<PAGE>
PROSPECTUS February 28, 1998
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Concert Investment Series
3100 Breckinridge Blvd., Bldg 200
Duluth, Georgia 30199-0062
(800) 544-5445
Concert Investment Series (the "Series") (formerly Common Sense Trust) cur-
rently offers six professionally managed investment portfolios (each, a
"Fund").
Emerging Growth Fund (the "Emerging Growth Fund") seeks capital appreciation
by investing in a portfolio of securities consisting principally of common
stocks of small and medium sized companies considered by Mutual Management
Corp., the Fund's investment manager, to be emerging growth companies.
International Equity Fund (the "International Equity 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 "Growth Fund") seeks capital appreciation through investments
in common stocks and options on common stocks. Any income realized on its
investments will be purely incidental to its goal of capital appreciation.
Growth and Income Fund (the "Growth and Income Fund") seeks reasonable growth
and income through investments in equity securities that provide dividend or
interest income, including common and preferred stocks and securities convert-
ible into common or preferred stocks.
Government Fund (the "Government Fund") seeks high current return consistent
with preservation of capital by investing in debt securities issued or guaran-
teed by the U.S. Government, its agencies or instrumentalities.
Municipal Bond Fund (the "Municipal Fund") seeks as high a level of current
interest income exempt from federal income tax as is consistent with the pres-
ervation of capital.
This Prospectus sets forth concisely certain information about the Series and
each of the Funds that prospective investors will find helpful in making an
investment decision. Investors are encouraged to read this Prospectus carefully
and retain it for future reference.
Additional information about each of the Funds is contained in a Statement of
Additional Information dated February 28, 1998, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Series at the telephone number or address set forth above or by
contacting a Registered Representative of PFS Investments Inc. ("PFS Invest-
ments"). The Statement of Additional Information has been filed with the Secu-
rities and Exchange Commission (the "SEC") and is incorporated by reference
into this Prospectus in its entirety.
PFS DISTRIBUTORS, INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Manager
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. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
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FINANCIAL HIGHLIGHTS 7
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INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES 15
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RISK FACTORS AND SPECIAL CONSIDERATIONS 21
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VALUATION OF SHARES 28
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DIVIDENDS, DISTRIBUTIONS AND TAXES 28
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PURCHASE OF SHARES 30
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EXCHANGE PRIVILEGE 35
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REDEMPTION OF SHARES 36
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PERFORMANCE 37
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MANAGEMENT OF THE SERIES 37
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DISTRIBUTOR 39
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ADDITIONAL INFORMATION 40
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</TABLE>
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No person has been authorized to give any information or to make any represen-
tations in connection with this offering other than those contained in this
Prospectus and, if given or made, such other information and representations
must not be relied upon as having been authorized by the Series or the distrib-
utor. This Prospectus does not constitute an offer by the Series or the dis-
tributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
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2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVES The Series is an open-end, diversified management
investment company that currently offers six professionally managed investment
portfolios. The Emerging Growth Fund seeks capital appreciation; the
International Equity Fund seeks total return on its assets from growth of
capital and income; the Growth Fund seeks capital appreciation; the Growth and
Income Fund seeks reasonable growth and income; the Government Fund seeks high
current return consistent with preservation of capital; and the Municipal Fund
seeks current interest income exempt from federal income tax. There is,
however, no assurance that any Fund will be successful in achieving its goals.
See "Investment Objectives and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS Each Fund offers two classes of shares
("Classes") to investors purchasing through PFS Investments Registered
Representatives designed to provide them with the flexibility of selecting an
investment best suited to their needs--the two classes of shares available are:
Class A shares and Class B shares. As of May 20, 1996, all of the previously
outstanding shares of the Growth Fund, the Growth and Income Fund, the
Government Fund and the Municipal Fund were redesignated as Class 1 shares
without any other changes, and Class A and Class B shares were authorized for
issuance. As of May 20, 1996, Class 1 shares were authorized for issuance for
the Emerging Growth Fund and the International Equity Fund. Each Fund offers
Class 1 shares only to accounts of previously established shareholders or
members of a family unit comprised of a husband, wife and minor children, and
Class 1 shareholders of a Fund exchanging their Class 1 shares for Class 1
shares of another Fund ("Eligible Class 1 Purchasers"). Each class of shares
represents an interest in the same portfolio of investments of a Fund. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% with respect to the Emerging Growth Fund, Growth
Fund, Growth and Income Fund and International Equity Fund and up to 4.50% with
respect to the Government and Municipal Funds. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary--Reduced
or No Initial Sales Charge." Class A shares of each Fund are subject to an
annual service fee of 0.25% of the average daily net assets of the Class.
Class B Shares. Class B shares of the Emerging Growth Fund, Growth Fund,
Growth and Income Fund and International Equity Fund are offered at net asset
value subject to a maximum CDSC of 5.00% of redemption proceeds, declining by
1.00% each year after the date of purchase to zero. Class B shares of the Gov-
ernment and Municipal Funds are offered at net asset value subject to a maximum
CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year after
purchase and 1.00% each year thereafter to zero. The CDSC may be waived for
certain redemptions. Class B shares of the Emerging Growth Fund, Growth Fund,
Growth and Income Fund and International Equity Fund are subject to an annual
service fee of 0.25% and an annual distribution fee of 0.75% of the average
daily net assets of the Class. Class B shares of the Government Fund and Munic-
ipal Fund are subject to an annual service fee of 0.25% and an annual distribu-
tion fee of 0.75% of the average daily net assets of the Class. The Class B
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class B Shares of a Fund purchased prior to December 31, 1997 and subsequently
redeemed will remain subject to the CDSC at the rates applicable at the time of
purchase.
Class 1 Shares. Class 1 shares are offered to Eligible Class 1 Purchasers.
Class 1 shares of the Emerging Growth Fund, the International Equity Fund, the
Growth Fund and the 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; and Class 1 shares of the Municipal
Fund are offered at a sales charge of 4.75% of offering price. The sales charge
is reduced on investments of $10,000 or more for the Emerging Growth Fund, the
International Equity Fund, the Growth Fund and the Growth and Income Fund,
$25,000 or more for the Government Fund, and $100,000 or more for the Municipal
Fund. See "Purchase of Shares--Class 1 Shares."
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
Intended Holding Period. The decision as to which Class of shares is more ben-
eficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
consider Class A shares; as the investment accumulates shareholders may qualify
for reduced sales charges and the shares are subject to lower ongoing expenses
over the term of the investment. As an alternative, Class B shares are sold
without any initial sales charge so the entire purchase price is immediately
invested in a Fund. Any investment return on these additional invested amounts
may partially or wholly offset the higher annual expenses of this Class.
Because a Fund's future return cannot be predicted, however, there can be no
assurance that this would be the case.
Reduced or No Initial Sales Charge. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in a Fund. In addition, Class A share purchases of
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange Privi-
lege." Class A share purchases also may be eligible for a reduced initial sales
charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B shares, purchasers eligible to pur-
chase Class A shares at net asset value or at a reduced sales charge should
consider doing so.
PFS Investments Registered Representatives may receive different compensation
for selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Series" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distribution and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through PFS Distributors, Inc.
("PFS"), the distributor of the Series' shares. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class B shares may open an account
by making an initial investment of at least $1,000 for each account (except for
Systematic Investment Plan accounts), or $250 for an individual retirement
account ("IRA") or a Self-Employed Retirement Plan. Subsequent investments of
at least $50 may be made for each Class. For participants in retirement plans
qualified under Section 403(b)(7) or Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), the minimum initial investment
requirement for Class A and Class B shares and the subsequent investment
requirement for each Class is $25. The minimum initial investment requirement
for Class A and Class B shares and the subsequent investment requirement for
all Classes through the Systematic Investment Plan described below is $25. See
"Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN Each Fund offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month for Fund shares in an amount of at least $25. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF EACH FUND Mutual Management Corp. ("MMC"), formerly known as
Smith Barney Mutual Funds Management Inc. serves as each Fund's investment
manager. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services, including Asset Management, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services.
EXCHANGE PRIVILEGE Shares of each Class may be exchanged for shares of the same
Class of certain other Smith Barney Mutual Funds at the respective net asset
values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of each Fund for the prior day generally
will be quoted daily in the financial section of most newspapers and is also
available from PFS Shareholder Services (the "Sub-Transfer Agent"). See
"Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS The Series intends to pay dividends from net
investment income monthly on shares of the Government Fund and Municipal Fund,
quarterly on shares of the Growth and Income Fund and annually on shares of the
Emerging Growth Fund, Growth Fund and International Equity Fund. Distributions
of net realized capital gains, if any, are paid annually for each Fund. See
"Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of each
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
distribution reinvestments will not be subject to any sales charge or CDSC.
Class B shares acquired through dividend and distribution reinvestments will
become eligible for conversion to Class A shares on a pro rata basis. See
"Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
investment objective of any Fund will be achieved. The value of the Funds'
investments, and thus the net asset value of Funds' shares, will fluctuate in
response to changes in market and economic conditions, as well as the
financial condition and prospects of issuers in which the Funds invest. For a
description of the risks involved in an investment in the Funds, see
"Investment Objectives and Management Policies."
EACH FUND'S EXPENSES The following expense tables list the costs and expenses
an investor will incur as a shareholder of each Fund, based on the maximum
sales charge or maximum CDSC that may be incurred at the time of purchase or
redemption, each Fund's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
APPLICABLE TO
THE EMERGING GROWTH FUND,
THE GROWTH FUND,
THE INTERNATIONAL EQUITY
FUND AND THE GROWTH
AND INCOME FUND
--------------------------
CLASS 1 CLASS A CLASS B
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
MAXIMUM SALES CHARGE IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE)........................................ 8.50% 5.00% None
MAXIMUM CDSC (AS A PERCENTAGE OF ORIGINAL COST OR REDEMPTION PROCEEDS,
WHICHEVER IS LOWER)........................................................ None None* 5.00%
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<CAPTION>
APPLICABLE TO
THE MUNICIPAL
FUND AND
THE GOVERNMENT
MUNICIPAL GOVERNMENT FUND
FUND FUND ---------------
CLASS 1 CLASS 1 CLASS A CLASS B
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
MAXIMUM SALES CHARGE IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) 4.75% 6.75% 4.50% None
MAXIMUM CDSC (AS A PERCENTAGE OF ORIGINAL COST OR REDEMPTION
PROCEEDS, WHICHEVER IS LOWER).................................... None None None* 4.50%
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
EMERGING GROWTH FUND GROWTH FUND GROWTH AND INCOME FUND
----------------------- ------------------------- --------------------------
CLASS 1 CLASS A CLASS B CLASS 1 CLASS A CLASS B CLASS 1 CLASS A CLASS B
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management fee......... 0.65% 0.65% 0.65% 0.60% 0.60% 0.60% 0.65% 0.65% 0.65%
12b-1 fee**............ 0.00 0.25 1.00 0.00 0.25 1.00 0.00 0.25 1.00
Other expenses......... 0.74 0.79 0.79 0.28 0.28 0.28 0.23 0.22 0.23
- ---------------------------------------------------------------------------------------------------------
Total Fund Operating
Expenses............. 1.39% 1.69% 2.44% 0.88% 1.13% 1.88% 0.88% 1.12% 1.88%
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL EQUITY
FUND GOVERNMENT FUND MUNICIPAL FUND
----------------------- ------------------------- --------------------------
CLASS 1 CLASS A CLASS B CLASS 1 CLASS A CLASS B CLASS 1 CLASS A CLASS B
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management fee......... 1.00% 1.00% 1.00% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60%
12b-1 fee**............ 0.00 0.25 1.00 0.00 0.25 1.00 0.00 0.25 1.00
Other expenses......... 1.26 1.31 1.30 0.30 0.30 0.30 0.38 0.34 0.34
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Total Fund Operating
Expenses............. 2.26% 2.56% 3.30% 0.90% 1.15% 1.90% 0.98% 1.19% 1.94%
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</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee.
The sales charges and CDSCs set forth in the above tables are the maximum
charges imposed on purchases or redemptions of each of the Funds' shares and
investors may actually pay lower or no charges, depending on the amount pur-
chased and, in the case of
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class B and certain Class A shares, the length of time the shares are held.
See "Purchase of Shares" and "Redemption of Shares." PFS receives an annual
12b-1 service fee of 0.25% of the value of average daily net assets of Class A
shares of each Fund. PFS also receives with respect to Class B shares of each
Fund an annual 12b-1 fee of 1.00% of the value of average daily net assets of
that Class, consisting of a 0.75% distribution fee and a 0.25% service fee.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in each of the Funds will bear directly or
indirectly. The example assumes payment by each Fund of operating expenses at
the levels set forth in the table above. See "Purchase of Shares," "Redemption
of Shares" and "Management of the Series."
<TABLE>
<CAPTION>
AN INVESTOR WOULD PAY THE FOLLOWING EXPENSES
ON A $1,000 INVESTMENT, ASSUMING (1) 5.00% ANNUAL
RETURN AND (2) REDEMPTION AT THE END OF EACH TIME PERIOD:
------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
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<S> <C> <C> <C> <C>
Emerging Growth Fund
Class 1 $ 98 $125 $155 $238
Class A 66 101 137 240
Class B 75 96 140 259
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Growth Fund
Class 1 93 111 130 184
Class A 61 84 109 181
Class B 69 89 112 201
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Growth and Income Fund
Class 1 93 111 130 184
Class A 62 87 114 190
Class B 69 89 112 203
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International Equity
Fund
Class 1 106 150 169 322
Class A 75 126 179 325
Class B 83 122 182 343
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Government Fund
Class 1 76 94 114 171
Class A 56 80 105 178
Class B 64 90 113 203
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Municipal Fund
Class 1 57 77 99 162
Class A 57 81 107 183
Class B 65 91 115 207
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<CAPTION>
AN INVESTOR WOULD PAY THE FOLLOWING EXPENSES
ON THE SAME INVESTMENT, ASSUMING THE SAME ANNUAL RETURN
BUT WITHOUT A REDEMPTION AT THE END OF EACH TIME PERIOD:
------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
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<S> <C> <C> <C> <C>
Emerging Growth Fund
Class 1 $ 98 $ 125 $155 $238
Class A 66 101 137 240
Class B 25 76 130 259
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Growth Fund
Class 1 93 111 130 184
Class A 61 84 109 181
Class B 19 59 102 201
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Growth and Income Fund
Class 1 93 111 130 184
Class A 62 87 114 190
Class B 19 59 102 203
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International Equity
Fund
Class 1 106 150 196 322
Class A 75 126 179 325
Class B 33 102 172 343
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Government Fund
Class 1 76 94 114 171
Class A 56 80 105 178
Class B 19 60 103 203
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Municipal Fund
Class 1 57 77 99 162
Class A 57 81 107 183
Class B 20 61 105 207
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</TABLE>
* Ten-year figures assume conversion of Class B Shares to Class A Shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, a Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by Ernst & Young LLP, independent
auditors, whose report thereon appears in the Series' annual report dated Octo-
ber 31, 1997. The information set out below should be read in conjunction with
the financial statements and related notes that also appear in the Series'
Annual Report to Shareholders, which is incorporated by reference into the
Statement of Additional Information.
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD:
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
AUGUST 8, 1996
(COMMENCEMENT
YEAR ENDED OF DISTRIBUTION) TO
CLASS 1 SHARES OCTOBER 31, 1997 OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD $18.59 $17.89
- -------------------------------------------------------------------------------
Net Investment Loss (0.08) (0.02)
Net Realized and Unrealized Gain 3.64 0.72
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Total from Investment Operations 3.56 0.70
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NET ASSET VALUE, END OF THE PERIOD $22.15 $18.59
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TOTAL RETURN(A) 19.15% 3.91%*
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NET ASSETS AT END OF PERIOD (IN MILLIONS) $ 6 $ 1.0
- -------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.39% 1.74%
Ratio of Net Investment Loss to Average
Net Assets (0.63) (1.09)
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PORTFOLIO TURNOVER 100% 80%
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Average Commission Paid Per Equity Share
Traded(b) $ 0.03 $ 0.05
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</TABLE>
*Non-Annualized.
(a)Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b)Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.
<TABLE>
<CAPTION>
FEBRUARY 21, 1995
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) TO
CLASS A SHARES OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1995(A)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $18.57 $15.12 $11.81
- ------------------------------------------------------------------------------
Net investment loss (0.16) (0.18) (0.24)
Net realized and
unrealized gain 3.66 3.63 3.55
- ------------------------------------------------------------------------------
Total from Investment
Operations 3.50 3.45 3.31
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $22.08 $18.57 $15.12
- ------------------------------------------------------------------------------
TOTAL RETURN(B) 18.90% 22.82% 28.11 %(c)
- ------------------------------------------------------------------------------
NET ASSETS AT END OF
PERIOD (IN MILLIONS) $ 101 $ 52 $ 16
- ------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets(d) 1.69% 2.21% 2.75 %
Ratio of Net Investment
Loss to Average Net
Assets(d) (0.92) (1.52) (1.65)%
- ------------------------------------------------------------------------------
PORTFOLIO TURNOVER 100% 80% 83 %*
- ------------------------------------------------------------------------------
Average Commission Paid
Per Equity Share
Traded(e) $ 0.03 $ 0.05 $ --
- ------------------------------------------------------------------------------
</TABLE>
*Non-Annualized.
(a)Based on average month-end shares outstanding.
(b)Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(c)Total Return from March 17, 1995 (date the Fund's investment strategy was
implemented) through October 31, 1995 without annualization.
(d) If Van Kampen American Capital Asset Management ("VKAC"), the Fund's
investment manager during this period had not waived fees for the period
ended October 31, 1995, the total return would have been lower and the
Ratios of Expenses to Average Net Assets and Net Investment Loss to Average
Net Assets would have been 3.37% and (2.27%) for Class A shares and 4.11%
and (3.07%) for Class B shares, respectively.
(e) Represents the average brokerage commissions paid per equality share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
FEBRUARY 21, 1995
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) TO
CLASS B SHARES OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1995(A)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $18.34 $15.04 $11.81
- ------------------------------------------------------------------------------
Net investment loss (0.27) (0.27) (0.35)
Net realized and
unrealized gain 3.56 3.57 3.58
- ------------------------------------------------------------------------------
Total from Investment
Operations 3.29 3.30 3.23
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $21.63 $18.34 $15.04
- ------------------------------------------------------------------------------
TOTAL RETURN(B) 17.94% 21.94% 27.43%(c)
- ------------------------------------------------------------------------------
NET ASSETS AT END OF
PERIOD (IN MILLIONS) $ 80 $ 39 $ 11
- ------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets(d) 2.44% 2.96% 3.49%
Ratio of Net Investment
Loss to Average Net
Assets(d) (1.67) (2.27) (2.45)
- ------------------------------------------------------------------------------
PORTFOLIO TURNOVER 100% 80% 83%*
- ------------------------------------------------------------------------------
Average Commission Paid
Per Equity Share
Traded(e) $ 0.03 $ 0.05 $ --
- ------------------------------------------------------------------------------
</TABLE>
*Non-Annualized.
(a)Based on average month-end shares outstanding.
(b)Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(c)Total Return from March 17, 1995 (date the Fund's investment strategy was
implemented) through October 31, 1995 without annualization.
(d) If VKAC, the Fund's investment manager during this period had not waived
fees for the period ended October 31, 1995, the total return would have
been lower and the Ratios of Expenses to Average Net Assets and Net
Investment Loss to Average Net Assets would have been 3.37% and (2.27%) for
Class A shares and 4.11% and (3.07%) for Class B shares, respectively.
