $11.70 $11.81
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .41 .42 .42 .42
Expenses(4).................................... (.31) (.21) (.41) (.25)
------ ------ ------ ------
Net investment income........................... .10 .21 .01 .17
Net realized and unrealized gains or losses on
securities..................................... 2.255 (.26) 2.234 (.251)
------ ------ ------ ------
Total from investment operations................ 2.355 (.05) 2.244 (.081)
------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income.......................... (.10) (.05) (.01) (.029)
Excess of book-basis net investment income..... (.045) -- (.054) --
------ ------ ------ ------
Total distributions............................. (.145) (.05) (.064) (.029)
------ ------ ------ ------
Net asset value, end of period.................. $13.92 $11.71 $13.88 $11.70
====== ====== ====== ======
TOTAL RETURN(3)................................. 20.20% (.42%) 19.19% (.68%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............ $ 13.5 $ 3.5 $ 21.2 $ 3.6
Average net assets (millions)................... $ 7.5 $ 1.9 $ 10.2 $ 1.5
Ratios to average net assets (annualized)(4)
Expenses....................................... 2.44% 3.37% 3.15% 4.42%
Expenses, without expense reimbursement........ 2.59% 3.40% 3.30% 4.45%
Net investment income.......................... .81% 3.38% .05% 3.00%
Net investment income (loss), without expense
reimbursement................................. .66% 3.35% (.10%) 2.97%
Portfolio turnover rate......................... 108% 215% 108% 215%
</TABLE>
(1) Commencement of operations
(2) Based on average shares outstanding
(3) Total return does not consider the effect of sales charges.
(4) See Note 2
See Notes to Financial Statements.
F-38
<PAGE> 266
FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
Class A(2) Class B(2)
---------------------------------- ----------------------------------
Year May 3, 1994(1) Year May 3, 1994(1)
Ended through Ended through
October 31, 1995 October 31, 1994 October 31, 1995 October 31, 1994
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Government II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............. $ 11.54 $11.91 $ 11.54 $11.91
------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................ .93 .38 .93 .38
Expenses......................................... (.32) (.15) (.42) (.18)
------- ------ ------- ------
Net investment income............................ .61 .23 .51 .20
Net realized and unrealized gains or losses on
securities...................................... .6366 (.40) .6523 (.41)
------- ------ ------- ------
Total from investment operations................. 1.2466 (.17) 1.1623 (.21)
LESS DISTRIBUTIONS FROM
Net investment income............................ (.61) (.20) (.51) (.16)
Excess of book-basis net investment income....... (.0366) - (.0523) -
------- ------ ------- ------
Total distributions.............................. (.6466) (.20) (.5623) (.16)
------- ------ ------- ------
Net asset value, end of period................... $ 12.14 $11.54 $ 12.14 $11.54
======= ====== ======= ======
TOTAL RETURN(3).................................. 11.20% (1.53%) 10.42% (1.83%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............. $ 9.8 $ 4.6 $ 9.5 $ 2.8
Average net assets (millions).................... $ 6.4 $ 3.9 $ 5.5 $ 1.1
Ratios to average net assets (annualized)
Expenses........................................ 2.74% 2.32% 3.48% 3.25%
Net investment income........................... 5.11% 3.54% 4.32% 3.49%
Portfolio turnover rate.......................... 113% 155% 113% 155%
</TABLE>
(1) Commencement of operations
(2) Based on average shares outstanding
(3) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-39
<PAGE> 267
FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout the
periods indicated.
<TABLE>
<CAPTION>
Class A(2) Class B(2)
-------------------- --------------------
February 21, 1995(1) February 21, 1995(1)
through through
October 31, 1995 October 31, 1995
-------------------- --------------------
<S> <C> <C>
Emerging Growth II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period....................................... $11.81 $11.81
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................................ .15 .15
Expenses(4).............................................................. (.39) (.50)
------ ------
Net investment loss........................................................ (.24) (.35)
Net realized and unrealized gain on securities............................. 3.55 3.58
------ ------
Total from investment operations........................................... 3.31 3.23
------ ------
Net asset value, end of period............................................. $15.12 $15.04
====== ======
TOTAL RETURN(3)............................................................ 28.11% 27.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................................... $ 15.9 $ 10.8
Average net assets (millions).............................................. $ 6.1 $ 3.7
Ratios to average net assets (annualized)(4)
Expenses.................................................................. 2.75% 3.49%
Expenses, without expense reimbursement................................... 3.37% 4.11%
Net investment loss....................................................... (1.65%) (2.45%)
Net investment loss, without expense reimbursement........................ (2.27%) (3.07%)
Portfolio turnover rate.................................................... 83% 83%
- ----------------------------------------------------------------------------------------------------------------------------
International Equity II Fund
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period....................................... $11.81 $11.81
------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................................ .19 .19
Expenses(4).............................................................. (.33) (.40)
------ ------
Net investment loss........................................................ (.14) (.21)
Net realized and unrealized gain on securities............................. 2.19 2.19
------ ------
Total from investment operations........................................... 2.05 1.98
------ ------
Net asset value, end of period............................................. $13.86 $13.79
====== ======
TOTAL RETURN(3)............................................................ 16.28%/(5) 15.69%/(5)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....................................... $ 6.6 $ 2.7
Average net assets (millions).............................................. $ 3.7 $ 1.0
Ratios to average net assets (annualized)(4)
Expenses.................................................................. 3.64% 4.33%
Expenses, without expense reimbursement................................... 5.97% 6.67%
Net investment loss....................................................... (1.40%) (2.80%)
Net investment loss, without expense reimbursement........................ (3.73%) (5.13%)
Portfolio turnover rate................................................... 17% 17%
/(1)/ Commencement of operations
/(2)/ Based on average shares outstanding
/(3)/ Total return has not been annualized and does not consider the effect of sales charges.
/(4)/ See Note 2
/(5)/ Total return from March 17, 1995 (date the Fund's investment strategy was implemented) through October 31, 1995.
</TABLE>
See Notes to Financial Statements.
F-40
<PAGE> 268
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Common Sense Trust
We have audited the accompanying statements of net assets of Common Sense II
Growth Fund, Common Sense II Growth and Income Fund, Common Sense II Government
Fund, Common Sense II Emerging Growth Fund, and Common Sense II International
Equity Fund, (cumulatively the "Funds"), five of ten portfolios constituting the
series of the Common Sense Trust (the "Trust"), as of October 31, 1995. For
Common Sense II Emerging Growth Fund and Common Sense II International Equity
Fund we have audited the related statements of operations, the statements of
changes in net assets and the financial highlights for the period from inception
(February 21, 1995) through October 31, 1995. For Common Sense II Growth Fund,
Common Sense II Growth and Income Fund and Common Sense II Government Fund we
have audited the related statements of operations, the statements of changes in
net assets and the financial highlights for the period from inception (May 3,
1994) through October 31, 1994 and for the year ended October 31, 1995. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds of the Common Sense Trust listed above at October 31,
1995, the results of their operations, the changes in their net assets, and the
financial highlights for the periods identified above, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 1, 1995
F-41