(e) Represents the average brokerage commissions paid per equality share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-------------------------------------------------------------------------------
CLASS 1 SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $17.98 $17.46 $15.31 $16.26 $16.02 $15.47 $11.26 $13.15 $10.81 $ 9.37
- ----------------------------------------------------------------------------------------------------------
Net investment income 0.17 .19 0.16 0.13 0.12 0.13 0.19 0.20 0.19 0.10
Net realized and
unrealized gain/loss 4.33 2.91 3.18 0.21 2.01 1.39 4.24 (1.35) 2.26 1.44
- ----------------------------------------------------------------------------------------------------------
Total from Investment
Operations 4.50 3.10 3.34 0.34 2.13 1.52 4.43 (1.05) 2.45 1.54
- ----------------------------------------------------------------------------------------------------------
LESS:
Distributions from net
investment income 0.18 0.18 0.16 0.11 0.12 0.17 0.22 0.20 0.11 --
Distributions from and
in Excess of Net
Realized Gain 1.35 2.40 1.03 1.18 1.76 0.80 -- 0.64 -- 0.10
- ----------------------------------------------------------------------------------------------------------
Total Distributions 1.53 2.58 1.19 1.29 1.88 0.97 0.22 0.84 0.11 0.10
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $20.94 $17.98 $17.46 $15.31 $16.26 $16.02 $15.47 $11.26 $13.15 $10.81
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 26.93% 19.94% 24.01% 2.04% 14.27% 9.83% 39.90% (8.73%) 22.90% 16.51%
- ----------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF THE
PERIOD (IN MILLIONS) $3,547 $3,005 $2,612 $2,170 $2,066 $1,648 $1,312 $ 866 $ 768 $ 492
- ----------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets 0.88% 0.93% 1.00% 1.09% 1.14% 1.18% 1.26% 1.53% 1.63% 1.93%
Ratio of Net Investment
Income to Average Net
Assets 0.86 1.08 1.04 0.89 0.80 0.91 1.44 1.79 1.75 1.30
- ----------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 165% 202% 230% 164% 166% 134% 100% 99% 101% 63%
- ----------------------------------------------------------------------------------------------------------
Average Commission Paid
Per Equity Share
Traded(b) $ 0.03 $ 0.06 -0- -0- -0- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996(C) OCTOBER 31, 1997 OCTOBER 31, 1996(C)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $17.96 $16.63 $17.93 $16.63
- ---------------------------------------------------------------------------------------------------
Net investment
income/loss 0.15 .02 .01 (.01)
Net realized and
unrealized gain 4.30 1.31 4.28 1.31
- ---------------------------------------------------------------------------------------------------
Total from Investment
Operations 4.45 1.33 4.29 1.30
- ---------------------------------------------------------------------------------------------------
LESS:
Distributions from net
investment income 0.16 -0- .11 -0-
Distributions from net
realized gain 1.36 -0- 1.35 -0-
- ---------------------------------------------------------------------------------------------------
Total Distributions 1.52 -0- 1.46 -0-
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $20.89 $17.96 $20.75 $17.93
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 26.65% 8.00%* 25.66% 7.82%*
- ---------------------------------------------------------------------------------------------------
NET ASSETS AT END OF THE
PERIOD (IN MILLIONS) $ 109 $ 49 $ 126 $ 74
- ---------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets 1.13% 1.17% 1.88% 1.93%
Ratio of Net Investment
Income/Loss to Average
Net Assets 0.57 0.46 (0.16) (0.29)
- ---------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 165% 202% 165% 202%
- ---------------------------------------------------------------------------------------------------
Average Commission Paid
Per Equity Share
Traded(b) $ 0.03 $ 0.06 $ 0.03 $ 0.06
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Non-Annualized.
(a)Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(b) Presents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
(c)Class A and Class B shares commenced distribution on August 18, 1996.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-------------------------------------------------------------------------------
CLASS 1 SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $18.11 $16.95 $15.77 $17.13 $15.54 $14.70 $11.49 $12.51 $10.49 $ 9.84
- ----------------------------------------------------------------------------------------------------------
Net investment income 0.24 0.31 0.36 0.29 0.29 0.28 0.31 0.30 0.31 0.27
Net realized and
unrealized gain/loss 4.23 2.94 2.72 (0.21) 1.88 1.28 3.22 (0.99) 2.00 0.65
- ----------------------------------------------------------------------------------------------------------
Total from Investment
Operations 4.47 3.25 3.08 0.08 2.17 1.56 3.53 (.69) 2.31 0.92
- ----------------------------------------------------------------------------------------------------------
LESS:
Distributions from net
investment income 0.30 0.34 0.30 0.28 0.28 0.30 0.32 0.33 0.29 0.24
Distributions from and
in Excess of Net
Realized Gain 2.18 1.76 1.60 1.16 0.30 0.42 -- 0.00 -- 0.03
- ----------------------------------------------------------------------------------------------------------
Total Distributions 2.48 2.10 1.90 1.44 0.58 0.72 0.32 .33 0.29 0.27
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $20.10 $18.11 $16.95 $15.77 $17.13 $15.54 $14.70 $11.49 $12.51 $10.49
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 27.35% 20.58% 22.45% 0.51% 14.13% 10.85% 31.68% (5.84%) 22.38% 9.55%
- ----------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF THE
PERIOD (IN MILLIONS) $1,097 $ 943 $ 828 $ 713 $ 712 $ 591 $ 500 $ 367 $ 278 $ 168
- ----------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets 0.88% 0.91% 0.96% 1.02% 1.05% 1.09% 1.14% 1.37% 1.39% 1.57%
Ratio of Net Investment
Income to Average Net
Assets 1.25 1.78 2.27 1.84 1.76 1.84 2.29 2.55 2.81 3.04
- ----------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 93% 121% 117% 88% 51% 32% 42% 48% 26% 64%
- ----------------------------------------------------------------------------------------------------------
Average Commission Paid
Per Equity Share
Traded(b) $ 0.03 $ 0.06 -0- -0- -0- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996(C) OCTOBER 31, 1997 OCTOBER 31, 1996(C)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $18.11 $17.19 $18.09 $17.19
- ---------------------------------------------------------------------------------------------------
Net investment income 0.20 0.07 0.06 0.04
Net realized and
unrealized gain 4.23 0.91 4.22 0.90
- ---------------------------------------------------------------------------------------------------
Total from Investment
Operations 4.43 0.98 4.28 0.94
- ---------------------------------------------------------------------------------------------------
LESS:
Distributions from net
investment income 0.25 0.06 0.11 0.04
Distributions from net
realized gain 2.18 -0- 2.18 -0-
- ---------------------------------------------------------------------------------------------------
Total Distributions 2.43 0.06 2.29 0.04
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $20.10 $18.11 $20.07 $18.09
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 27.04% 5.72% 26.08% 5.49%*
- ---------------------------------------------------------------------------------------------------
NET ASSETS AT END OF THE
PERIOD (IN MILLIONS) $ 80 $ 33 $ 99 $ 52
- ---------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets 1.12% 1.16% 1.88% 1.91%
Ratio of Net Investment
Income to Average Net
Assets 0.96 1.78 0.22 1.05
- ---------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 93% 121% 93% 121%
- ---------------------------------------------------------------------------------------------------
Average Commission Paid
Per Equity Share
Traded(b) $ 0.03 $ 0.06 $ 0.03 $ 0.06
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Non-Annualized.
(a)Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(b) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
(c)Class A and Class B shares commenced distribution on August 18, 1996.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
AUGUST 8, 1996
(COMMENCEMENT
OF
YEAR ENDED DISTRIBUTION) TO
CLASS 1 SHARES OCTOBER 31, 1997 OCTOBER 31, 1996(A)
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD $16.52 $16.00
- -------------------------------------------------------------------------------
Net investment loss (0.17) (0.03)
Net realized and unrealized gain 1.81 .55
- -------------------------------------------------------------------------------
Total from Investment Operations 1.64 .52
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF THE PERIOD $18.16 $16.52
- -------------------------------------------------------------------------------
TOTAL RETURN*(B) 9.99% 3.25%**
- -------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (IN MILLIONS) $ 2 $ 0.2
- -------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 2.26% 2.50%
Ratio of Net Investment Loss to Average
Net Assets* (1.24) (1.31)
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER 57% 78%**
- -------------------------------------------------------------------------------
Average Commission Paid Per Equity Share
Traded(c) $ 0.02 $ 0.03
*If certain expenses had not been waived
or reimbursed by VKAC, Total Return would
have been lower and the ratios would have
been as follows:
Ratio of expenses to average net assets N/A 3.87%
Ratio of net investment loss to average
net assets N/A (2.67)
- -------------------------------------------------------------------------------
</TABLE>
** Non-Annualized
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.
N/A = Not Applicable
<TABLE>
<CAPTION>
FEBRUARY 21, 1995
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) IN
CLASS A SHARES OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1995(A)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $16.54 $13.86 $11.81
- -------------------------------------------------------------------------------
Net investment loss (0.26) (0.19) (0.14)
Net realized and
unrealized gain 1.85 2.87 2.19
- -------------------------------------------------------------------------------
Total from Investment
Operations 1.59 2.68 2.05
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $18.14 $16.54 $13.86
- -------------------------------------------------------------------------------
TOTAL RETURN*(B) 9.74% 19.34% 16.28%**(c)
- -------------------------------------------------------------------------------
NET ASSETS AT END OF
PERIOD (IN MILLIONS) $ 17 $ 10 $ 7
- -------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets* 2.56% 2.75% 3.64%
Ratio of Net Investment
Loss to Average Net
Assets* (1.59) (1.56) (1.40)
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER 57% 78% 17%**
- -------------------------------------------------------------------------------
Average Commission Paid
Per Equity Share
Traded(d) $ 0.02 $ 0.03 --
*If certain expenses had
not been waived or
reimbursed by VKAC,
Total Return would have
been lower and the
ratios would have been
as follows:
Ratio of expenses to
average net assets N/A 4.12% 5.97%
Ratio of net investment
loss to average net
assets N/A (2.92) (3.73)
- -------------------------------------------------------------------------------
</TABLE>
** Non-Annualized
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) Total Return from March 17, 1995 (date the Fund's investment strategy was
implemented) through October 31, 1995 without annualization.
(d) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.
N/A = Not Applicable
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FEBRUARY 21, 1995
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) IN
CLASS B SHARES OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1995(A)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $16.36 $13.79 $11.81
- -------------------------------------------------------------------------------
Net investment loss (0.32) (0.25) (0.21)
Net realized and
unrealized gain 1.76 2.82 2.19
- -------------------------------------------------------------------------------
Total from Investment
Operations 1.44 2.57 1.98
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $17.81 $16.36 $13.79
- -------------------------------------------------------------------------------
TOTAL RETURN*(B) 8.93% 18.64% 15.69%**(c)
- -------------------------------------------------------------------------------
NET ASSETS AT END OF
PERIOD (IN MILLIONS) $ 14 $ 8 $ 3
- -------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets* 3.30% 3.50% 4.33%
Ratio of Net Investments
Loss to Average Net
Assets* (2.34) (2.31) (2.80)
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER 57% 78% 17%**
- -------------------------------------------------------------------------------
Average Commission Paid
Per Equity Share
Traded(d) $ 0.02 $ 0.03 --
*If certain expenses had
not been waived or
reimbursed by VKAC,
Total Return would have
been lower and the
ratios would have been
as follows:
Ratios of expenses to
average net assets N/A 4.87% 6.67%
Ratio of net investment
loss to average net
assets N/A (3.67) (5.13)
- -------------------------------------------------------------------------------
</TABLE>
** Non-Annualized
(a) Based on average month-end shares outstanding.
(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) Total Return from March 17, 1995 (date the Fund's investment strategy was
implemented) through October 31, 1995 without annualization.
(d) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.
N/A = Not Applicable
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
GOVERNMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-------------------------------------------------------------------------------
CLASS 1 SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $10.41 $10.67 $ 9.99 $11.80 $11.56 $11.47 $10.79 $11.46 $11.13 $11.08
- ----------------------------------------------------------------------------------------------------------
Net investment income 0.69 0.70 0.70 0.69 0.76 0.86 0.90 0.95 1.03 0.94
Net realized and
unrealized gain/loss 0.17 (0.25) 0.68 (1.36) 0.43 0.16 0.68 (0.44) 0.33 0.04
- ----------------------------------------------------------------------------------------------------------
Total from Investment
Operations 0.86 0.45 1.38 (0.67) 1.19 1.02 1.58 0.51 1.36 0.98
- ----------------------------------------------------------------------------------------------------------
LESS:
Distributions from and
in excess of net
investment income 0.68 0.72 0.70 0.69 0.76 0.86 0.90 0.96 1.03 0.93
Distributions from and
in Excess of Net
Realized Gain -- -- -- 0.45 0.19 0.07 -0- 0.22 -0- -0-
- ----------------------------------------------------------------------------------------------------------
Total Distributions 0.68 0.72 0.70 1.14 0.95 0.93 0.90 1.18 1.03 0.93
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $10.58 $10.40 $10.67 $ 9.99 $11.80 $11.56 $11.47 $10.79 $11.46 $11.13
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 8.56% 4.58% 14.27% (5.45%) 10.55% 9.32% 15.16% 4.94% 12.87% 9.20%
- ----------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF THE
PERIOD (IN MILLIONS) $ 241 $ 288 $ 329 $ 335 $ 370 $ 282 $ 189 $ 141 $ 101 $ 71
- ----------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets 0.90% 0.84% 0.83% 0.89% 0.89% 0.95% 0.96% 1.09% 1.20% 1.44%
Ratio of Net Investment
Income to Average Net
Assets 6.69 6.79 6.84 7.06 7.35 7.46 8.15 8.78 9.29 8.55
- ----------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 104% 276% 214% 256% 218% 112% 39% 28% 29% 51%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996(B) OCTOBER 31, 1997 OCTOBER 31, 1996(B)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $10.41 $10.32 $10.41 $10.32
- ---------------------------------------------------------------------------------------------------
Net investment income 0.67 0.15 0.59 0.14
Net realized and
unrealized gain 0.17 0.09 0.17 0.09
- ---------------------------------------------------------------------------------------------------
Total from Investment
Operations 0.84 0.24 0.76 0.23
- ---------------------------------------------------------------------------------------------------
Less Distributions from
and in Excess of Net
Investment Income 0.66 0.15 0.59 0.14
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $10.58 $10.41 $10.58 $10.41
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 8.35% 2.36%* 7.55% 2.18%*
- ---------------------------------------------------------------------------------------------------
NET ASSETS AT END OF THE
PERIOD (IN MILLIONS) $ 14 $ 11 $ 12 $ 14
- ---------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets 1.15% 1.09% 1.90% 1.84%
Ratio of Net Investment
Income to Average Net
Assets 6.44 6.50 5.69 5.74
- ---------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 104% 276% 104% 276%
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Non-Annualized.
(a) Total return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(b) Class A and Class B commenced distribution on August 8, 1995.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
--------------------------------------------------------------------------------
CLASS 1 SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(B)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $13.83 $13.77 $12.89 $14.07 $13.03 $12.84 $12.18 $12.37 $12.26 $11.91
- -----------------------------------------------------------------------------------------------------------
Net investment income 0.69 0.70 0.74 0.71 0.73 0.72 0.76 0.76 0.77 0.19
Net realized and
unrealized gain/loss 0.39 0.11 0.87 (1.18) 1.04 0.22 0.65 (0.18) 0.10 0.31
- -----------------------------------------------------------------------------------------------------------
Total from Investment
Operations 1.08 0.81 1.61 (0.47) 1.77 0.94 1.41 0.58 0.87 0.50
- -----------------------------------------------------------------------------------------------------------
LESS:
Distributions from net
investments income 0.66 0.71 0.73 0.71 0.73 0.75 0.75 0.77 0.76 0.15
Distributions from and
in excess of net
realized gain 0.04 0.04 -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Total Distributions 0.70 0.75 0.73 0.71 0.73 0.75 0.75 0.77 0.76 0.15
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $14.21 $13.83 $13.77 $12.89 $14.07 $13.03 $12.84 $12.18 $12.37 $12.26
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 8.04% 6.09% 12.72% (3.38%) 13.84% 7.57% 11.79% 4.77% 7.31% 4.26%*
- -----------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF THE
PERIOD (IN MILLIONS) $ 104 $ 119 $ 119 $ 112 $ 96 $ 60 $ 43 $ 37 $ 25 $ 6
- -----------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets 0.98% 1.05% 0.96% 0.99% 0.96% 1.14% 1.15% 1.25% 1.25% 1.91%
Ratio of Net Investment
Income to Average Net
Assets 4.93 5.13 5.58 5.27 5.29 5.56 6.08 6.21 6.28 5.55
- -----------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 50% 80% 49% 4% 4% 6% 1% 4% 0% 5%*
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996(B) OCTOBER 31, 1997 OCTOBER 31, 1996(B)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF THE PERIOD $13.83 $13.78 $13.82 $13.78
- ---------------------------------------------------------------------------------------------------
Net investment income 0.65 0.11 0.54 0.09
Net realized and
unrealized gain 0.40 0.04 0.40 0.04
- ---------------------------------------------------------------------------------------------------
Total from Investment
Operations 1.05 0.15 0.94 0.13
- ---------------------------------------------------------------------------------------------------
LESS:
Distributions from net
investments income 0.63 0.10 0.52 0.09
Distributions from net
realized gains 0.04 -- 0.04 --
- ---------------------------------------------------------------------------------------------------
Total Distributions 0.67 0.10 0.56 0.09
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
THE PERIOD $14.21 $13.83 $14.20 $13.82
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 7.77% 1.12%* 6.98% 0.93%*
- ---------------------------------------------------------------------------------------------------
NET ASSETS AT END OF THE
PERIOD (IN MILLIONS) $ 9 $ 2 $ 3 $ 0.7
- ---------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average Net Assets 1.19% 1.30% 1.94% 2.05%
Ratio of Net Investment
Income to Average Net
Assets 4.79 4.82 4.04 4.06
- ---------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER 50% 80% 50% 80%
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Non-Annualized.
(a) Total Return is based upon Net Asset Value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(b) Class A and Class B shares commenced distribution on August 18, 1996.
14
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Although each Fund of the Series has a different goal which it pursues through
separate investment policies described below, each Fund, except the Interna-
tional Equity Fund, will not purchase any securities issued by any company pri-
marily engaged in the manufacture of alcohol or tobacco. The differences in
goals and investment policies among the Funds can be expected to affect the
return of each Fund and the degree of market and financial risk to which each
Fund is subject. The goal and investment policies, the percentage limitations,
and the kinds of securities in which each Fund may invest are generally not
fundamental policies and may be changed by the Trustees. Further information
about each Fund's investment policies, including a list of those restrictions
which may not be changed without the approval of shareholders appears in the
Statement of Additional Information.
EMERGING GROWTH FUND
The goal of the Emerging Growth Fund is to seek capital appreciation by
investing in a portfolio of securities consisting principally of common stocks
of small and medium sized companies considered by MMC to be emerging growth
companies. Any ordinary income received from portfolio securities is entirely
incidental. There can, of course, be no assurance that the objective of capital
appreciation will be realized; therefore, full consideration should be given to
the risks inherent in the investment techniques that MMC may use to achieve
such objective.
Under normal conditions, the Fund invests at least 65% of its total assets in
common stocks of small and medium sized companies, both domestic and foreign,
in the early stages of their life cycle that MMC believes have the potential to
become major enterprises. Investments in such companies may offer greater
opportunities for growth of capital than larger, more established companies,
but also may involve certain special risks. Emerging growth companies often
have limited product lines, markets, or financial resources, and they may be
dependent upon one or a few key people for management. The securities of such
companies may be subject to more abrupt or erratic market movements than secu-
rities of larger, more established companies or the market averages in general.
While the Fund will invest primarily in common stocks, to a limited extent, it
may invest in other securities such as preferred stocks, convertible securities
and warrants.
The Fund does not limit its investment to any single group or type of securi-
ty. The Fund may also invest in special situations involving new management,
special products and techniques, unusual developments, mergers or liquidations.
Investments in unseasoned companies and special situations often involve much
greater risks than are inherent in ordinary investments, because securities of
such companies may be more likely to experience unexpected fluctuations in
price.
The Fund's primary approach is to seek what MMC believes to be unusually
attractive growth investments on an individual company basis. The Fund may
invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
The Fund attempts to reduce overall exposure to risk from declines in securi-
ties prices by spreading its investments over many different companies in a
variety of industries. There is, however, no assurance that the Fund will be
successful in achieving its objective.
The Fund may hold a portion of its assets in high grade short-term debt secu-
rities and high grade corporate or government bonds in order to provide liquid-
ity. Such investments may be increased by the Fund up to 100% of its assets,
when deemed appropriate by MMC for temporary defensive purposes. Short-term
investments may include repurchase agreements with banks or broker-dealers. The
Fund may invest up to 20% of its total assets in securities of foreign issuers.
See "Risk Factors and Special Considerations."
INTERNATIONAL EQUITY FUND
The goal of the International Equity Fund is to seek 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 secu-
rities of established non-United States issuers.
Under normal market conditions, the Fund invests at least 65% of its total
assets in a diversified portfolio of equity securities consisting of dividend
and non-dividend paying common stock, preferred stock, convertible debt and
rights and warrants to such securities and up to 35% of the Fund's assets in
bonds, notes and debt securities (consisting of securities issued in the
Eurocurrency markets or obligations of the United States or foreign governments
and their political subdivisions) of established non-United States issuers.
Investments may be made for capital appreciation or for income or any combina-
tion of both for the purpose of achieving a higher overall return than might
otherwise be obtained solely from investing for growth of capital or for
income. There is no limitation on the percentage or amount of the Fund's assets
which may be invested for growth or income and, therefore, from time to time
the investment emphasis may be placed solely or primarily on growth of capital
or solely or primarily on income.
15
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
In seeking to achieve its goal, the Fund presently expects to invest its
assets primarily in common stocks of established non-United States companies
which in the opinion of MMC have potential for growth of capital. However,
there is no requirement that the Fund invest exclusively in common stocks or
other equity securities and, if deemed advisable, the Fund may invest up to 35%
of its assets in bonds, notes and other debt securities (including securities
issued in the Eurocurrency markets or obligations of the United States or for-
eign governments and their political subdivisions). When MMC believes that the
return on debt securities will equal or exceed the return on common stocks, the
Fund may, in seeking its goal of total return, substantially increase its hold-
ings (up to a maximum of 35% of its assets) in such debt securities. In deter-
mining whether the Fund will be invested for capital appreciation or for income
or any combination of both, MMC regularly analyzes a broad range of interna-
tional equity and fixed income markets in order to assess the degree of risk
and level of return that can be expected from each market.
In general, the prices of debt securities vary inversely with interest rates.
If interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price (gain-
ing or losing more in value) than shorter-maturity debt securities, and gener-
ally offer higher yields than shorter-maturity debt securities, all other fac-
tors, including credit quality, being equal.
The Fund will generally invest its assets broadly among countries and will
normally have represented in the portfolio business activities in not less than
three different foreign countries. Except as stated below, the Fund will invest
at least 65% of its assets in companies organized or governments located in any
area of the world other than the United States, such as the Far East (e.g.,
Japan, Hong Kong, Singapore, Malaysia), Western Europe (e.g., United Kingdom,
Germany, The Netherlands, France, Italy, Switzerland), Eastern Europe (e.g.,
Hungary, Poland, The Czech Republic and the countries of the former Soviet
Union), Central and South America (e.g., Mexico, Chile and Venezuela), Austra-
lia, Canada and such other areas and countries as MMC may determine from time
to time. Allocation of the Fund's investments will depend upon the relative
attractiveness of the international markets and particular issuers. Concentra-
tion of the Fund's assets in one or a few countries or currencies will subject
the Fund to greater risks than if the Fund's assets were not geographically
concentrated.
Under unusual economic or market conditions as determined by MMC, for defen-
sive purposes the Fund may temporarily invest all or a major portion of its
assets in U.S. Government securities or in debt or equity securities of compa-
nies incorporated in and having their principal business activities in the
United States. To the extent the Fund's assets are invested for temporary
defensive purposes, such assets will not be invested in a manner designed to
achieve the Fund's investment goal.
In determining the appropriate distribution of investments among various coun-
tries and geographic regions, MMC ordinarily considers the following factors:
prospects for relative economic growth between countries; expected levels of
inflation; government policies influencing business conditions; the outlook for
currency relationships; and the range of individual investment opportunities
available to international investors. In the future, if any other relevant fac-
tors arise they will also be considered. In analyzing companies for investment,
MMC ordinarily looks for one or more of the following characteristics: an
above-average earnings growth per share; high return on invested capital;
healthy balance sheet; sound financial and accounting policies and overall
financial strength; strong competitive advantages; effective research and prod-
uct development and marketing; efficient service; pricing flexibility; strength
of management; and general operating characteristics which will enable the com-
pany to compete successfully in its market place. Ordinarily, MMC will not view
a company as being sufficiently well established to be considered for inclusion
in the Fund's portfolio unless the company, together with any predecessors, has
been operating for at least three fiscal years. However, the Fund may invest up
to 5% of its assets in such "unseasoned" issuers.
It is expected that portfolio securities will ordinarily be traded on a stock
exchange or other market in the country in which the issuer is principally
based, but may also be traded on markets in other countries including, in many
cases, the United States securities exchanges and over-the-counter markets.
To the extent that the Fund's assets are not otherwise invested as described
above, the assets may be held in cash, in any currency, or invested in United
States as well as foreign high quality money market instruments and
equivalents.
GROWTH FUND
The goal of the Growth Fund is to seek capital appreciation through invest-
ments in common stocks and options on common stocks. Any income realized on its
investments will be purely incidental to its goal of capital appreciation.
Portfolio securities are selected by MMC using an investment research process
blending traditional security analysis and quantitative security techniques.
Such process includes focusing on securities of companies that MMC believes
either: (1) experienced above-average and consistent long-term growth of earn-
ings and have excellent prospects for outstanding future growth in earnings;
(2) are presently experiencing or expected to have a material increase in prof-
its and sales; (3) are undervalued either in that such securities are
16
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
selling at prices that do not reflect the current market value of its securi-
ties 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 secu-
rity is not reflected in the price of the security; (4) will experience a fun-
damental change in structure that potentially may result in higher earnings; or
(5) will produce new products, new services or new processes. The Fund may
invest in options and other securities that have above average volatility of
price movement. Because prices of common stocks, options and other investments
fluctuate, the value of an investment in the Fund will vary based upon the
Fund's investment performance. The Fund attempts to reduce overall exposure to
risk from declines in securities prices by spreading its investments over many
different companies in a variety of industries and by using stock index options
and stock index futures and options thereon, as discussed in the Statement of
Additional Information. There is no assurance that the Fund will be successful
in achieving its goal.
The Fund may hold a portion of its assets in high grade short-term debt secu-
rities and high grade corporate or government bonds in order to provide liquid-
ity. The amount of assets the Fund may hold for liquidity purposes is based on
market conditions and the need to meet redemption requests. Such investments
may be increased by the Fund, up to 100% of its assets, when deemed appropriate
by MMC for temporary defensive purposes. A description of the ratings of com-
mercial paper and bonds is contained in the Appendix to the Statement of Addi-
tional Information. Short-term investments may include repurchase agreements
with banks or broker-dealers. See "Risk Factors and Special Considerations."
Certain policies of the Fund, such as purchasing and selling options on
stocks, purchasing options on stock indices and purchasing stock index futures
contracts and options thereon involve inherently greater investment risk and
could result in more volatile price fluctuations. Options, futures contracts
and related options are described in "Risk Factors and Special Considerations"
and the Statement of Additional Information. The Fund may also invest up to 20%
of its total assets in securities of foreign issuers and in investment compa-
nies. See "Risk Factors and Special Considerations." Since the Fund may take
substantial risks in seeking its goal of capital appreciation, it is not suit-
able for investors unable or unwilling to assume such risks.
GROWTH AND INCOME FUND
The goal of the Growth and Income Fund is to seek reasonable growth and income
through investments in equity securities that provide dividend or interest
income, including common and preferred stocks and securities convertible into
common and preferred stocks.
Portfolio securities are selected by MMC using an investment research process
blending traditional security analysis and quantitative security selection
techniques. Such process includes focusing on securities of companies that MMC
believes either: (1) experienced above-average and consistent long-term growth
of earnings and have excellent prospects for outstanding future growth in earn-
ings; (2) are presently experiencing or expected to have a material increase in
profits and sales; (3) are undervalued either in that such securities are sell-
ing 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 secu-
rity is not reflected in the price of the security; (4) will experience a fun-
damental change in structure that potentially may result in higher earnings; or
(5) will produce new products, new services or new processes. In general, the
Fund intends to invest primarily in securities that have yielded a dividend or
interest income to security holders within the past twelve months; however, it
may invest in non-income producing investments held for anticipated increase in
value. There is no assurance that the Fund will be successful in achieving its
goal.
Convertible securities rank senior to common stocks in a corporation's capital
structure. They are consequently of higher quality and entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible secu-
rity sells above its value as fixed income security. The Fund may purchase con-
vertible securities rated Ba or lower by Moody's or BB or lower by S&P or in
non-rated securities considered by MMC to be of comparable quality. Although
the Fund selects these securities primarily on the basis of their equity char-
acteristics, investors should be aware that debt securities rated in these cat-
egories are considered high risk securities; the rating agencies consider them
speculative, and payment of interest and principal is not considered well
assured. To the extent that such convertible securities are acquired by the
Fund, there is a greater risk as to the timely payment of the principal of, and
timely payment of interest or dividends on, such securities than in the case of
higher rated convertible securities.
Although the portfolio turnover rate will not be considered a limiting factor,
the Fund does not intend to engage in trading directed at realizing short-term
profits. Nevertheless, changes in the portfolio will be made promptly when
determined to be advisable by reason of developments not foreseen at the time
of the investment decision, and usually without reference to the length of time
the security has been held.
17
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
The Fund may hold a portion of its assets in high grade short-term debt secu-
rities and high grade corporate or government bonds in order to provide liquid-
ity. The amount of assets the Fund may hold for liquidity purposes is based on
market conditions and the need to meet redemption requests. Such investment may
be increased by the Fund, up to 100% of its assets, when deemed appropriate by
MMC for temporary defensive purposes. Short-term investments may include repur-
chase agreements with banks or broker-dealers. See "Risk Factors and Special
Considerations." The Fund may also invest up to 20% of its total assets in
securities of foreign issuers and in investment companies. See "Risk Factors
and Special Considerations." The Fund may engage in portfolio management strat-
egies and techniques involving options, futures contracts and options on
futures. Options, futures contracts and related options are described in "Risk
Factors and Special Considerations" and the Statement of Additional Informa-
tion.
GOVERNMENT FUND
The goal of the Government Fund is to seek high current return consistent with
preservation of capital. The Fund invests primarily in debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. In
order to hedge against changes in interest rates, the Fund may purchase or sell
options on U.S. Government securities and engage in transactions involving
interest rate futures contracts and options on such contracts. See "Risk Fac-
tors and Special Considerations" and the Statement of Additional Information
for further discussion. The Fund may invest in repurchase agreements fully col-
lateralized by U.S. Government securities. The Fund may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Risk Factors and
Special Considerations." The Fund is not designed for investors seeking long-
term capital appreciation. Shares of the Fund are not insured or guaranteed by
the U.S. Government, its agencies or instrumentalities or by any other person
or entity. There is no assurance that the Fund will be successful in achieving
its goal.
The Fund may also engage in transactions involving obligations issued or guar-
anteed by U.S. Government agencies and instrumentalities which are supported by
any of the following: (a) the full faith and credit of the U.S. Government
(such as Government National Mortgage Association ("GNMA") Certificates), (b)
the right of the issuer to borrow an amount limited to a specific line of
credit from the U.S. Government, (c) discretionary authority of the U.S. Gov-
ernment 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 Mort-
gage Association ("FNMA"). The Fund expects in any event that at all times at
least 80% of its assets will be invested in U.S. Government securities.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities include: (1) U.S. Treasury obligations, which differ in their
interest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturity of one to ten years), and
U.S. Treasury bonds (generally maturities of greater than ten years), including
the principal components or the interest components issued by the U.S. Govern-
ment under the Separate Trading of Registered Interest and Principal of Securi-
ties program (i.e. "STRIPS"), all of which are backed by the full faith and
credit of the United States; and (2) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, including government guaranteed mort-
gage-related securities, some of which are backed by the full faith and credit
of the U.S. Treasury, some of which are supported by the right of the issue to
borrow from the U.S. Government and some of which are backed only by the credit
of the issuer itself.
Mortgage loans made by banks, savings and loan institutions, and other lenders
are often assembled into pools, which are issued or guaranteed by an agency or
instrumentality of the U.S. Government, though not necessarily by the U.S. Gov-
ernment itself. Interests in such pools are what this Prospectus calls "mort-
gage-related securities."
Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by GNMA, FNMA and the Federal Home Loan Mortgage Corpora-
tion ("FHLMC"). GNMA is a wholly owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned corpora-
tion, and FHLMC, a federal corporation, are instrumentalities of the United
States. The securities and guarantees of FNMA and FHLMC are not backed,
directly or indirectly, by the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has discretionary
authority to lend FNMA up to $2.25 billion outstanding at any time, neither the
United States nor any agency thereof is obligated to finance FNMA's or FHLMC's
operations or to assist FNMA or FHLMC in any other manner. Securities of FNMA
and FHLMC include those issued in principal only or interest only components.
Mortgage-related securities are characterized by monthly payments to the hold-
er, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. Thus, the securityholders frequently receive prepayments of principal,
in addition to the principal which is part of the regular monthly payment. A
borrower is more likely to prepay a
18
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
mortgage which bears a relatively high rate of interest. This means that in
times of declining interest rates, some of the Fund's higher yielding securi-
ties might be converted to cash, and the Fund will be forced to accept lower
interest rates when that cash is used to purchase additional securities. The
increased likelihood of prepayment when interest rates decline also limits mar-
ket price appreciation of mortgage-related securities. If the Fund buys mort-
gage-related securities at a premium, mortgage foreclosures or mortgage prepay-
ments may result in a loss to the Fund of up to the amount of the premium paid
since only timely payment of principal and interest is guaranteed.
In general, the prices of debt securities vary inversely with interest rates.
If interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price (gain-
ing or losing more in value) than shorter-maturity debt securities, and gener-
ally offer higher yields than shorter-maturity debt securities, all other fac-
tors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, MMC seeks to moderate market risk by gener-
ally maintaining a portfolio duration within a range of approximately four to
six years. Duration is a measure of the expected life of a debt security that
was developed as a more precise alternative to the concept of "term to maturi-
ty." Duration incorporates a debt security's yield, coupon interest payments,
final maturity and call features into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration measures the length of the
time interval between the present and the time when the interest and principal
payments are scheduled to be received (or in the case of a callable bond,
expected to be received), weighing them by the present value of the cash to be
received at each future point in time. In general, the lower the coupon rate of
interest or the longer the maturity, or the lower the yield-to-maturity of a
debt security, the longer its duration; conversely, the higher the coupon rate
of interest, the shorter the maturity or the higher the yield-to-maturity of a
debt security, the shorter its duration.
With respect to some securities, there may be some situations where even the
standard duration calculation does not properly reflect the interest rate expo-
sure of a security. In these and other similar situations, MMC will use more
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure. The duration is
likely to vary from time to time as MMC pursues its strategy of striving to
maintain an active balance between seeking to maximize income and endeavoring
to maintain the value of the Fund's capital. Thus, the objective of providing
high current return consistent with preservation of capital to shareholders is
tempered by seeking to avoid undue market risk and thus provide reasonable
total return as well as high distributed return. There is, of course, no assur-
ance that MMC will be successful in achieving such results for the Fund.
The Fund generally purchases debt securities at a premium over the principal
or face value in order to obtain higher current income. The amount of any pre-
mium declines during the term of the security to zero at maturity. Such decline
generally is reflected in the market price of the security and thus in the
Fund's net asset value. Any such decline is realized for accounting purposes as
a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.
The principal reason for selling call or put options is to obtain, through the
receipt of premiums, a greater return than would be realized on the underlying
securities alone. By selling options, the Fund reduces its potential for capi-
tal appreciation on debt securities if interest rates decline. Thus, if market
prices of debt securities increase, the Fund would receive a lower total return
from its optioned positions than it would have received if the options had not
been sold. The purpose of selling options is intended to improve the Fund's
total return and not to "enhance" monthly distributions. During periods when
the Fund has capital loss carryforwards, any capital gains generated from such
transactions will be retained in the Fund. See "Risk Factors and Special Con-
siderations" and the Statement of Additional Information for further discus-
sion.
The purchase and sale of options may result in a high portfolio turnover rate.
The Fund's turnover rate is shown in the table of Financial Highlights. See
"Risk Factors and Special Considerations" for a discussion of the effect of a
Fund's portfolio turnover.
MUNICIPAL FUND
The goal of the Municipal Fund is to seek as high a level of current interest
income exempt from federal income tax as is consistent with the preservation of
capital. Because the value of and yield on municipal bonds fluctuate, there can
be no assurance that the Fund's goal will be achieved.
19
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
The Fund seeks to achieve its objective by investing in a diversified portfo-
lio of obligations issued by or on behalf of states, territories or possessions
of the United States and the District of Columbia and their political subdivi-
sions, agencies and instrumentalities, the interest from which, in the opinion
of bond counsel for the issuer, is exempt from federal income tax ("Municipal
Bonds"). It is a fundamental policy of the Fund under normal conditions to
invest at least 80% of its assets in Municipal Bonds which are considered tax-
exempt. The Fund does not independently evaluate the tax-exempt status of the
Municipal Bonds in which it invests. The Fund invests principally in Municipal
Bonds rated at the time of purchase within the three highest grades assigned by
Moody's or S&P. Ratings at the time of purchase determine which securities may
be acquired, and a subsequent reduction in rating does not require the Fund to
dispose of a security. At least 75% of the Fund's total assets will be invested
in Municipal Bonds rated "A" or higher. The Fund may invest up to 25% of its
total assets in Municipal Bonds rated "Baa" by Moody's or "BBB" by S&P or any
non-rated Municipal Bonds having characteristics similar to Municipal Bonds
rated "Baa" or "BBB." Municipal Bonds rated BBB or Baa may have speculative
characteristics so that changes in economic conditions or other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade Municipal Bonds. The market prices of
Municipal Bonds generally fluctuate with changes in interest rates so that the
value of investments in such securities can be expected to decrease as interest
rates rise and increase as interest rates fall. Because investment in lower
rated securities involves greater investment risks, achievement of the Fund's
goal may be more dependent on MMC's credit analysis than would be the case if
the Fund invested only in higher rated securities. Non-rated Municipal Bonds
are not necessarily of lower quality than rated Municipal Bonds, but the market
for rated Municipal Bonds is often broader. The Fund may seek to hedge against
changes in interest rates through transactions in listed futures contracts
related to U.S. Government securities, Municipal Bonds or to an index of Munic-
ipal Bonds, and options on such contracts. See the Statement of Additional
Information for discussion of futures contracts and options.
On a temporary basis, due to market conditions or pending investment in Munic-
ipal Bonds, the Fund may invest up to 100% of its assets in "Temporary Invest-
ments" consisting of short-term municipal notes rated MIG 1 through MIG 4 by
Moody's or SP-1 or SP-2 by S&P; tax-exempt commercial paper rated P-1 or P-2 in
the case of Moody's or A-1 or A-2 by S&P; securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities; corporate bonds and
debentures; certificates of deposit and bankers' acceptances of domestic banks
with assets of $500 million or more and having deposits insured by the Federal
Deposit Insurance Corporation; commercial paper and repurchase agreements. The
income on corporate bonds and debentures, certificates of deposit and bankers'
acceptances, commercial paper and repurchase agreements is taxable. See the
Appendix in the Statement of Additional Information for discussion of ratings
of commercial paper and bonds.
The Fund may invest up to 10% of its net assets in illiquid securities which
include Municipal Bonds issued in limited placements under which the Fund rep-
resents that it is purchasing for investment purposes only, repurchase agree-
ments maturing in more than seven days and other securities subject to legal or
contractual restrictions on resale. Municipal Bonds acquired in limited place-
ments generally may be resold only in a privately negotiated transaction to one
or more other institutional investors. Restricted securities are generally pur-
chased at a discount from the market price of unrestricted securities of the
same issuer. Investments in restricted securities are not readily marketable
without some time delay. A Fund position in restricted securities might
adversely affect the liquidity and marketability of such securities. Such limi-
tations could result in the Fund's inability to realize a favorable price upon
disposition, and in some cases might make disposition of such securities at the
time desired by the Fund impossible. The 10% limitation applies at the time the
purchase commitment is made. See "Risk Factors and Special Considerations."
Variations in the quality and maturity of the Fund's portfolio investments can
be expected to affect the Fund's yield and the degree of market and financial
risk to which the Fund is subject. Generally, Municipal Bonds with longer matu-
rities tend to produce higher yields and are subject to greater market fluctua-
tions as a result of changes in interest rates than Municipal Bonds with
shorter maturities and lower yields. The market value of Municipal Bonds gener-
ally rises when interest rates decline and falls when interest rates rise. Gen-
erally lower rated Municipal Bonds provide a higher yield than higher rated
Municipal Bonds of similar maturity but are subject to greater market and
financial risk. The Fund is not limited as to the maturities of the Municipal
Bonds in which it invests. Such securities may have remaining maturities of up
to 30 years or more.
Municipal Bonds. Municipal Bonds include debt obligations of a state, terri-
tory or a possession of the United States and the District of Columbia and
their political subdivisions, agencies and instrumentalities issued to obtain
funds for various public purposes, including the construction of a wide range
of public facilities such as airports, highways, bridges, schools, hospitals,
housing, mass transportation, streets and water and sewer works. Other public
purposes for which Municipal Bonds may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and obtaining funds
to lend to other public institutions and facilities. Certain types of Municipal
Bonds are issued to obtain funding for privately operated facilities.
Many new issues of Municipal Bonds are sold on a "when issued" basis. While
the Fund has ownership rights to the bonds, the Fund does not have to pay for
them until they are delivered, normally 15 to 45 days later. To meet that pay-
ment obligation, the Fund
20
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
sets aside with the custodian sufficient cash or high grade securities equal to
the amount that will be due. When the Fund engages in when-issued and delayed
delivery transactions, the Fund relies on the buyer or seller, as the case may
be, to consummate the trade. Failure of the buyer or seller to do so may result
in the Fund missing the opportunity of obtaining a price considered to be
advantageous. See "Risk Factors and Special Considerations."
The yields of Municipal Bonds depend on, among other things, general money
market conditions, general conditions of the Municipal Bond market, size of a
particular offering, the maturity of the obligation and rating of the issue.
The ratings of Moody's and S&P represent their opinions of the quality of the
Municipal Bonds they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Municipal Bonds of the same maturity and coupon with different
ratings may have the same yield. A description of the ratings is included in
the Statement of Additional Information.
Among the various types of Municipal Bonds are general obligation bonds, reve-
nue or special obligation bonds, industrial development bonds, pollution con-
trol bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes.
General obligation bonds are backed by the taxing power of the issuing munici-
pality. Revenue bonds are backed by the revenues of a project or facility--
tolls from a toll-bridge, for example. Industrial development revenue bonds are
a specific type of revenue bond backed by the credit and security of a private
user. The Fund's ability to achieve its goal depends to a great extent on the
ability of these various issuers to meet their scheduled payments of principal
and interest.
The Fund considers investments in Municipal Bonds not to be subject to concen-
tration policies and may invest a relatively high percentage of its assets in
Municipal Bonds issued by entities having similar characteristics. The issuers
may be located in the same geographic area or may pay their interest obliga-
tions from revenue of similar projects such as hospitals, utility systems and
housing finance agencies. This may make the Fund's investments more susceptible
to similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's per share net
asset value also increases. The Fund may invest more than 25% of its total
assets in industrial development revenue bonds, but it does not intend to
invest more than 25% of its assets in industrial development revenue bonds
issued for companies in the same industry or state. Sizeable investments in
such obligations could involve an increased risk to the Fund should any of such
issuers of any such relate projects or facilities experience financial diffi-
culties.
From time to time, proposals have been introduced before Congress for the pur-
pose of restricting or eliminating the federal income tax exemption for inter-
est on Municipal Bonds. It may be expected that similar proposals may be intro-
duced in the future. If any such proposals were to be enacted, the ability of
the Fund to pay "exempt-interest" dividends may be adversely affected and the
Fund would re-evaluate its investment objective and policies and consider
changes in its structure.
Interest on certain "private-activity bonds" issued after August 7, 1986, is
an item of tax preference subject to the alternative minimum tax on individuals
and corporations. THE FUND WILL NOT PURCHASE ANY PRIVATE ACTIVITY BONDS SUBJECT
TO THE ALTERNATIVE MINIMUM TAX.
The Omnibus Budget Reconciliation Act of 1993, which was signed into law on
August 10, 1993, included certain provisions intended to prevent the conversion
of ordinary income into capital gain. One such provision affects tax-exempt
securities by requiring that gains on certain debt instruments purchased at a
market discount be treated as ordinary income to the extent of the accrued mar-
ket discount. The law extends this treatment to market discount bonds issued
before July 18, 1984 and to tax-exempt bonds, if the bonds are acquired after
April 30, 1993. Such bonds were exempt from the market discount rules under
prior law.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Repurchase Agreements (All Funds). Each Fund may enter into repurchase agree-
ments with broker-dealers or domestic banks. A repurchase agreement is a short-
term investment in which the purchaser (e.g., the Fund) acquires ownership of a
debt security and the seller agrees to repurchase the obligation at a future
time and set price, thereby determining the yield during the purchaser's hold-
ing period. Repurchase agreements involve certain risks in the event of a
default by the other party. No Fund will invest in repurchase agreements matur-
ing in more than seven days if any such investment, together with any other
illiquid securities held by such Fund, exceeds in the case of the Emerging
Growth Fund and the International Equity Fund, 15% of the value of the Fund's
net assets and, in the case of the Growth Fund, the Growth and Income Fund, the
Government Fund and the Municipal Fund 10% of the value of the Fund's net
assets. The International Equity Fund may enter into repurchase agreements of
up to 25% of its assets but the Fund currently does not expect that it will
enter into repurchase agreements on more than 5% of its assets. See the State-
ment of Additional Information.
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RISK FACTORS AND SPECIAL CONSIDERATIONS (CONTINUED)
For the purpose of investing in repurchase agreements, MMC may aggregate the
cash that certain funds advised or subadvised by MMC or its affiliates would
otherwise invest separately into a joint account. The cash in the joint account
is then invested in repurchase agreements and the funds that contributed to the
joint account share pro rata in the net revenue generated. MMC believes that
the joint account produces efficiencies and economies of scale that may con-
tribute to reduced transaction costs, higher returns, higher quality invest-
ments and greater diversity of investments for a Fund than would be available
to a Fund investing separately. The manner in which the joint account is man-
aged is subject to conditions set forth in an SEC exemptive order authorizing
this practice, which conditions are designed to ensure the fair administration
of the joint account and to protect the amounts in that account.
Adjusting Investment Exposure (All Funds). The Funds can use various tech-
niques to increase or decrease their exposure to changing security prices,
interest rates, commodity prices, or other factors that affect security values.
These techniques may involve derivative securities such as options, futures
contracts, swaps, and forward commitments, all as discussed more fully below.
Options, Futures and Related Options (All Funds). The Funds expect to utilize
options, futures contracts and options thereon in several different ways,
depending upon the status of a Fund's portfolio and MMC's expectations concern-
ing the securities markets.
For example, in times of stable or rising security prices, a Fund generally
seeks to obtain maximum exposure to the securities markets, i.e., to be "fully
invested." Nevertheless, even when a Fund is fully invested, prudent management
requires that at least a small portion of assets be available as cash to honor
redemption requests and for other short-term needs. A Fund may also have cash
on hand that has not yet been invested. The portion of a Fund's assets that is
invested in cash equivalents does not fluctuate with security market prices, so
that, in times of rising market prices, a Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
futures contracts, however, a Fund can compensate for the cash portion of its
assets and obtain equivalent performance to investing 100% of its assets in
equity securities.
If MMC forecasts a market decline, a Fund may take a defensive position,
reducing its exposure to the securities markets by increasing its cash posi-
tion. By selling futures contracts instead of portfolio securities, a similar
result can be achieved to the extent that the performance of the futures con-
tracts correlates to the performance of a Fund's portfolio securities. Sale of
futures contracts could frequently be accomplished more rapidly and at less
cost than the actual sale of securities. Once the desired hedged position has
been effected, a Fund could then liquidate securities in a more deliberate man-
ner, reducing its futures position simultaneously to maintain the desired bal-
ance, or it could maintain the hedged position.
As an alternative to selling futures contracts, a Fund can purchase puts (or
futures puts) to hedge the portfolio's risk in a declining market. Since the
value of a put increases as the index declines below a specified level, the
portfolio's value is protected against a market decline to the degree the per-
formance of the index correlates with the performance of a Fund's investment
portfolio. If the market remains stable or advances, a Fund can refrain from
exercising the put and its portfolio will participate in the advance, having
incurred only the premium cost for the put.
In many cases, a Fund could achieve results similar to those available from
options and futures contracts without investing in the options and futures mar-
kets. For example, instead of hedging portfolio securities it owned with
options and futures contracts, the Fund could sell the securities and invest
the proceeds in money market instruments. In other cases, however, the options
and futures markets provide investment or risk management opportunities that
are not available from direct investments in securities. In addition, some
strategies can be implemented with greater ease and at lower cost by utilizing
the options and futures markets.
The International Equity Fund may enter into futures contracts and options for
non-hedging purposes, subject to applicable law. Such transactions may be con-
sidered a form of speculation.
Potential Risks of Options, Futures and Related Options (All Funds). The pur-
chase and sale of options and futures contracts involve risks different from
those involved with direct investments in underlying securities. While utiliza-
tion of options, futures contracts and similar instruments may be advantageous
to a Fund, if MMC is not successful in employing such instruments in managing a
Fund's investments, a Fund's performance will be worse than if a Fund did not
make such investments. In addition, a Fund would pay commissions and other
costs in connection with such investments, which may increase a Fund's expenses
and reduce its return.
Each Fund other than the Municipal Fund may write or purchase options in pri-
vately negotiated transactions ("OTC Options") as well as listed options. OTC
Options can be closed out only by agreement with the other party to the trans-
action. Any OTC Option purchased by a Fund will be considered an illiquid secu-
rity. Any OTC Option written by a Fund will be with a qualified dealer pursuant
22
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS (CONTINUED)
to an agreement under which the Fund may repurchase the option at a formula
price. Such options will be considered illiquid to the extent that the formula
price exceeds the intrinsic value of the option. Each Fund other than the
International Equity Fund may not purchase or sell futures contracts or related
options for which the aggregate initial margin and premiums exceed 5% of the
fair market value of the 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 the regulations of the Com-
modity Futures Trading Commission (the "CFTC")), or (ii) for non-hedging pur-
poses provided that the aggregate initial margin and premiums on such non-hedg-
ing positions does not exceed 5% of the liquidation value of the Fund's assets.
In order to prevent leverage in connection with the purchase of futures con-
tracts thereon by the Fund, appropriate securities as required by the 1940 Act
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 Fund's custodian. The Growth Fund, the Growth and Income Fund, the Govern-
ment Fund and the Municipal Fund may not invest more than 10% of their net
assets in illiquid securities and repurchase agreements which have a maturity
of longer than seven days; the Emerging Growth Fund and the International
Equity Fund are limited to 15% of their net assets. The successful use of
futures and options is dependent upon the ability of MMC to predict changes in
interest rates. The daily deposit requirements in futures contracts create an
ongoing greater potential financial risk than do option purchase transactions,
where the exposure is limited to the cost of the premium for the option. Trans-
actions in futures and options on futures for non-hedging purposes involve
greater risks and could result in losses which are not offset by gains on other
portfolio assets. A more complete discussion of the potential risks involved in
transactions involving options or futures contracts and related options, is
contained in the Statement of Additional Information.
Special Risks Associated with Futures Transactions (All Funds). There are sev-
eral risks connected with the use of futures contracts as a hedging device.
These include the risk of imperfect correlation between movements in the price
of the futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
Currency Transactions (International Equity Fund). In order to protect the
dollar equivalent value of its portfolio securities against declines resulting
from currency value fluctuations and changes in interest rate or other market
changes, the Fund may enter into the following hedging transactions: forward
foreign currency contracts, interest rate and currency swaps and various
futures contracts and related options contracts. The Fund will enter into vari-
ous currency transactions, i.e., forward foreign currency contracts, currency
swaps, foreign currency or currency index futures contracts and put and call
options on such contracts or on currencies. A forward foreign currency contract
involves an obligation to purchase or sell a specific currency for a set price
at a future date. A currency swap is an arrangement whereby each party
exchanges one currency for another on a particular date and agrees to reverse
the exchange on a later date at a specific exchange rate. Forward foreign cur-
rency contracts and currency swaps are established in the interbank market con-
ducted directly between currency traders (usually large commercial banks or
other financial institutions) on behalf of their customers. Futures contracts
are similar to forward contracts except that they are traded on an organized
exchange and the obligations thereunder may be offset by taking an equal but
opposite position to the original contract, with profit or loss determined by
the relative prices between the opening and offsetting positions. The Fund may
enter into these currency contracts and swaps in primarily the following cir-
cumstances to "lock in" the U.S. dollar equivalent price of a security the Fund
is contemplating to buy or sell that is denominated in a non-U.S. currency; or
to protect against a decline against the U.S. dollar of the currency of a par-
ticular country to which the Fund has exposure. The Fund may seek to achieve
the same economic result by using from time to time for such hedging a currency
different from the one of the given portfolio security as long as, in the view
of MMC, such currency is essentially correlated to the currency of the relevant
portfolio security based on historic and expected exchange rate patterns.
Interest Rate Transactions (International Equity Fund). The Fund will enter
into various interest rate transactions (i.e., futures contracts in various
financial instruments and interest rate related indices, put and call options
on such futures contracts and on such financial instruments and interest rate
swaps). The Fund will enter into these transactions primarily to " lock-in" a
return or spread on a particular investment or portion of its portfolio and to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitment to pay or receive inter-
est (e.g., an exchange of floating rate payments for fixed rate payments). The
Fund will not enter into an interest rate swap transaction in which its inter-
est commitment is greater or measured differently than the interest receivable
on specific portfolio securities. Interest rate swaps may be combined with cur-
rency swaps to take advantage of rate differentials in different markets on the
same or similar securities.
Market Index Transactions (International Equity Fund). The Fund may enter into
various market index contracts (i.e., index futures contracts on particular
non-U.S. securities markets or industry segments and related put and call
options). These contracts are used primarily to protect the value of the Fund's
securities against a decline in a particular market or industry in which it is
invested.
23
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS (CONTINUED)
Potential Risks of Currency Transactions, Interest Rate Transactions and Mar-
ket Index Transactions (International Equity Fund). The Fund will engage in
these transactions primarily as a means to hedge risks associated with manage-
ment of its portfolio. All of the foregoing transactions present certain risks.
In particular, the variable degree of correlation between price movements of
futures contracts and dollar equivalent price movements in the currency or
security being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Fund's securities. In addition, these
instruments may not be liquid in all circumstances and are generally closed out
by entering into offsetting transactions rather than by disposing of the Fund's
obligations. As a result, in volatile markets, the Fund may not be able to
close out a transaction without incurring losses. Although the contemplated use
of these contracts should tend to minimize the risk of loss due to a decline in
the value of the hedged currency or security, at the same time they tend to
limit any potential gain which might result from an increase in the value of
such currency or security.
With respect to interest rate swaps, the Fund recognizes that such arrange-
ments are relatively illiquid and will include the principal amount of the
obligations owed to it under a swap as an illiquid security for purposes of the
Fund's investment restrictions except to the extent a third party (such as a
large commercial bank) has guaranteed the Fund's ability to offset the swap at
any time.
Securities of Foreign Issuers (All Funds except Government Fund and Municipal
Fund). The International Equity Fund invests at least 65% of its total assets
in the equity securities of foreign issuers and the Emerging Growth Fund, the
Growth Fund and the Growth and Income Fund may invest up to 20% of the value of
their total assets in securities of foreign governments and companies of devel-
oped and emerging markets countries.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or
other foreign or United States governmental laws or restrictions applicable to
such investments. Since each Fund may invest in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates may affect the value of investments in the portfolio and the
accrued income and unrealized appreciation or depreciation of investments.
Changes in foreign currency rates relative to the U.S. dollar will affect the
U.S. dollar value of the Fund's assets denominated in that currency and the
Fund's yield on such assets.
Each Fund may also purchase foreign securities in the form of American Deposi-
tary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other secu-
rities representing underlying shares of foreign companies. ADRs are publicly
traded on exchanges or over-the-counter in the United States and are issued
through "sponsored" or "unsponsored" arrangements. In a sponsored ADR arrange-
ment, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR, and the
financial information about a company may not be reliable for an unsponsored
ADR as it is for a sponsored ADR. Each Fund may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.
With respect to certain foreign countries, there is the possibility of expro-
priation of assets, confiscatory taxation, political or social instability or
diplomatic developments which could affect investment in those countries. There
may be less publicly available information about a foreign security than about
a United States security, and foreign entities may not be subject to account-
ing, auditing and financial reporting standards and requirements comparable to
those of United States entities. In addition, certain foreign investments made
by the Fund may be subject to foreign withholding taxes, which would reduce the
Fund's total return on such investments and the amounts available for distribu-
tions by the Fund to its shareholders. See "Dividends, Distributions and Tax-
es." Foreign financial markets, while growing in volume, have, for the most
part, substantially less volume than United States markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have dif-
ferent clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are not invested and no return is earned thereon. The inability of each Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of port-
folio securities due to settlement problems could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in pos-
sible liability to the purchaser. Costs associated with transactions in foreign
securities, including custodial costs and foreign brokerage commissions, are
generally higher than with transactions in United States securities. In addi-
tion, each Fund will incur cost in connection with conversions between various
currencies. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there
are in the United States. These risks may be intensified in the case of invest-
ments in developing or emerging markets. In many developing markets, there is
less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the United States. The
foreign securities markets of many of the countries in which the Fund may
invest may also be smaller, less liquid, and subject to greater price volatil-
ity than those in the United States.
24
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS (CONTINUED)
Finally, in the event of a default on any such foreign debt obligations, it may
be more difficult for the Fund to obtain or to enforce a judgment against the
issuers of such securities.
The Emerging Growth Fund, the International Equity Fund, the Growth Fund and
the Growth and Income Fund may invest in the securities of developing coun-
tries. A developing country generally is considered to be a country that is in
the initial stages of its industrialization cycle. Investing in the equity and
fixed-income markets of developing countries involves exposure to economic
structures that are generally less diverse and mature, and to political systems
that can be expected to have less stability, than those of developed countries.
Historical experience indicates that the markets of developing countries have
been more volatile than the markets of the more mature economics of developed
countries; however, such markets often have provided higher rates of return to
investors.
One or more of the risk discussed above could affect adversely the economy of
a developing market or a Fund's investments in such a market. In Eastern
Europe, for example, upon the accession to power of Communist regimes in the
past, the governments of a number of Eastern European countries expropriated a
large amount of property. The claims of many property owners against those gov-
ernments were never finally settled. There can be no assurance that any invest-
ments that the Fund might make in such emerging markets would not be expropri-
ated, nationalized or otherwise confiscated at some time in the future. In such
an event, the Fund could lose its entire investment in the market involved.
Moreover, changes in the leadership or policies of such markets could halt the
expansion or reverse the liberalization of foreign investment policies now
occurring in certain of these markets and adversely affect existing investment
opportunities.
Forward Commitments (Government Fund). The Fund may purchase or sell U.S. Gov-
ernment securities on a "when-issued" or "delayed delivery" basis ("Forward
Commitments"). These transactions occur when securities are purchased or sold
by the Fund with payment and delivery taking place in the future, frequently a
month or more after such transactions. The price is fixed on the date of the
commitment, and the seller continues to accrue interest on the securities cov-
ered by the Forward Commitment until delivery and payment take place. At the
time of settlement, the market value of the securities may be more or less than
the purchase or sale price.
The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or before
the settlement date in which event the Fund may reinvest the proceeds in
another Forward Commitment. The Fund's use of Forward Commitments may increase
its overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction; should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure.
The Fund maintains a segregated account (which is marked to market daily) of
appropriate securities as required by the 1940 Act covered by the Forward Com-
mitment with the Fund's custodian in an aggregate amount equal to the amount of
its commitment as long as the obligation to purchase or sell continues.
Loans of Portfolio Securities (All Funds). Each Fund may lend portfolio secu-
rities to unaffiliated brokers, dealers and financial institutions provided
that (a) immediately after any such loan, the value of the securities loaned
does not exceed 10% of the total value of that Fund's assets (15% in the case
of the Emerging Growth Fund and the International Equity Fund), and (b) any
securities loan is collateralized in accordance with applicable regulatory
requirements. MMC believes the risk of loss on such transaction is slight,
because, if a borrower was to default for any reason, the collateral should
satisfy the obligation. See the Statement of Additional Information.
Variable Rate Demand Notes (Municipal Fund). The Fund may invest in variable
rate demand notes ("VRDNs") which are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and which are subject to
an unconditional right of demand to receive payment of the principal balance
plus accrued interest either at any time or at specified intervals not exceed-
ing one year and in either case upon no more than seven days' notice. The
interest rates are adjustable at intervals ranging from daily ("floating rate")
to up to one year to some prevailing market rate for similar investments, such
adjustment formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The adjust-
ments are typically based upon the prime rate of a bank or some other appropri-
ate interest rate adjustment index.
The Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution"). Participat-
ing VRDNs provide the Fund with a specified undivided interest (up to 100%) in
the underlying obligation and the right to demand payment of the unpaid princi-
pal balance plus accrued interest on the Participating VRDNs from the institu-
tion upon a specified number of days' notice, not to exceed seven days. The
Fund has an undivided interest in the underlying obligation and thus partici-
pates on the same basis as the institution in such
25
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS (CONTINUED)
obligation except that the institution typically retains fees out of the inter-
est paid on the obligation for servicing the obligation and issuing the repur-
chase commitment.
Stand-by Commitments (Municipal Fund). The Fund may acquire stand-by commit-
ments with respect to Municipal Bonds held by it. Under a stand-by commitment,
a bank or dealer from which Municipal Bonds are acquired agrees to purchase
from the Fund, at the Fund's option, the Municipal Bonds at a specified price.
Such commitments are sometimes called "liquidity puts."
The amount payable to the Fund upon its exercise of a stand-by commitment is
normally (i) the Fund's acquisition cost of the Municipal Bonds (excluding any
accrued interest which the Fund paid on their acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period. Stand-by
commitments generally can be acquired when the remaining maturity of the under-
lying Municipal Bonds is not greater than one year, and are exercisable by the
Fund at any time before the maturity of such obligations.
The Fund's right to exercise stand-by commitments is unconditional and unqual-
ified. A stand-by commitment generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Bonds to a third party at
any time.
The Fund expects that stand-by commitments will generally be available without
the payment of any direct or indirect consideration. However, if necessary or
advisable, the Fund may pay for a stand-by commitment either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to the commitment (thus reducing the yield to maturity otherwise available for
the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund will not exceed one-half of one percent
of the value of the Fund's total asses calculated immediately after each stand-
by commitment is acquired. The Fund intends to enter into stand-by commitments
only with banks and dealers which, in MMC's opinion, present minimal credit
risks.
The Fund would acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a stand-by commitment would not affect the valua-
tion of the underlying Municipal Bonds which would continue to be valued in
accordance with the method of valuation employed by the Fund. Stand-by commit-
ments acquired by the Fund would be valued at zero in determining net asset
value. Where the Fund paid any consideration directly or indirectly for a
stand-by commitment, the cost would be reflected as unrealized depreciation for
the period during which the commitment was held by the Fund.
Delayed Delivery and When-Issued Securities (Municipal Fund). Municipal Bonds
may at times be purchased or sold on a "delayed delivery" or a "when issued"
basis. These transactions arise when securities are purchased or sold by the
Fund with payment and delivery taking place in the future, often a month or
more after the purchase. The payment obligation and the interest rate are each
fixed at the time the Fund enters into the commitment. The Fund will only make
commitments to purchase such securities with the intention of actually acquir-
ing the securities, but the Fund may sell these securities prior to settlement
date if it is deemed advisable. Purchasing Municipal Bonds on a when-issued
basis involves the risk that the yields available in the market when the deliv-
ery takes place may actually be higher than those obtained in the transaction
itself; if yields so increase, the value of the when-issued obligation will
generally decrease. The Fund maintains a separate account at its custodian bank
consisting of appropriate securities as required by the 1940 Act (valued on a
daily basis) equal to all times to the amount of any when-issued commitment.
Restricted Securities (All Funds). The Emerging Growth Fund and the Interna-
tional Equity Fund may each invest up to 15% of their net assets in restricted
securities and other illiquid assets and the Growth Fund, the Growth and Income
Fund, the Government Fund and the Municipal Bond Fund may each invest up to 5%
of their net assets. As used herein, restricted securities are those that have
been sold in the United States without registration under the Securities Act of
1933 and are thus subject to restrictions on resale. Excluded from the limita-
tion, however, are any restricted securities which are eligible for resale pur-
suant to Rule 144A under the Securities Act of 1933 and which have been deter-
mined to be liquid by the Trustees or by MMC pursuant to board-approved guide-
lines. The determination of liquidity is based on the volume of reported trad-
ing in the institutional secondary market for each security. This investment
practice could have the effect of increasing the level of illiquidity in each
Fund to the extent that qualified institutional buyers become for a time unin-
terested in purchasing these restricted securities. These difficulties and
delays could result in a Fund's inability to realize a favorable price upon
disposition of restricted securities, and in some cases might make disposition
of such securities at the time desired by the Fund impossible. Since market
quotations are not readily available for restricted securities, such securities
will be valued by a method that the Trustees believe accurately reflects fair
value.
Notwithstanding the foregoing, due to various state regulations, the Emerging
Growth Fund and the International Equity Fund will not invest more than 10% of
each Fund's net assets in restricted securities; restricted securities eligible
for resale pursuant to Rule 144A are not included within this limitation. In
the event that the Fund's shares cease to be qualified under the laws of such
states or if such regulations are amended or otherwise cease to be operative,
the Funds would not be subject to this 10% restriction.
26
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS (CONTINUED)
Portfolio Turnover (All Funds). Each Fund may purchase or sell securities
without regard to the length of time the security has been held and thus may
experience a high rate of portfolio turnover. A 100% turnover rate would occur,
for example, if all the securities in a portfolio were replaced in a period of
one year. Under certain market conditions, the Growth Fund and the Government
Fund may experience a high rate of portfolio turnover. This may occur, for
example, if the Fund writes a substantial number of covered call options and
the market prices of the underlying securities appreciate. The rate of portfo-
lio turnover is not a limiting factor when MMC deems it desirable to purchase
or sell securities or to engage in options transactions. The annual turnover
rates of the Growth Fund, the Government Fund and the Municipal Bond Fund are
not expected to exceed 400%; and the annual turnover rates of the Emerging
Growth Fund, the International Equity Fund and the Growth and Income Fund are
not expected to exceed 100%. High portfolio turnover involves correspondingly
greater transaction costs, including any brokerage commissions, which are borne
directly by the respective Fund and may increase the recognition of short-term,
rather than long-term, capital gains if securities are held for one year or
less and may be subject to applicable income taxes. See "Dividends, Distribu-
tions and Taxes."
Portfolio Transactions and Brokerage Practices (All Funds). MMC is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Series and the negotiation of brokerage commissions on such transac-
tions. Brokerage firms are selected on the basis of their professional capabil-
ity for the type of transaction and the value and quality of execution services
rendered on a continuous basis. Orders may be directed to any broker including,
to the extent and in the manner permitted by applicable law, Smith Barney and
Robinson Humphrey, Inc. ("Robinson Humphrey"). Smith Barney and Robinson
Humphrey may be considered affiliated persons of PFS because they are each an
indirect subsidiary of Travelers Group Inc. ("Travelers"). Smith Barney and
Robinson Humphrey are subject to SEC regulations which state that to effect any
such transaction, the commissions, fees or other remuneration received by Smith
Barney and Robinson Humphrey must be reasonable and fair compared to the com-
missions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities, futures or options on
futures being purchased or sold on an exchange during a comparable period of
time. This standard would allow Smith Barney and Robinson Humphrey to receive
no more than the remuneration that would be expected to be received by an unaf-
filiated broker in a commensurate arms-length transaction. Furthermore, the
Trustees of the Series, including a majority of the Trustees who are not "in-
terested" Trustees, have adopted procedures that are reasonably designed to
provide that any commissions, fees or other remuneration paid to Smith Barney
and Robinson Humphrey are consistent with the foregoing standard. Brokerage
transactions with Smith Barney and Robinson Humphrey are also subject to such
fiduciary standards as may be imposed upon Smith Barney and Robinson Humphrey
by applicable law. U.S. Government securities in which the Series invests are
traded in the over-the-counter market. Such securities are generally traded on
a net basis with a dealer acting as principal for its own account without a
stated commission, although the prices of the securities usually include a
profit to the dealer. MMC is authorized to place portfolio transactions with
broker-dealers participating in the distribution of shares of the Series if it
reasonably believes that the quality of the execution and any commission are
comparable to that available from other qualified firms. MMC is authorized to
pay higher commissions to brokerage firms that provide it with investment and
research information than to firms which do not provide such service if they
determine that such commissions are reasonable in relation to the overall serv-
ices provided. The information received may be used by MMC in managing the
assets of other advisory accounts managed by MMC as well as in the management
of the assets of the Series.
Short Sales Against the Box (Emerging Growth Fund, International Equity Fund,
Growth Fund and Growth and Income Fund). Each Fund may from time to time make
short sales of securities it owns or has the right to acquire through conver-
sion or exchange of other securities it owns. A short sale is "against the box"
to the extent that the Fund contemporaneously owns or has the right to obtain
at no added cost securities identical to those sold short. In a short sale, the
Fund does not immediately deliver the securities sold and does not receive the
proceeds from the sale. The Fund is said to have a short position in the secu-
rities sold until it delivers the securities sold, at which time it receives
the proceeds of the sale. The Fund may not make short sales or maintain a short
position if to do so would cause more than 25% of its total assets, taken at
market value, to be held as collateral for such sales.
To secure its obligation to deliver the securities sold short, the Fund will
deposit in escrow in a separate account with its custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by deliv-
ering securities already held by the Fund, because the Fund may want to con-
tinue to receive interest and dividend payments on securities in its portfolio
that are convertible into the securities sold short. However, the Fund will not
purchase and deliver new securities to satisfy its short order if such purchase
and sale would cause the Fund to derive more than 30% of its gross income from
the sale of securities held for less than three months.
Leverage (International Equity Fund). The Fund may borrow from banks, on a
secured or unsecured basis, up to 25% of the value of its assets. If the Fund
borrows and uses the proceeds to make additional investments, income and appre-
ciation from such investments will improve its performance if they exceed the
associated borrowing costs but impair its performance if they are less than
such borrowing costs. This speculative factor is known as "leverage."
27
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS (CONTINUED)
Leverage creates an opportunity for increased returns to shareholders of the
Fund but, at the same time, creates special risk considerations. For example,
leverage may exaggerate changes in the net asset value of the Fund's shares and
in the Fund's yield. Although the principal or stated value of such borrowings
will be fixed, the Fund's assets may change in value during the time the bor-
rowing is outstanding. Leverage will create interest or dividend expenses for
the Fund which can exceed the income from the assets retained. To the extent
the income or other gain derived from securities purchased with borrowed funds
exceed the interest or dividends the Fund will have to pay in respect thereof,
the Fund's net income or other gain will be greater than if leverage had not
been used. Conversely, if the income or other gain from the incremental assets
is not sufficient to cover the cost of leverage, the net income or other gain
of the Fund will be less than if leverage had not been used. If the amount of
income from the incremental securities is insufficient to cover the cost of
borrowing, securities might have to be liquidated to obtain required funds.
Depending on market or other conditions, such liquidations could be disadvanta-
geous to the Fund.
Year 2000. (All Funds). The investment management services provided to each
Fund by MMC and the services provided to shareholders by PFS, the Series' Dis-
tributor, depend on the smooth functioning of their computer systems. Many com-
puter software systems in use today cannot recognize the year 2000, but revert
to 1900 or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on each Fund's opera-
tions, including the handling of securities trades, pricing and account servic-
es. MMC and PFS have advised each Fund that they have been reviewing all of
their computer systems and actively working on necessary changes to their sys-
tems to prepare for the year 2000 and expect that their systems will be compli-
ant before that date. In addition, MMC has been advised by each Fund's custodi-
an, transfer agent and accounting service agent that they are also in the proc-
ess of modifying their systems with the same goal. There can, however, be no
assurance that MMC, PFS or any other service provider will be successful, or
that interaction with other non-complying computer systems will not impair Fund
services at that time.
VALUATION OF SHARES
Each Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Series Board of Trustees. Portfolio
securities that are traded primarily on a domestic stock exchange are valued at
the last sale price on that exchange or, if there were no sales during the day,
at the current quoted bid price. Over-the-counter securities are valued on the
basis of the bid price at the close of business on each day. Investments in
U.S. government securities (other than short-term securities) are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Trustees determine that amortized cost reflects fair value of
those investments. An option generally is valued at the last sale price or, in
the absence of the last sale price, the last offer price. The value of a
futures contract equals the unrealized gain or loss on the contract, which is
determined by marking the contract to the current settlement price for a like
contract acquired on the day on which the futures contract is being valued. A
settlement price may not be used if the market makes a limit move with respect
to a particular commodity or if the underlying securities market experiences
significant price fluctuations after the determination of the settlement price.
In such event, the futures contract will be valued at a fair market price to be
determined by or under the direction of the Board of Trustees. Further informa-
tion regarding the Series's valuation policies with respect to the Fund is con-
tained in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Unless the shareholder instructs otherwise, all dividends and capital gain
distributions of each Fund are automatically reinvested in additional shares of
the same class of such Fund. Dividends and distributions paid by a Fund have
the effect of reducing the net asset value per share on the record date by the
amount of the dividend or distribution. Therefore, a dividend or distribution
paid shortly after a purchase of shares by an investor would represent, in sub-
stance, a return of capital to the shareholder (to the extent it is paid on the
shares so purchased), even though it would be subject to income taxes, as dis-
cussed below.
Dividends and Distributions of the Emerging Growth Fund, the International
Equity Fund and the Growth Fund. It is each Fund's policy to distribute sub-
stantially all its net investment income (that is, its income other than its
net realized capital gains) and net realized capital gains,if any, once a year,
normally at the end of the year in which earned or at the beginning of next
year.
28
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Dividends and Distributions of the Growth and Income Fund. The Fund's policy
is to distribute its net investment income (that is, its income other than its
net realized capital gains) quarterly, and to declare and pay its net realized
capital gains, if any, once a year, normally at the end of the year in which
earned or at the beginning of the next year.
Dividends and Distributions of the Government Fund. The Fund declares and pays
monthly income dividends (that is, its income other than net realized capital
gains) on shares of the Fund and declares and pays its net realized capital
gains, if any, once a year, normally at the end of the year in which earned or
at the beginning of next year.
In computing interest income, the Fund does not amortize debt discount or pre-
miums resulting from the purchase of debt securities. Thus in the case of U.S.
Government securities purchased at a premium, interest income is greater than
it would be if the premium was amortized.
Dividends and Distributions of the Municipal Fund. The Fund declares and pays
monthly income dividends (that is, its income other than net realized capital
gains) on shares of the Fund and declares and pays its net realized capital
gains, if any, once a year, normally at the end of the year in which earned or
at the beginning of next year.
Net long-term gains realized from transactions in futures and related options
transactions may be paid out more frequently (with short-term gains) as may be
determined from time to time by the Trustees, but only after appropriate regu-
latory approval is first obtained. There is no assurance that such regulatory
approval will be obtained.
In order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make
an additional distribution shortly before December 31 in each year of any
undistributed ordinary income or capital gains and expects to pay any other
dividends and distributions necessary to avoid the application of this tax.
The per share dividends on Class B shares of a Fund may be lower than the per
share dividends on Class A shares principally as a result of the distribution
fee applicable with respect to Class B shares. Distributions of capital gains,
if any, will be in the same amount for Class A and Class B shares.
Taxes. Each Fund has qualified and intends to qualify as a "regulated invest-
ment company" under the Code. By so qualifying and by distributing all of its
net investment income and net realized capital gains within the time periods
specified in the Code, each Fund would not be required to pay any federal
income tax. Dividends from net investment income and distributions from any net
realized short-term capital gains are taxable to shareholders as ordinary
income. All such dividends are taxable to the shareholder whether or not rein-
vested in shares. However, shareholders not subject to tax on their income will
not be required to pay tax on amounts distributed to them.
In addition, the Municipal Fund intends to invest in sufficient Municipal
Bonds to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
Municipal Securities qualify as exempt-interest dividends if, at the close of
each quarter of the fiscal year, at least 50% of the value of the total assets
of the Fund consists of Municipal Bonds. See "Federal Tax Information" in the
Statement of Additional Information.
Exempt-interest dividends paid to shareholders are not includable in the
shareholder's gross income for federal income tax purposes. The percentage of
the total dividends paid by the Fund during any taxable year that qualify as
exempt-interest dividends will be the same for all shareholders of the Fund
receiving dividends during such year.
Dividends and interest received by the Emerging Growth Fund, the International
Equity Fund, the Growth Fund and the Growth and Income Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. It is impossible to determine the rate of foreign tax in advance since
the amount of a Fund's assets to be invested in various countries is not known.
Such foreign taxes would reduce the income of the Fund distributed to share-
holders.
If, at the end of the International Equity Fund's taxable year, more than 50%
of the value of its total assets consists of stock or securities of foreign
corporations, the Fund may make an election pursuant to which foreign income
taxes paid by it will be treated as paid directly by its shareholders. The Fund
will make this election only if it deems the election to be in the best inter-
ests of its shareholders, and will notify shareholders in writing each year if
it makes the election and the amount of foreign taxes to be treated as paid by
the shareholders. If the Fund makes such an election, the amount of such for-
eign taxes would be included in the income of shareholders, and a shareholder
other than a foreign corporation or non-resident alien individual could claim
either a credit or, provided the shareholder itemizes deductions, a deduction
for U.S. federal income tax purposes for such foreign taxes. Shareholders who
choose to utilize a credit (rather than a deduction) for foreign taxes will be
subject to the limitation that the credit may not exceed the
29
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
shareholders' U.S. tax (determined without regard to the availability of the
credit) attributed to their total foreign source taxable income. For this pur-
pose, the portion of dividends and distributions paid by the Fund from its for-
eign source income will be treated as foreign source income. The Fund's gains
and losses from the sale of securities and from certain foreign currency gains
and losses will generally be treated as derived from U.S. sources. The limita-
tion on the foreign tax credit is applied separately to foreign source "passive
income," such as the portion of dividends received from the Fund that qualifies
as foreign source income. In addition, the foreign tax credit is allowed to
offset only 90% of the alternative minimum tax imposed on corporations and
individuals. Because of these limitations, shareholders may be unable to claim
a credit for the full amount of their proportionate share of the foreign income
taxes paid by the Fund.
The foregoing is a brief summary of some of the federal income tax considera-
tions affecting the Series and its investors who are U.S. residents or U.S.
corporations. Investors should consult their tax advisors for more detailed tax
advice including state and local tax considerations. Foreign investors should
consult their own counsel for further information as to the U.S. and their
country of residence or citizenship tax consequences of receipt of dividends
and distributions from the Series.
Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions, including information as to the portion (including
short-term capital gains) taxable as ordinary income, and the portion taxable
as long-term capital gains. TO AVOID BEING SUBJECT TO A 31% FEDERAL BACKUP
WITHHOLDING ON DIVIDENDS, DISTRIBUTIONS AND REDEMPTION PAYMENTS, SHAREHOLDERS
MUST FURNISH THE FUND WITH THEIR CORRECT TAXPAYER IDENTIFICATION NUMBER. Share-
holders are urged to consult their tax advisers with specific reference to
their own tax situation.
State and Local Taxes. The exemption of interest income for federal income tax
purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to share-
holders under state or local law as dividend income even though a portion of
such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is rec-
ommended that shareholders consult their tax advisers for information in this
regard. The Municipal Fund will report annually to its shareholders the per-
centage and source, on a state-by-state basis, of interest income earned on
Municipal Bonds held by the Fund during the preceding year. Distributions paid
by the Fund from sources other than tax-exempt interest are generally subject
to taxation at the state and local levels.
Tax Treatment of Options and Futures Transactions. Gains or losses on each
Fund's transactions in certain listed options (except certain equity options)
on securities or indices, futures or options on futures generally are treated
as 60% long-term and 40% short-term, and positions held by a Fund at the end of
its fiscal year generally are required to be marked to market, with the result
that unrealized gains and losses are treated as though they were realized.
Gains and losses realized by a Fund on transactions in over-the-counter options
generally are short-term capital gains or losses unless the option is exercised
in which case the character of the gain or loss is determined by the holding
period of the underlying security. The Code contains certain "straddle" rules
which require deferral of losses incurred in certain transactions involving
hedged positions to the extent a Fund has unrealized gains in offsetting posi-
tions and generally terminate the holding period of the subject position. Addi-
tional information is set forth in the Statement of Additional Information.
PURCHASE OF SHARES
GENERAL
Each Fund offers two Classes of shares to investors purchasing through PFS
Investments Registered Representatives. Class A shares are sold to investors
with an initial sales charge and Class B shares are sold without an initial
sales charge but are subject to a CDSC payable upon certain redemptions. As of
May 20, 1996, all of the previously outstanding shares of the Growth Fund, the
Growth and Income Fund, the Government Fund, and the Municipal Fund were
redesignated as Class 1 shares without any other changes, and Class A and Class
B shares were authorized for issuance. As of May 20, 1996, Class 1 shares were
authorized for issuance for the Emerging Growth Fund and the International
Equity Fund. Each Fund offers Class 1 shares only to Eligible Class 1 Purchas-
ers. Each class of shares represents an interest in the same portfolio of
investments of a Fund. See "Prospectus Summary--Alternative Purchase Arrange-
ments" for a discussion of factors to consider in selecting which Class of
shares to purchase.
Initial purchases of shares of each Fund of the Series must be made through a
PFS Investments Registered Representative by completing the appropriate appli-
cation found in this Prospectus. The completed application should be forwarded
to the Sub-Transfer Agent, 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia
30199-0062. Checks drawn on foreign banks must be payable in U.S. dollars and
have the routing number of the U.S. bank encoded on the check. Subsequent
investments may be sent directly to the Sub-Transfer Agent.
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Investors in Class A and Class B shares may open an account by making an ini-
tial investment of at least $1,000 for each account in each Class (except for
Systematic Investment Plan accounts), or $250 for an IRA or a Self-Employed
Retirement Plan in a Fund. Subsequent investments of at least $50 may be made
for each Class. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A and Class B shares and the subsequent investment
requirement for each Class in a Fund is $25. For each Fund's Systematic Invest-
ment Plan, the minimum initial investment requirement for Class A and Class B
shares and the subsequent investment requirement for each Class is $25. There
are no minimum investment requirements in Class A shares for employees of Trav-
elers and its subsidiaries, including Smith Barney, Directors or Trustees of
any of the Smith Barney Mutual Funds, and their spouses and children. The
Series reserves the right to waive or change minimums, to decline any order to
purchase its shares and to suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's account by the Sub-Transfer
Agent. Share certificates are issued only upon a shareholder's written request
to the Sub-Transfer Agent. A shareholder who has insufficient funds to complete
any purchase, will be charged a fee of $25 per returned purchase by PFS or the
Sub-Transfer Agent.
Purchase orders received by the Sub-Transfer Agent prior to the close of regu-
lar trading on the NYSE, on any day a Fund calculates its net asset value, are
priced according to the net asset value determined on that day.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, the Sub-Transfer Agent is authorized through preau-
thorized transfers of $25 or more to charge the regular bank account or other
financial institution indicated by the shareholder on a monthly basis to pro-
vide systematic additions to the shareholder's Fund account. A shareholder who
has insufficient funds to complete the transfer will be charged a fee of up to
$25 by PFS or the Sub-Transfer Agent. A shareholder who places a stop payment
on a transfer or the transfer is returned because the account has been closed,
will also be charged a fee of $25 by PFS or the Sub-Transfer Agent.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Emerging
Growth Fund, International Equity Fund, Growth Fund and Growth and Income Fund
are as follows:
<TABLE>
<CAPTION>
SALES CHARGE
--------------------------------- DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $ 25,000 5.00% 5.26% 4.50%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 and over * * *
- -----------------------------------------------------------------------------
</TABLE>
The sales charges applicable to purchases of Class A shares of the Government
Fund and the Municipal Fund are as follows:
<TABLE>
<CAPTION>
SALES CHARGE
--------------------------------- DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $ 25,000 4.50% 4.71% 4.05%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 2.50 2.56 2.25
250,000 - 499,999 1.50 1.52 1.35
500,000 and over * * *
- -----------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to PFS, which in turn, pays PFS Investments to compensate
its Registered Representatives whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC applica-
ble to Class B shares is waived. See "Deferred Sales Charge Alternatives" and
"Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and may
be deemed to be underwriters of the Series as defined in the Securities Act of
1933, as amended.
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
The reduced sales charges shown above apply to the aggregate of purchases of
Class A Shares of a Fund made at one time by "any person", which includes an
individual and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to (i) Board
members and employees of Travelers and its subsidiaries and any of the Smith
Barney Mutual Funds (including retired Board Members and employees); the imme-
diate families of such persons (including the surviving spouse of a deceased
Board Member or employee); and to a pension, profit-sharing or other benefit
plan for such persons; and (ii) employees of members of the National Associa-
tion of Securities Dealers, Inc., provided such sales are made upon the assur-
ance of the purchaser that the purchase is made for investment purposes and
that the securities will not be resold except through redemption or repurchase;
(b) offers of Class A shares to any other investment company to effect the com-
bination of such company with the Fund by merger, acquisition of assets or oth-
erwise; (c) purchases by shareholders who have redeemed Class A shares in a
Fund (or Class A shares of another fund of the Smith Barney Mutual Funds that
are sold with a maximum sales charge equal to or greater than the maximum sales
charge of the Fund) and who wish to reinvest their redemption proceeds in the
Fund, provided the reinvestment is made within 60 calendar days of the redemp-
tion; (d) purchases by accounts managed by registered investment advisory sub-
sidiaries of Travelers; (e) sales through PFS Investments Registered Represent-
atives where the amounts invested represent the redemption proceeds from
investment companies, on the condition that (i) the redemption has occurred no
more than 60 days prior to the purchase of the shares, (ii) the shareholder
paid an initial sales charge on such redeemed shares and (iii) the shares
redeemed were not subject to a deferred sales charge; (f) direct rollovers by
plan participants of distributions from a 401(k) plan enrolled in the Smith
Barney 401(k) Program (note: subsequent investments will be subject to the
applicable sales charge; (g) purchases by separate accounts used to fund cer-
tain unregistered variable annuity contracts; and (h) purchases by investors
participating in a Smith Barney fee based arrangement. PFS Investments may pay
its Registered Representatives an amount equal to 0.40% of the amount invested
if the purchase represents redemption proceeds from an investment company dis-
tributed by an entity other than PFS. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
In addition, Class A shares of the Funds may be purchased at net asset value
by the PFS Primerica Corporation Savings and Retirement Plan (the "Primerica
Plan") for its participants, subject to the provisions of the Employee Retire-
ment Income Security Act of 1974, as amended ("ERISA"). Class A shares so pur-
chased are purchased for investment purposes and may not be resold except by
redemption or repurchase by or on behalf of the Primerica Plan. Class A shares
are also offered at net asset value to accounts opened for shareholders by PFS
Investments Registered Representatives where the amounts invested represent the
redemption proceeds from investment companies distributed by an entity other
than PFS, if such redemption has occurred no more than 60 days prior to the
purchase of shares of the Series, and the shareholder paid an initial sales
charge and was not subject to a deferred sales charge on the redeemed account.
Class A shares are offered at net asset value to such persons because of antic-
ipated economies in sales efforts and sales related expenses. The Series may
terminate, or amend the terms of, offering shares of the Series at net asset
value to such persons at any time. PFS may pay PFS Investments Registered Rep-
resentatives through whom purchases are made at net asset value an amount equal
to 0.40% of the amount invested if the purchase represents redemption proceeds
from an investment company distributed by an entity other than PFS. Contact the
Sub-Transfer Agent at (800) 544-5445 for further information and appropriate
forms.
VOLUME DISCOUNTS
The "Amount of Investment" referred to in the sales charge table set forth
above under "Initial Sales Charge Alternative--Class A Shares" includes the
purchase of Class A shares in a Fund and of other funds sponsored by Smith Bar-
ney that are offered with a sales charge listed under "Exchange Privilege." A
person eligible for a volume discount includes: an individual; members of a
family unit comprising a husband, wife and minor children; a trustee or other
fiduciary purchasing for a single fiduciary account including pension, profit-
sharing and other employee benefit trusts qualified under Section 401(a) of the
Code; or multiple custodial accounts where more than one beneficiary is
involved if purchases are made by salary reduction and/or payroll deduction for
qualified and nonqualified accounts and transmitted by a common employer enti-
ty. Employer entity for payroll deduction accounts may include trade and craft
associations and any other similar organizations.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity for
an investor to obtain a reduced sales charge by aggregating investments over a
13-month period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases of all Class
A shares of each Fund and other Smith Barney Mutual Funds offered with a sales
charge over a 13-month period based on the total amount of
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
intended purchases plus the value of all Class A shares previously purchased
and still owned. An alternative is to compute the 13-month period starting up
to 90 days before the date of execution of a Letter of Intent. Each investment
made during the period receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is not achieved within the
period, the investor must pay the difference between the sales charges applica-
ble to the purchases made and the charges previously paid, or an appropriate
number of escrowed shares will be redeemed. Please contact a PFS Investments
Registered Representative to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
CDSC Shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in a Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (i) Class B shares and
(ii) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class A shares that are CDSC Shares,
shares redeemed more than 12 months after their purchase.
Class A shares that are CDSC Shares are subject to a 1.00% CDSC if redeemed
within 12 months of purchase. In circumstances in which the CDSC is imposed on
Class B shares, the amount of the charge will depend on the number of years
since the shareholder made the purchase payment from which the amount is being
redeemed. Solely for purposes of determining the number of years since a pur-
chase payment, all purchase payments made during a month will be aggregated and
deemed to have been made on the last day of the preceding Smith Barney state-
ment month. The following table sets forth the rates of the charge for redemp-
tions of Class B shares by shareholders.
<TABLE>
<CAPTION>
CDSC
APPLICABLE TO EMERGING GROWTH FUND, CDSC
YEARS SINCE PURCHASE INTERNATIONAL EQUITY FUND, GROWTH APPLICABLE TO GOVERNMENT
PAYMENT WAS MADE FUND AND GROWTH AND INCOME FUND FUND AND MUNICIPAL FUND
- ----------------------------------------------------------------------------------
<S> <C> <C>
First 5.00% 4.50%
Second 4.00 4.00
Third 3.00 3.00
Fourth 2.00 2.00
Fifth 1.00 1.00
Sixth and
thereafter 0.00 0.00
- ----------------------------------------------------------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There will also be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholder as the total number
of his or her Class B shares converting at the time bears to the total number
of outstanding Class B shares (other than Class B Dividend Shares) owned by the
shareholder. See "Prospectus Summary--Alternative Purchase Arrangements--Class
B Shares Conversion Feature."
Class B shares of a Fund purchased prior to December 31, 1997 and subsequently
redeemed will remain subject to the CDSC at the rates applicable at the time of
purchase.
In determining the applicability of any CDSC or the conversion feature
described above, it will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing the reinvestment
of dividends and capital gain distributions and finally of other shares held by
the shareholder for the longest period of time. The length of time that CDSC
Shares acquired through an exchange have been held will be calculated from the
date that the shares exchanged were initially acquired in one of the other
Smith Barney Mutual Funds, and Fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal income tax purpos-
es, the amount of the CDSC will reduce the gain or increase the loss, as the
case may be, on the amount realized on redemption. The amount of any CDSC will
be paid to PFS.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount that represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
33
<PAGE>
PURCHASE OF SHARES (CONTINUED)
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan"); (c) redemptions of shares within twelve
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a share-
holder who has redeemed shares from other Smith Barney Mutual Funds may, under
certain circumstances, reinvest all or part of the redemption proceeds within
60 days and receive pro rata credit for any CDSC imposed on the prior redemp-
tion.
CDSC waivers will be granted subject to confirmation by PFS of the sharehold-
er's status or holdings, as the case may be.
CLASS 1 SHARES
Class 1 shares are offered to Eligible Class 1 Share Purchasers at the next
determined net asset value plus a sales charge, as set forth below.
EMERGING GROWTH FUND, INTERNATIONAL EQUITY FUND, GROWTH FUND AND GROWTH AND
INCOME FUND
<TABLE>
<CAPTION>
REALLOWED
TO PFS
INVESTMENTS
AS % OF AS % OF (AS A % OF
NET AMOUNT OFFERING OFFERING
SIZE OF INVESTMENT INVESTED PRICE PRICE)*
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $10,000 9.29% 8.50% 7.00%
$ 10,000 but less than $ 25,000 8.40% 7.75% 6.25%
$ 25,000 but less than $ 50,000 6.38% 6.00% 5.00%
$ 50,000 but less than $ 100,000 4.71% 4.50% 3.75%
$ 100,000 but less than $ 250,000 3.63% 3.50% 3.00%
$ 250,000 but less than $ 400,000 2.56% 2.50% 2.00%
$ 400,000 but less than $ 600,000 2.04% 2.00% 1.60%
$ 600,000 but less than $5,000,000 1.01% 1.00% 0.75%
$5,000,000 or more 0.25% 0.25% 0.20%
- -----------------------------------------------------------------------------------
</TABLE>
Government Fund
<TABLE>
<CAPTION>
REALLOWED
TO PFS
INVESTMENTS
AS % OF AS % OF (AS A % OF
NET AMOUNT OFFERING OFFERING
SIZE OF INVESTMENT INVESTED PRICE PRICE)*
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 7.24% 6.75% 6.00%
$ 25,000 but less than $ 50,000 6.10% 5.75% 5.00%
$ 50,000 but less than $ 100,000 4.44% 4.25% 3.50%
$ 100,000 but less than $ 250,000 3.63% 3.50% 2.75%
$ 250,000 but less than $ 500,000 2.56% 2.50% 2.00%
$ 500,000 but less than $1,000,000 2.04% 2.00% 1.60%
$1,000,000 but less than $2,500,000 1.01% 1.00% 0.75%
$2,500,000 but less than $5,000,000 0.50% 0.50% 0.40%
$5,000,000 or more 0.25% 0.25% 0.20%
- -----------------------------------------------------------------------------------
</TABLE>
Municipal Bond Fund
<TABLE>
<CAPTION>
REALLOWED
TO PFS
INVESTMENTS
AS % OF AS % OF (AS A % OF
NET AMOUNT OFFERING OFFERING
SIZE OF INVESTMENT INVESTED PRICE PRICE)*
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.99% 4.75% 4.25%
$ 100,000 but less than $ 250,000 3.90% 3.75% 3.25%
$ 250,000 but less than $ 500,000 3.09% 3.00% 2.50%
$ 500,000 but less than $1,000,000 2.04% 2.00% 1.60%
$1,000,000 but less than $2,500,000 1.01% 1.00% 0.75%
$2,500,000 but less than $5,000,000 0.50% 0.50% 0.40%
$5,000,000 or more 0.25% 0.25% 0.20%
- -----------------------------------------------------------------------------------
</TABLE>
* Additionally, PFS will pay to PFS Investments a promotional fee calculated as
a percentage of the sales charge reallowed to PFS Investments. The percentage
used in the calculation is 3%.
34
<PAGE>
PURCHASE OF SHARES (CONTINUED)
PFS Investments may be deemed to be an underwriter for purposes of the Securi-
ties Act of 1933. From time to time, PFS or its affiliates may also pay for
certain non-cash sales incentives provided to PFS Investments Registered Repre-
sentatives. Such incentives do not have any effect on the net amount invested.
In addition to the reallowances from the applicable public offering price
described above, PFS may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other compensa-
tion to PFS Investments Registered Representatives that sell shares of the
Series.
Class 1 shares of the Series may be purchased at net asset value by the
Primerica Plan for Eligible Class 1 Purchasers participating in the Primerica
Plan, subject to the provisions of ERISA. Shares so purchased are purchased for
investment purposes and may not be resold except by redemption or repurchase by
or on behalf of the Primerica Plan. Class 1 Shares are also offered at net
asset value to accounts opened for shareholders by PFS Investments Registered
Representatives where the amounts invested represent the redemption proceeds
from investment companies distributed by an entity other than the PFS, if such
redemption has occurred no more than 60 days prior to the purchase of shares of
the Series and the shareholder paid an initial sales charge and was not subject
to a deferred sales charge on the redeemed account. Shares are offered at net
asset value to such persons because of anticipated economies in sales efforts
and sales related expenses. The Series may terminate, or amend the terms of,
offering shares of the Series at net asset value to such persons at any time.
PFS may pay PFS Investment Registered Representatives through whom purchases
are made at net asset value an amount equal to 0.40% of the amount invested if
the purchase represents redemption proceeds from an investment company distrib-
uted by an entity other than the PFS. Contact the Sub-Transfer Agent at (800)
544-5445 for further information and appropriate forms.
Investors purchasing Class 1 shares may under certain circumstances be enti-
tled to reduced sales charges. The circumstances under which such investors may
pay reduced sales charges are the same as those described above under "Pur-
chases of Shares--"Volume Discounts" and "Letter of Intent."
EXCHANGE PRIVILEGE
Shares of each class of a Fund may be exchanged at the net asset value next
determined for shares of the same class in the following funds, to the extent
shares are offered for sale in the shareholder's state of residence, except,
however, for exchanges of Class 1 shares into a fund which does not offer Class
1 shares which, may be made for Class A shares of such fund. Exchanges are sub-
ject to minimum investment requirements and all shares are subject to the other
requirements of the fund into which exchanges are made.
FUND NAME
.Concert Peachtree Growth Fund
.Concert Social Awareness Fund
.Smith Barney Appreciation Fund Inc.
.Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
.Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
.Smith Barney Concert Allocation Series Inc.-- Growth Portfolio
.Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
.Smith Barney Concert Allocation Series Inc.--Income Portfolio
.Smith Barney Investment Grade Bond Fund
.*Smith Barney Money Funds, Inc.--Cash Portfolio
.**Smith Barney Exchange Reserve Fund
- --------------------------------------------------------------------------------
* Available for exchange with Class A shares of a Fund.
** Available for exchange with Class B shares of a Fund.
Class A Exchanges. Class A shareholders of each Fund who wish to exchange all
or a portion of their shares for Class A shares in any of the funds identified
above may do so without imposition of any charge.
Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares into any of the funds imposing a higher CDSC
than that imposed by a Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.
35
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to a Fund's performance and its shareholders. The Series
may determine that a pattern of frequent exchanges is excessive and contrary
to the best interests of each Fund's other shareholders. In this event, the
Series may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination by the Series, the
Series will provide notice in writing or by telephone to the shareholder at
least 15 days prior to suspending the exchange privilege and during the 15 day
period the shareholder will be required to (a) redeem his or her shares in the
Fund or (b) remain invested in the Fund or exchange into any of the Smith Bar-
ney Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
Exchanges will be processed at the net asset value next determined. Redemp-
tion procedures discussed below are also applicable for exchanging shares, and
exchanges will be made upon receipt of all supporting documents in proper
form. If the account registration of the shares of the fund being acquired is
identical to the registration of the shares of the fund exchanged, no signa-
ture guarantee is required. A capital gain or loss for tax purposes will be
realized upon the exchange, depending upon the cost or other basis of shares
redeemed. Before exchanging shares, investors should read the current prospec-
tus describing the shares to be acquired. Each Fund reserves the right to mod-
ify or discontinue exchange privileges upon 60 days' prior notice to share-
holders.
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares of a Fund at any
time by sending a written request in proper form directly to the Sub-Transfer
Agent, PFS Shareholder Services, at 3100 Breckinridge Blvd, Bldg. 200, Duluth,
Georgia 30199-0062. If you should have any questions concerning how to redeem
your account after reviewing the information below, please contact the Sub-
Transfer Agent at (800) 544-5445, Spanish-speaking representatives (800) 544-
7278 or TDD Line for the Hearing Impaired (800) 824-1721.
As described under "Purchase of Shares," redemptions of Class B shares are
subject to a CDSC.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account regis-
tration. If the proceeds of the redemption exceed $50,000, or if the proceeds
are not paid to the record owner(s) at the record address, if the sharehold-
er(s) has had an address change in the past 45 days, or if the shareholder(s)
is a corporation, sole proprietor, partnership, trust or fiduciary, signa-
ture(s) must be guaranteed by one of the following: a bank or trust company; a
broker-dealer; a credit union; a national securities exchange, registered
securities association or clearing agency; a saving and loan association; or a
federal savings bank.
Generally, a properly completed Redemption Form with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, in the case of shareholders
holding certificates, the certificates for the shares being redeemed must
accompany the redemption request. Additional documentary evidence of authority
is also required by the Sub-Transfer Agent in the event redemption is
requested by a corporation, partnership, trust, fiduciary, executor or admin-
istrator. Additionally, if a shareholder requests a redemption from a Retire-
ment Plan account (IRA, SEP or 403(b)(7)), such request must state whether or
not federal income tax is to be withheld from the proceeds of the redemption
check.
A shareholder may utilize the Sub-Transfer Agent's FAX to redeem their
account as long as a signature guarantee or other documentary evidence is not
required. Redemption requests should be properly signed by all owners of the
account and faxed to the Sub-Transfer Agent at (800) 554-2374. Facsimile
redemptions may not be available if the shareholder cannot reach the Sub-
Transfer Agent by FAX, whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the Fund's regular
redemption procedure described above. Facsimile redemptions received by the
Sub-Transfer Agent prior to 4:00 p.m. Eastern time on a regular business day
will be processed at the net asset value per share determined that day.
In all cases, the redemption price is the net asset value per share of the
Fund next determined after the request for redemption is received in proper
form by the Sub-Transfer Agent. Payment for shares redeemed will be made by
check mailed within three days after acceptance by the Sub-Transfer Agent of
the request and any other necessary documents in proper order. Such payment
may be postponed or the right of redemption suspended as provided by the rules
of the SEC. If the shares to be redeemed have been recently purchased by check
or draft, the Sub-Transfer Agent may hold the payment of the proceeds until
the purchase check or draft has cleared, usually a period of up to 15 days.
Any taxable gain or loss will be recognized by the shareholder upon redemption
of shares.
36
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
After following the above-stated redemption guidelines, a shareholder(s) may
elect to have the redemption proceeds wire-transferred directly to the share-
holder's bank account of record (defined as a currently established pre-autho-
rized draft on the shareholder's account with no changes within the previous 45
days), as long as the bank account is registered in the same name(s) as the
account with the Series. If the proceeds are not to be wired to the bank
account of record, or mailed to the registered owner(s), a signature guarantee
will be required from all shareholder(s). A $25 service fee will be charged by
the Sub-Transfer Agent to help defray the administrative expense of executing a
wire redemption. Redemption proceeds will normally be wired to the designated
bank account on the next business day following the redemption, and should
ordinarily be credited to the shareholder's bank account by the shareholder's
bank within 48 to 72 hours.
AUTOMATIC CASH WITHDRAWAL PLAN
Each Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of a Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal
plan, shareholders should contact the Sub-Transfer Agent.
The Series reserves the right to involuntarily liquidate any shareholder's
account in a Fund if the aggregate net asset value of the shares held in that
Fund account is less than $500. (If a shareholder has more than one account in
a Fund, each account must satisfy the minimum account size.) The Series, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Series exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
PERFORMANCE
From time to time a Fund may include its total return, average annual total
return, yield and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A and
Class B shares of each Fund. These figures are based on historical earnings and
are not intended to indicate future performance. Total return is computed for a
specified period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends
and capital gain distributions on the reinvestment dates at prices calculated
as stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the SEC is
derived from this total return, which provides the ending redeemable value.
Such standard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into account. The
yield of a Fund's Class refers to the net investment income earned by invest-
ments in the Class over a 30-day period. This net investment income is then
annualized, i.e., the amount of income earned by the investments during that
30-day period is assumed to be earned each 30-day period for twelve periods and
is expressed as a percentage of the investments. The yield is calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The Government Fund and Municipal
Fund calculate current dividend return for each of its Classes by annualizing
the most recent monthly distribution and dividing by the net asset value or the
maximum public offering price (including sales charge) on the last day of the
period for which current dividend return is presented. Each Class' current div-
idend return may vary from time to time depending on market conditions, the
composition of the investment portfolio and its operating expenses. These fac-
tors and possible differences in the methods used in calculating current divi-
dend return should be considered when comparing current return of a Class to
yields published for other investment companies and other investment vehicles.
Each Fund may also include comparative performance information in advertising
or marketing its shares. Such performance information may include data from
Lipper Analytical Services, Inc. and other financial publications.
MANAGEMENT OF THE SERIES
BOARD OF TRUSTEES
Overall responsibility for management and supervision of each Fund rests with
the Series's Board of Trustees. The Trustees approve all significant agreements
between the Series and the companies that furnish services to the Series and
each Fund, including agreements with the Series's distributor, investment man-
ager and administrator, custodian and transfer agent. The day-to-day operations
of each
37
<PAGE>
MANAGEMENT OF THE SERIES (CONTINUED)
Fund are delegated to MMC. The Statement of Additional Information contains
background information regarding each Trustee and executive officer of the
Series.
INVESTMENT MANAGER
Investment Manager. Effective December 31, 1997, MMC replaced Van Kampen
American Capital Asset Management, Inc. as investment adviser to each Fund of
the Series. MMC provides investment advisory and management services to
investment companies affiliated with Smith Barney and, prior to December 31,
1997 was the Sub-Advisor to the International Equity Fund. MMC is a wholly
owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings
is a wholly owned subsidiary of Travelers Group Inc., a diversified financial
services holding company engaged, through its subsidiaries, principally in
four business segments: Investment Services including Asset Management, Con-
sumer Finance Services, Life Insurance Services and Property & Casualty Insur-
ance Services.
An investment advisory agreement with MMC and the Series, on behalf of each
Fund has been approved by the Board of Trustees of the Series at a meeting
held on June 10, 1997 and by shareholders of each Fund at a meeting held on
December 18, 1997. MMC, located at 388 Greenwich Street, New York, New York,
10013, was formed in 1968 and renders investment advice to investment compa-
nies which had aggregate assets under management as of January 31, 1998, in
excess of $94 billion. MMC also furnishes each Fund with bookkeeping, account-
ing and administrative services, office space and equipment, and the services
of the officers and employees of the Series.
Under separate investment advisory Agreements with each Fund, the Series pays
MMC an annual fee for the Emerging Growth Fund, the Growth Fund and the Growth
and Income Fund, calculated separately for each Fund at the following rates:
0.65% of the first $1 billion of the Fund's average daily net assets; 0.60% of
the next $1 billion of the Fund's average daily net assets; 0.55% of the next
$1 billion of the Fund's average daily net assets; 0.50% of the next $1 bil-
lion 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 Series pays MMC 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 Series believes it is justified by the special international
nature of the Fund and is not necessarily higher than the fees charged by cer-
tain mutual funds with investment objectives and policies similar to those of
the Fund. The Series pays MMC an annual fee for the Government Fund of 0.60%
of the first $1 billion of the Fund's average daily net assets; 0.55% of the
next $1 billion of the Fund's average daily net assets; 0.50% of the next $1
billion of the Fund's average daily net assets; 0.45% of the next $1 billion
of the Fund's average daily net assets; 0.40% of the next $1 billion of the
Fund's average daily net assets; and 0.35% of the Fund's average daily net
assets in excess of $5 billion. For the Municipal Fund, the Series pays MMC an
annual fee of 0.60% of the first $1 billion of the Fund's average daily net
assets; 0.55% of the next $1 billion of the Fund's average daily net assets;
0.50% of the next $1 billion of the Fund's average daily net assets; and 0.45%
of the Fund's average daily net assets over $3 billion. The fee is computed
daily and payable monthly with respect to each Fund. Each of the investment
advisory agreements described above is referred to in this Prospectus as an
"Advisory Agreement" and together, as the "Advisory Agreements."
MMC may, from time to time, agree to waive their respective investment advi-
sory fees or any portion thereof or elect to reimburse a Fund for ordinary
business expenses in excess of an agreed upon amount.
PORTFOLIO MANAGEMENT
The following persons are primarily responsible for the day-to-day operation
of the Fund indicated beside their name and business experience:
Emerging Growth Fund--Sandip Bhagat; Investment Officer of MMC and President
of Travelers Investment Management Company, an affiliate of MMC.
Growth Fund--Larry Weissman; Investment Officer of MMC and Managing Director
of Smith Barney since October, 1997; Prior to that time, Portfolio Manager of
Neuberger & Berman, LLC since 1995; Prior to that, Portfolio Manager of Col-
lege Retirement Equities Fund since 1991.
Growth and Income Fund--R. Jay Gerken; Investment Officer of MMC and Managing
Director of Smith Barney.
Government Fund--James E. Conroy; Investment Officer of MMC and Managing
Director of Smith Barney.
Municipal Fund--Joseph P. Deane; Investment Officer of MMC and Managing
Director of Smith Barney.
International Equity Fund--Maurits Edersheim, Jeffrey Russell, James Conheady
and Rein Van der Does, all Investment Officers of MMC and Managing Directors
of Smith Barney.
Management's discussion and analysis and additional performance information
regarding the Series during the fiscal year ended October 31, 1997 is included
in the Annual Report dated October 31, 1997. A copy of the Annual Report may
be obtained upon request and without charge from a PFS Investments Registered
Representative or by writing or calling the Series at the address or phone
number listed on page one of this Prospectus.
38
<PAGE>
DISTRIBUTOR
PFS, located at 3100 Breckinridge Blvd., Bldg 200, Duluth, Georgia 30199-0062,
distributes shares of each Fund as a principal underwriter and as such conducts
a continuous offering pursuant to a best efforts arrangement requiring PFS to
take and pay for only such securities as may be sold to the public.
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Trustees of the Series, and the
shareholders of Class A and Class B of each Fund have adopted two Distribution
Plans (hereinafter referred to as the "Class A Plan" and the "Class B Plan.")
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") applicable to
mutual fund sales charges. The NASD Rules limit the annual distribution costs
and service fees that a mutual fund may impose on a class of shares. The NASD
Rules also limit the aggregate amount which the Fund may pay for such distribu-
tion costs. Under the Class A Plan, a Fund pays 0.25% per annum of its average
daily net assets attributable to such class of shares to PFS as a service fee.
The service fee is intended to cover personal services provided to Class A
shareholders of a Fund by representatives of PFS Investments and the mainte-
nance of their accounts.
Under the Class B Plan, Class B shares of each Fund are subject to a combined
annual distribution fee and service fee at the rate of 1.00% of a Fund's aggre-
gate average daily net assets attributable to such class of shares. Payments by
each Fund to PFS under the Class B Plan are used to make service fee payments
to PFS Investments of 0.25% per annum of average daily net assets. Each Fund
pays PFS 0.75% of the aggregate average daily net assets of Class B shares, as
compensation for providing sales and promotional activities and services. Such
activities and services relate to the sale, promotion and marketing of the
Class B shares. The expenditures of PFS may consist of sales commissions to PFS
Investments for selling Class B shares, compensation, sales incentives and pay-
ments to sales and marketing personnel, and the payment of expenses incurred in
its sales and promotional activities, including advertising expenditures
related to the Class B shares of a Fund and the costs of preparing and distrib-
uting promotional materials with respect to such Class B shares.
PFS receives the proceeds of the initial sales charge, if any, paid upon the
purchase of Class A shares and the contingent deferred sales charge paid upon
certain redemptions of Class B shares, and may use these proceeds for any of
the distribution and service expenses described above.
During the period they are in effect, the Class A Plan and the Class B Plan
obligate each Fund to pay service fees and distribution fees to PFS as compen-
sation for its service and distribution activities, not as reimbursement for
specific expenses incurred. Thus, even if PFS's expenses exceed its service or
distribution fees for any Fund, the Fund will not be obligated to pay more than
those fees and, if PFS's expenses are less than such fees, it will retain its
full fees and realize a profit. Each Fund will pay the service fees and distri-
bution fees to PFS until either the applicable Plan is terminated or not
renewed. In that event, PFS's expenses in excess of service fees and distribu-
tion fees received or accrued through the termination date will be PFS's sole
responsibility and not obligations of a Fund. In their annual consideration of
the continuation of each Fund's Plans, the Trustees will review each Plan and
PFS's corresponding expenses for each class separately.
Actual distribution expenditures paid by PFS with respect to Class B shares
for any given year are expected to exceed the fees received pursuant to the
Class B Plan and payments received pursuant to contingent deferred sales
charges. Such excess will be carried forward and may be reimbursed by the Fund
or its shareholders from payments received through contingent deferred sales
charges in future years and from payments under the Class B Plan so long as
such Plan is in effect. For example, if in a fiscal year PFS incurred distribu-
tion expenses under the Class B Plan of $1 million, of which $500,000 was
recovered in the form of contingent deferred sales charges paid by investors
and $400,000 was reimbursed in the form of payments made by the Fund to PFS
under the Class B Plan, the balance of $100,000, would be subject to recovery
in future fiscal years from such sources.
If the Class B Plan was terminated or not continued, the Fund would not be
contractually obligated and has no liability to pay PFS for any expenses not
previously reimbursed by the Fund or recovered through contingent deferred
sales charges.
PFS Investments may be deemed to be an underwriter for purposes of the Securi-
ties Act of 1933. From time to time, PFS or its affiliates may also pay for
certain non-cash sales incentives provided to PFS Investments Registered Repre-
sentatives. Such incentives do not have any effect on the net amount invested.
In addition to the reallowances from the applicable public offering price
described above, PFS may from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other compensa-
tion to PFS Investments Registered Representatives that sell shares of each
Fund.
39
<PAGE>
ADDITIONAL INFORMATION
The Series was organized on January 29, 1987 under the laws of the Common-
wealth of Massachusetts and is a business entity commonly known as a "Massachu-
setts business trust." It is a diversified, open-end management investment com-
pany authorized to issue an unlimited number of Class A, Class B and Class 1
shares of beneficial interest of $.01 par value, in the Funds. Shares issued
are fully paid, non-assessable and have no preemptive or conversion rights. In
the event of liquidation of any Fund, shareholders of such Fund are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders.
Shareholders are entitled to one vote for each full share held and to frac-
tional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of share-
holders. Each class of shares represents interest 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 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 Plan which pertains
to that class of each Fund. All shares have equal voting rights, except that
only shares of the respective Fund are entitled to vote on matters concerning
only that Fund. There will normally be no meetings of shareholders for the pur-
pose 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.
PNC Bank, National Association ("PNC") serves as custodian for each Fund other
than the International Equity Fund, and The Chase Manhattan Bank ("Chase")
serves as custodian for the International Equity Fund. First Data Investor
Services Group, Inc. ("First Data") serves as transfer agent for the Funds.
PNC is located at 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103.
Chase is located at Chase Metrotech Center, Brooklyn, New York 11245.
First Data is located at Exchange Place, Boston, Massachusetts 02109.
The Sub-Transfer Agent is located at 3100 Breckinridge Blvd., Bldg 200,
Duluth, Georgia 30199-0062.
The Series intends to send its shareholders a semi-annual report and an
audited annual report, which will include listings of the investment securities
held by the Series at the end of the period covered. In an effort to reduce the
Series' printing and mailing costs, the Series plans to consolidate the mailing
of its semi-annual and annual reports by household. This consolidation means
that a household having multiple accounts with the identical address of record
will receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their account should contact the Sub-Transfer Agent.
Also available at the shareholder's request, is an Account Transcript identify-
ing every financial transaction in an account since it was opened. To defray
administrative expenses involved with providing multiple years worth of infor-
mation, there is a $15 charge for each Account Transcript requested.
Additional copies of tax forms are available at the shareholder's request. A
$10 fee for each tax form will be assessed.
Additional information regarding the Sub-Transfer Agent's services may be
obtained by contacting the Client Services Department at (800) 544-5445.
40
STATEMENT OF ADDITIONAL INFORMATION
CONCERT INVESTMENT SERIES
388 Greenwich Street
New York, NY 10013
February 28, 1998
Concert Investment Series (the "Trust") is a diversified,
open-end management investment company with six separate Funds
which are discussed herein: the Emerging Growth Fund (the
"Emerging Growth Fund"), the International Equity Fund (the
"International Equity Fund"), the Growth Fund (the "Growth
Fund"), the Growth and Income Fund (the "Growth and Income
Fund"), the Government Fund (the "Government Fund") and the
Municipal Bond Fund (the "Municipal Bond 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. Please call Customer Service
at (800) 544-5445 for information on the Funds.
TABLE OF CONTENTS
Page
General Information 2
Goals and Investment Policies 2
Investment Restrictions 14
Trustees and Officers 18
Investment Advisory Agreements 21
Distributor 22
Portfolio Turnover 24
Distribution Plans 24
Portfolio Transactions and Brokerage 25
Determination of Net Asset Value 29
Purchase and Redemption of Shares 31
Exchange Privilege 33
Dividends, Distributions and Federal Taxes 33
Other Information 37
Financial Statements 40
Appendix -- Commercial Paper, Bond and Other Short- and
Long-Term Ratings A-1
Municipal Bond
GENERAL INFORMATION
Mutual Management Corp. formerly Smith Barney Mutual
Funds Management Inc. (the "Adviser") was incorporated on
March 12, 1968 and renders investment management advice to
investment companies with aggregate assets under management in
excess of $94 billion as of January 31, 1998. The Adviser is an
affiliate of Smith Barney Inc. and a wholly-owned subsidiary of
Salomon Smith Barney Holdings Inc. which in turn is a
wholly-owned subsidiary of Travelers Group Inc. ("Travelers").
Travelers is engaged primarily in investment services,
including asset management, consumer finance services, life
insurance services and property and casualty 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 12, 1998, 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.
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.
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.
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.
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 1.00% more than high grade
corporate bonds and 1/2 of 1.00% 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.
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 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.
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.
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 5.00% 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
Adviser 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.
Options, Futures Contracts and Related Options
Selling Call and Put Options (The Emerging Growth Fund, the
International Equity Fund, the Growth Fund, the Growth and
Income Fund and the 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, the
International Equity Fund, the Growth Fund and the Growth and
Income 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 the 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 liquid 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 be
in violation of those limits, and it may impose other sanctions
or restrictions. These position limits may restrict the number
of options the Fund may be able to write.
Purchasing Call and Put Options (The Emerging Growth Fund, the
International Equity Fund, the Growth Fund, the Growth and
Income Fund and the 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 (The Emerging Growth Fund, the
International Equity Fund, the Growth Fund and the Growth and
Income 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 (The 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 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
The Trust may engage in transactions involving futures
contracts and related options in accordance with rules and
interpretations of the Commodity Futures Trading Commission
("CFTC") under which the Trust and its Funds is exempt from
registration as a "commodity pool".
Types of Contracts. An interest rate futures contract is
a bilateral agreement pursuant to which two parties agree to
take or make delivery of a specific type of debt security at a
specified future time and at a specified price. Although
interest rate futures contracts call for delivery of specified
securities, in most cases the contracts are closed out (by an
offsetting purchase or sale) prior to actual delivery, with the
difference between the contract price and the offsetting price
paid in cash.
A municipal bond futures contract is an agreement
pursuant to which two parties agree to take and make delivery
of an amount of cash equal to a specified dollar amount times
the differences between The Bond Buyer Municipal Bond Index
value at the close of the last trading day of the contract and
the price at which the futures contract is originally struck.
A stock index futures contract is a bilateral agreement
pursuant to which two parties agree to take or make delivery of
cash equal to a specified dollar amount times the difference
between the stock index value at a specified time and the price
at which the futures contract is originally struck. A stock
index fluctuates with changes in the market values of the
stocks included. No physical delivery of the underlying stocks
in the index is made.
Currently, stock index futures contracts can be purchased
with respect to the Standard & Poor's 500 Stock Index on the
Chicago Mercantile Exchange ("CME"), the New York Stock
Exchange Composite Index on the New York Futures Exchange and
the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in
differences in correlation of the futures contracts with
movements in the value of the securities being hedged.
Foreign stock index futures traded outside the United
States include the Nikkei Index of 225 Japanese stocks traded
on the Singapore International Monetary Exchange ("Nikkei
Index"), Osaka Index of 50 Japanese stocks traded on the Osaka
Exchange, Financial Times Stock Exchange Index of the
100 largest stocks on the London Stock Exchange, the All
Ordinaries Share Price Index of 307 stocks on the Sydney,
Melbourne Exchanges, Hang Seng Index of 33 stocks on the Hong
Kong Stock Exchange, Barclays Share Price Index of 40 stocks on
the New Zealand Stock Exchange and Toronto Index of 35 stocks
on the Toronto Stock Exchange. Futures and futures options on
the Nikkei Index are traded on the CME and United States
commodity exchanges may develop futures and futures options on
other indices of foreign securities. Futures and options on
United States devised index of foreign stocks are also being
developed. 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 appropriate securities as required
by the 1940 Act equal to a percentage (which will normally
range between 2% and 10%) 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 otherwise 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 incur a loss of all or
part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an over-the-counter
option purchased by the Government Fund, the Fund could
experience a loss of all or part of the value of the option.
Transactions are entered into by a Fund only with brokers or
financial institutions deemed creditworthy by the Adviser.
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 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
A Fund may also purchase and sell options on futures
contracts which are traded on an Exchange. An option on a
futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if
the option is a put), at a specified exercise price at any time
during the option period. As a seller of an option on a futures
contract, a Fund is subject to initial margin and maintenance
requirements similar to those applicable to futures contracts.
In addition, net option premiums received by a Fund are
required to be included as initial margin deposits. When an
option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the
difference between the current market price of the futures
contract and the exercise price of the option. A Fund may
purchase put options on futures contracts in lieu of, and for
the same purposes as, the sale of a futures contract. The
purchase of call options on futures contracts in intended to
serve the same purpose as the actual purchase of the futures
contract.
Risks of Transactions in Options on Stock Index Futures.
In addition to the risks described above which apply to all
options transactions, there are several special risks relating
to options on stock index futures. The Advisers will not
purchase options on stock index futures on any Exchange unless
and until, in the Adviser's opinion, the market for such
options has developed sufficiently that the risks in connection
with options on futures transactions are no greater than the
risks in connection with stock index futures transactions.
Compared to the use of stock index futures, the purchase of
options on stock index futures involves less potential risk to
the Growth Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However
there may be circumstances, such as when there is no movement
in the level of the index, when the use of an option on a stock
index future would result in a loss to the Fund when the use of
a stock index future would not.
Forward Commitments (The Government Fund Only)
Relative to a Forward Commitment purchase, the Fund
maintains a segregated account (which is marked to market
daily) of appropriate securities as required by the 1940 Act
(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 appropriate securities as required by the
1940 Act (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 (The
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 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 Fund 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 (The 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 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 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 (The 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 securities 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, appropriate
securities as required by the 1940 Act 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
securities 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 securities
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 securities 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
securities equal to the amount of the Fund's obligations.
OTC options entered into by the Fund, including those on
securities, currency, financial instruments or indices, and
OCC-issued and exchange-listed index options will generally
provide for cash settlement, although the Fund will not be
required to do so. As a result, when the Fund sells these
instruments it will segregate an amount of assets equal to its
obligations under the options. OCC-issued and exchange-listed
options sold by the Fund other than those described above
generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the
option. OTC options settling with physical 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 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
securities 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 approval by
the vote of a majority of such Fund's outstanding voting
shares, which is defined by the 1940 Act as 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.
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, the
Growth and Income Fund and the Municipal Bond 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
(the "1933 Act") 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, the
Growth and Income Fund and the Municipal Bond 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, the Growth and Income Fund and the Municipal
Bond 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
respect 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
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.
The following restrictions apply to the Growth Fund, the Growth
and Income Fund, the Government 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 Fund, the Growth and Income 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, the Growth and Income Fund and the Municipal
Bond 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, the Growth
and Income Fund and the Municipal Bond 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, the Growth and Income Fund and the Municipal Bond
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;
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.
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.
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 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 Emerging Growth Fund and the
International Equity 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
Emerging Growth Fund and the International Equity 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 Emerging Growth Fund and the
International Equity 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 or
Subadviser 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
Emerging Growth Fund and the International Equity 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.
TRUSTEES AND OFFICERS
The Trustees and executive officers and their principal
occupations for the past five years are listed below.
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); 60.
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; 59.
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; 50.
HEATH B. McLENDON,* Trustee. Managing Director of Smith
Barney; President and Director of the Adviser and Travelers
Investment Adviser, Inc. ("TIA"); Chairman of Smith Barney
Strategy Advisers Inc. Prior to July 1993, Senior Executive
Vice President of Shearson Lehman Brothers Inc., Vice Chairman
of Shearson Asset Management, Director of Pan-Agora Asset
Management, Inc. and Pan-Agora Asset Management Limited; 64.
ALAN G. MERTEN, Trustee. George Mason University, 4400
University Drive, Fairfax, Virginia 22030-4444. President of
George Mason University. Director of Comshare, Inc.
(information technology), and Tompkins County Trust Company,
Ithaca, New York; formerly The Anne and Elmer Lindseth Dean of
Johnson Graduate School of Management of Cornell University;
56.
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; 55.
ALAN B. SHEPARD, JR., Trustee. 1512 Bonifacio Road, P.O.
Box 63, Pebble Beach, California 93953-0063. President of Seven
Fourteen Enterprises, Inc. (investments); Partner of Houston
Partners (venture capital); Director and Vice Chairman of
Kwik-Kopy Corporation (printing); Director of Allied Waste
Industries (waste treatment).(1)(2); 74
* Such Trustees are "interested persons" (within the
meaning of Section 2(a)(19) of the Investment Company Act
of 1940). Mr. McLendon is an interested person of the
Adviser and the Trust by reason of his position with the
Adviser.
OFFICERS
Heath B. McLendon, President (See description under
"Trustees").
Lewis E. Daidone, Senior Vice President and Treasurer
(Age 40). Managing Director of Smith Barney; Director and
Senior Vice President of MMC and TIA. Mr. Daidone serves as
Senior Vice President and Treasurer of 42 Smith Barney Mutual
Funds. His address is 388 Greenwich Street, New York, New York
10013.
Sandip A. Bhagat, Vice President and Investment Officer
(Age 37). President of TIMCO; prior to 1995, Senior Portfolio
Manager for TIMCO. His address is One Tower Square, Hartford,
Connecticut 06183-2030.
James E. Conroy, Vice President and Investment Officer
(Age 46). Managing Director of Smith Barney; prior to July
1993, Managing Director of Shearson Lehman Advisors ("SLA").
Mr. Conroy serves as Investment Officer of four Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York,
New York 10013.
Joseph P. Deane, Vice President and Investment Officer
(Age 50). Managing Director of Smith Barney; prior to July
1993, Managing Director of SLA. Mr. Deane serves as Investment
Officer of 8 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
R. Jay Gerken, Vice President and Investment Officer (Age
46). Managing Director of Smith Barney; prior to July 1993,
Managing Director of SLA. Mr. Gerken is Vice President and
Investment Officer of two other Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Jeffrey Russell, Vice President and Investment Officer
(Age 40). Managing Director of Smith Barney; Mr. Russell is
Vice President and Investment Officer of six other Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York,
New York 10013.
Larry Weissman, Vice President and Investment Officer;
(Age 36 ). Managing Director of Smith Barney; Prior to October
1997, Portfolio Manager of Newberger & Berman LLC; Prior to
1995, Portfolio Manager of College Retirement Equities Fund.
Christina T. Sydor, Secretary (Age 47). Managing Director
of Smith Barney; General Counsel and Secretary of MMC and TIA.
Ms. Sydor also serves as Secretary of 42 Smith Barney Mutual
Funds. Her address is 388 Greenwich Street, New York, New York
10013.
As of February 12, 1998, the Trustees and officers of the
Trust as a group own less than one percent of the outstanding
shares of each Fund 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 $ 22,294 plus a
fee of $1,486 per day for each Board meeting attended. During
the fiscal period ended October 31, 1997, the Trustees who were
not affiliated with the Adviser received as a group $19,936,
$16,741, $191,675, $80,659, $30,342, and $21,772 in Trustees'
fees from the Emerging Growth Fund, the International Equity
Fund, the Growth Fund, the Growth and Income Fund, the
Government Fund, and the Municipal Bond Fund respectively, in
addition to certain out-of-pocket expenses.
Additional information regarding compensation paid by the
Funds and the related mutual funds for which the Trustees serve
as trustees noted above is set forth below. The compensation
shown for the Funds is for the fiscal year ended October 31,
1997, while the total compensation shown for the Funds and
other related mutual funds is for the calendar year ended
December 31, 1997. Mr. McLendon is not compensated for his
service as Trustee, because of his affiliation with the
Adviser.
COMPENSATION TABLE
Total(1)
Compensation
Pension or From
Retirement Registrant
Benefits and Fund Complex Number of Funds
Aggregate Compensation Accrued as For Which Trustee
From Registrant(3) Part of Fund Paid Serves Within Fund
Name of Person EM INT G G/I GVT MB Expenses (4) to DirectorsComplex
Dr. Donald M. Carlton $2,464 $2,173 $15,811 $7,600 $3,082 $2,575 - $33,703 1
Dr. A. Benton Cocanougher 2,210 1,949 14,181 6,816 2,764 2,309 - 30,229 1
Stephen Randolph Gross 2,692 2,375 17,278 8,305 3,368 2,814 - 36,832 1
Dr. Norman Hackerman(2) 388 137 16,.274 5,360 1,731 652 - 24,543 0
Heath B. McLendon* - - - - - - - - 42
Robert D. H. Harvey(2) 407 144 17,078 5,625 1,817 684 - 25,757 0
Dr. Alan G. Merten 2,134 1,882 13,692 6,581 2,669 2,230 - 29,187 1
Dr. Steven Muller(2) 2,210 1,949 14,181 6,816 2,764 2,309 - 30,239 0
Dr. F. Robert Paulsen(2) 1,981 1,444 22,881 9,094 3,040 2,050 - 40,490 0
Dr. R. Richardson Pettit 2,184 2,184 14,018 6,738 2,733 2,283 - 30,139 1
Alan B. Shepard, Jr. 2,553 2,251 16,381 7,874 3,139 2,668 - 34,920 1
Miller Upton(2) 383 136 16,069 5,293 1,709 644 - 24,254 0
Benjamin N. Woodson(2) 330 117 13,834 4,557 1,472 554 - 20,863 0
- --------------------------------------
*Represents Interested Trustee.
(1) Amounts reflected are for the calendar year ended
December 31, 1997.
(2) Messrs. Hackerman, Harvey, Upton and Woodson retired as
Trustees on March 31, 1996. Mr. Paulsen retired as a
Trustee on April 10, 1997. Mr. Muller retired as a
Trustee on January 2, 1998.
(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.
(4) Retirement Benefits accrued are $3,406, $777, $173,126,
$62,617, $21,389, and $7,794, per the Emerging Growth Fund,
the International Equity Fund, the Growth Fund, the Growth and
Income Fund, the Government Fund and the Municipal Bond Fund,
respectively, as part of each Fund's expenses.
Legend:
EM = Emerging Growth Fund
INT = International Equity Fund
G = Growth Fund
G/I = Growth and Income Fund
GVT = Government Fund
MB = Municipal Bond Fund
Legal Counsel
Sullivan & Worcester LLP
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"). An
investment advisory agreement with the Adviser and the Trust,
on behalf of each Fund had been approved by the Board of
Trustees of the Trust at a meeting held on June 10, 1997 and by
shareholders of each Fund at a meeting held on December 18,
1997. Under the Advisory Agreements, the Trust retains the
Adviser to manage the investment of its assets and to place
orders for the purchase and sale of its portfolio securities.
The Adviser is responsible for obtaining and evaluating
economic, statistical, and financial data and for formulating
and implementing investment programs in furtherance of each
Fund's investment objectives. The Adviser also furnishes at no
cost to the Trust (except as noted herein) the services of
sufficient executive and clerical personnel for the Trust as
are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation
materials. In addition, the Adviser furnishes at no cost to the
Trust the services of a President of the Trust, one or more
Vice Presidents as needed, and a Secretary.
Under the Advisory Agreements, the Trust bears the cost
of its accounting services, which includes maintaining its
financial books and records and calculating the daily net asset
value of each Fund. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating
under his direction. The services are provided at cost which is
allocated among all investment companies advised or subadvised
by the Adviser. The Trust also pays transfer agency fees,
custodian fees, legal fees, the costs of reports to
shareholders and all other ordinary expenses not specifically
assumed by the Adviser.
The Trust retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its
portfolio securities. Under the relevant Advisory Agreement,
the Trust pays the Adviser an annual fee for the Emerging
Growth Fund, the Growth Fund and the Growth and Income 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 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 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 Municipal Bond Fund at
the rate of 0.60% of the first $1 billion of the Fund's average
daily net assets; 0.55% of the next $1 billion of the Fund's
average daily net assets; 0.50% of the next $1 billion of the
Fund's average daily net assets; and 0.45% of the Fund's
average daily net assets in excess of $3 billion.
The average daily net assets of each Fund are determined
by taking the average of all of the determinations of net asset
value of such Fund for each business day during a given
calendar month. Such fee is payable for each calendar month as
soon as practicable after the end of that month.
The following table shows expenses paid under the
relevant investment advisory agreement during the periods ended
October 31, 1997, 1996 and 1995:
Emerging International Growth & Municipal
Growth Equity Growth Income Government Bond
October 31, 1997
Accounting Services $37,198 $21,601 $420,043 $161,748 $55,786 $39,999
Gross Advisory Fees 904,959 267,897 20,533,544 7,574,209 1,702,968 704,693
Contractual Expense
Reimbursement -- -- -- -- -- --
Voluntary Expense
Reimbursement -- -- -- -- -- --
October 31, 1996
Accounting Services $ 79,620 $ 30,600 $ 406,931 $ 168,039 $ 93,056 $ 99,374
Gross Advisory Fees 376,436 130,149 17,148,560 6,017,204 1,883,666 728,210
Contractual Expense
Reimbursement -- 130,149 -- -- -- --
Voluntary Expense
Reimbursement -- 47,998 -- -- -- --
October 31, 1995
Accounting Services $ 6,356 $ 4,807 $ 277,991 $ 123,458 $ 92,277 $ 90,522
Gross Advisory Fees 47,662 35,227 14,436,748 4,937,121 1,979,623 678,530
Contractual Expense
Reimbursement -- -- -- -- -- --
Voluntary Expense
Reimbursement -- -- -- -- -- --
For these periods, Van Kampen American Capital Asset
Management Inc. ("VKAC") served as the Trust's investment
adviser. Effective December 31, 1997, Mutual Management Corp.
(formerly Smith Barney Mutual Funds Management Inc.) replaced
VKAC as investment adviser to each Fund of the Trust.
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 2.50% of the first $30 million, 2% of the next $70 million,
and 1.50% of the remaining average net assets. The Trust has
received from California (the state with the most restrictive
expense limitation) a waiver, effective retroactive to the
inception of the Trust, which allows each Fund to exclude
shareholder service costs from the calculation of the expense
limitation.]
DISTRIBUTOR
The Distributor acts as the principal underwriter of the
shares of the Trust pursuant to a written agreement 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, 1997, 1996
and 1995.
Emerging International Growth & Municipal
Growth Equity Growth Income Government Bond
October 31, 1997
Total Underwriting
Commissions $3,846,082 $608,726 $18,002,508 $6,979,966 $808,858 $487,303
Amount Retained By
Distributor 251,247 37,018 2,787,423 825,118 98,702 87,157
Amount Received By PFS
Investments 3,594,835 571,708 15,215,088 6,154,848 710,156 400,146
October 31, 1996
Total Underwriting
Commissions $1,519,351 $235,791 $19,303,603 $5,144,500 $ 950,019 $1,029,147
Amount Retained By
Distributor 124,777 21,437 3,405,104 888,760 162,072 124,395
Amount Received By PFS
Investments 1,394,574 214,354 15,898,499 4,255,740 1,173,867 904,752
October 31, 1995
Total Underwriting
Commissions $ 569,333 $147,459 $21,001,021 $5,352,114 $1,871,172 $1,033,937
Amount Retained By
Distributor 47,949 11,149 3,711,115 929,500 378,331 118,219
Amount Received By PFS
Investments 521,384 136,310 17,289,906 4,422,614 1,492,841 915,718
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.
DISTRIBUTION PLANS
The Trust has adopted a Class A distribution plan and a
Class B distribution plan (the "Class A Plan" and "Class B
Plan," respectively) to permit each Fund directly or indirectly
to pay expenses associated with servicing shareholders and in
the case of the Class B Plan the distribution of its shares
(the Class A Plan and the Class B Plan are sometimes referred
to herein collectively as "Plans" and individually as a
"Plan").
With respect to the Class A Plan, each Fund is authorized
to pay the Distributor, as compensation for the Distributor's
services, a service fee at an annual rate of 0.25% of the
average daily net assets of the Fund's Class A shares. Such fee
shall be calculated and accrued daily and paid monthly. With
respect to the Class A Plan, the Distributor intends to make
payments thereunder only to compensate PFS Investments for
personal service and the maintenance of shareholder accounts.
With respect to the Class B Plan, authorized payments by each
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 fiscal year ended October 31, 1997, the aggregate
expenses for the Emerging Growth Fund under the Fund's Class A
Plan were $193,021 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 fiscal year ended
October 31, 1997, the Fund's aggregate expenses under the
Class B Plan were $587,117 or 1.00% of the Class B shares'
average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $146,779 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 $440,338 for fees paid to Service
Organizations for servicing Class B shareholders and
administering the Class B Plan.
For the fiscal year ended October 31, 1997, the aggregate
expenses for the International Equity Fund under the Fund's
Class A Plan were $36,192 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 fiscal year ended
October 31, 1997, the Fund's aggregate expenses under the
Class B Plan were $113,854 or 1.00% of the Class B shares'
average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $28,464 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 $85,390 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B
Plan.
For the fiscal year ended October 31, 1997, the aggregate
expenses for the Growth Fund under the Class A Plan were
$192,932 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 fiscal year ended October 31, 1997, the Fund's
aggregate expenses under the Class B Plan were $999,572 or
1.00% of the Class B shares' average net assets. Such expenses
were paid to reimburse the Distributor for the following
payments: $249,893 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 $749,679 for fees paid
to Service Organizations for servicing Class B shareholders and
administering the Class B Plan.
For the fiscal year ended October 31, 1997, the aggregate
expenses for the Growth and Income Fund under the Fund's
Class A Plan were $137,612 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 fiscal year ended
October 31, 1997, the Fund's aggregate expenses under the
Class B Plan were $752,643 or 1.00% of the Class B shares'
average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $188,161 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 $564,482 for fees paid to Service
Organizations for servicing Class B shareholders and
administering the Class B Plan.
For the fiscal year ended October 31, 1997, the aggregate
expenses for the Government Fund under the Fund's Class A Plan
were $30,357 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 fiscal year ended October 31, 1997, the Fund's
aggregate expenses under the Class B Plan were $128,349 or
1.00% of the Class B shares' average net assets. Such expenses
were paid to reimburse the Distributor for the following
payments: $32,087 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 $96,262 for fees paid
to Service Organizations for servicing Class B shareholders and
administering the Class B Plan.
For the fiscal year ended October 31, 1997, the aggregate
expenses for the Municipal Bond Fund under the Fund's Class A
Plan were $13,371 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 fiscal year ended
October 31, 1997, the Fund's aggregate expenses under the Class
B Plan were $16,121 or 1.00% of the Class B shares' average net
assets. Such expenses were paid to reimburse the Distributor
for the following payments: $4,030 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 $12,091 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B
Plan.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell
securities for the Trust and for the placement of its portfolio
business and the negotiation of any commissions paid on such
transactions. It is the policy of the 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 seeks the best security price at the
most favorable commission rate. From time to time, the Fund may
place brokerage transactions with affiliated persons of the
Adviser. In selecting broker/dealers and in negotiating
commissions, the Adviser considers the firm's reliability, the
quality of its execution services on a continuing basis and its
financial condition. When more than one firm is believed to
meet these criteria, preference may be given to firms which
also provide research services to the Trust or the Adviser.
Section 28(e) of the Securities Exchange Act of 1934
("Section 28(e)") permits an investment adviser, under certain
circumstances, to cause an account to pay a broker or dealer
who supplies brokerage and research services a commission for
effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for
effecting the transaction. Brokerage and research services
include (a) furnishing advice as to the value of securities,
the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or
sellers of securities, (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors
and trends, portfolio strategy, and the performance of
accounts, (c) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and
custody), and (d) furnishing other products or services that
assist the Adviser or the Subadviser in fulfilling their
investment-decision making responsibilities.
Pursuant to provisions of the relevant Advisory
Agreement, the Trustees have authorized the Adviser to cause
the Trust to incur brokerage commissions in an amount higher
than the lowest available rate in return for research services
provided to the Adviser. The Adviser is of the opinion that the
continued receipt of supplemental investment research services
from dealers is essential to its provision of high quality
portfolio management services to the Trust. The Adviser
undertakes that such higher commissions will not be paid by the
Trust unless (a) the Adviser determines in good faith that the
amount is reasonable in relation to the services in terms of
the particular transaction or in terms of the Adviser's overall
responsibilities with respect to the accounts as to which it
exercises investment discretion, (b) such payment is made in
compliance with the provisions of Section 28(e) and other
applicable state and federal laws, and (c) in the opinion of
the Adviser, the total commissions paid by the Trust are
reasonable in relation to the expected benefits to the Trust
over the long term. The investment advisory fees paid by the
Trust under the Advisory Agreements are not reduced as a result
of the Adviser's receipt of research services.
Consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and subject to
seeking best execution and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the
Trust as a factor in the selection of firms to execute
portfolio transactions for the Trust.
The Adviser places portfolio transactions for other
advisory accounts including other investment companies.
Research services furnished by firms through which the Trust
effects its securities transactions may be used by the Adviser
in servicing all of its accounts; not all of such services may
be used by the Adviser in connection with the Trust. In the
opinion of the Adviser, the benefits from research services to
the Funds of the Trust and to the accounts managed by the
Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not
uniform, the amount of commissions in excess of the lowest
available rate paid by each account for brokerage and research
services will vary. However, in the opinion of the Adviser,
such costs to the Trust will not be disproportionate to the
benefits received by the Trust on a continuing basis.
The Adviser will seek to allocate portfolio transactions
equitably whenever concurrent decisions are made to purchase or
sell securities by the Trust and other accounts that the
Adviser may establish in the future. In some cases, this
procedure could have an adverse effect on the price or the
amount of securities available to the Trust. In making such
allocations among the Trust and other advisory accounts, the
main factors considered by the Adviser is 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.
Emerging International Growth & Municipal
Growth Equity Growth Income Government Bond
1997
Total Brokerage Commissions $185,242 $10,105,482 $2,428,087 $140,190 --
Commissions for Research
Services 77,926 -- 3,257,868 759,080 --
Value of Research
Transactions 90,303,044 -- 1,471,817,568 612,451,022 -- --
1996
Total Brokerage Commissions $99,218 $94,895 $ 10,114,647 $ 2,273,725
$160,181 --
Commissions for Research
Services 73,884 -- 3,194,442 896,669 -- --
Value of Research
Transactions 13,016,975 -- 2,657,952,353 821,323,593 -- --
1995
Total Brokerage Commissions $ 33,144 $51,642 $11,276,872 $2,443,026
$125,499 --
Commissions for Research
Services 27,920 -- 2,878,071 880,873 -- --
Value of Research
Transactions 24,893,286 -- 1,995,983,303 524,158,962 -- --
The Funds may from time to time place brokerage
transactions with brokers that may be considered affiliated
persons of the Adviser or the Distributor. Such affiliated
persons include Smith Barney Inc. ("Smith Barney") and Robinson
Humphrey, Inc. ("Robinson Humphrey"). For the periods described
above, as of October 31, 1996, Morgan Stanley Group Inc.
("Morgan Stanley") became an affiliate of VKAC and as of May
31, 1997, Dean Witter Discover & Co. ("Dean Witter") also
became an affiliate of VKAC. Effective December 31, 1997,
Morgan Stanley and Dean Witter were no longer considered
affiliated persons of the Adviser 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:
Robinson
Smith
Morgan
Dean
Fiscal 1997 Commissions
Humphrey
Barney
Stanley
Witter
Emerging Growth
- --
- --
- --
- --
International Equity
- --
- --
$ 9,368
- --
Growth
$4,500
$327,320
20,688
$17,100
Growth & Income
- --
90,639
375
- --
Government
- --
27,848
- --
- --
Municipal Bond
- --
- --
- --
- --
Fiscal 1997 Percentage
Emerging Growth
- --
- --
- --
- --
International Equity
- --
- --
8.14%
- --
Growth
0.04%
3.24%
0.20%
0.17%
Growth & Income
- --
3.73%
0.02%
- --
Government
- --
19.86%
- --
- --
Municipal Bond
- --
- --
- --
- --
Valuation of transactions with
affiliates to total transactions
Emerging Growth
- --
- --
- --
- --
International Equity
- --
- --
1.43%
- --
Growth
0%
0.04%
0%
0.28%
Growth & Income
- --
- --
0%
- --
Government
- --
2.34%
- --
- --
Municipal Bond
- --
- --
- --
- --
Fiscal 1996 Commissions
Emerging Growth
- --
$ 1,835
International Equity
- --
- --
Growth
$7,200
240,982
Growth & Income
2,400
92,761
Government
- --
28,322
Municipal Bond
- --
- --
Robinson Smith
Fiscal 1996 Percentages Humphrey Barney
Emerging Growth -- 1.87%
International Equity -- --
Growth 0.07% 2.38%
Growth & Income 0.10% 4.08%
Government -- 17.68%
Municipal Bond -- --
Value of transactions with Robinson Smith
affiliates to total transactions Humphrey Barney
Emerging Growth -- --
International Equity -- --
Growth -- 0.002%
Growth & Income -- 0.027%
Government -- 4.65%
Municipal Bond -- 5.35%
Robinson Smith
Fiscal 1995 Commissions Humphrey Barney
Emerging Growth $ -- $ 310
International Equity -- 1,077
Growth 5,250 253,827
Growth & Income 189 118,952
Government -- 20,942
Municipal Bond -- --
Robinson Smith
Fiscal 1995 Percentages Humphrey Barney
Commissions with affiliates to total commissions
Emerging Growth -- 0.94%
International Equity -- 2.10%
Growth 0.05% 2.25%
Growth & Income 0.01% 4.87%
Government -- 16.69%
Municipal Bond -- --
Value of transactions with Robinson Smith
affiliates to total transactions Humphrey Barney
Emerging Growth -- 0.35%
International Equity -- 1.23%
Growth 0.03% 7.40%
Growth & Income -- 10.52%
Government -- 15.55%
Municipal Bond -- --
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is
determined as of the close of the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York time) on each
business day on which the Exchange is open.
The Emerging Growth Fund, The International Equity Fund, The
Growth Fund and The 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 Exchange is open. Further, trading takes place in
various foreign markets on days on which the Exchange 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. Eastern time
on each day that the Exchange is open will not be reflected in
a Fund's net asset value unless the Adviser, 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.
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.
The 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.
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 and liabilities
allocated to that class.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements the sections in the
Funds' Prospectus captioned "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 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. 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 except that
each class has exclusive voting rights with respect to the
Rule 12b-1 distribution plan pursuant to which its distribution
fees are 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 accompanying 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 and Class 1 shares of the Emerging Growth Fund, the
International Equity Fund, the Growth Fund, the Growth and
Income Fund, the Government Fund and the Municipal Bond Fund.
An aggregate investment includes all shares of all of the above
Funds and shares of other Common Sense Funds 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 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. When an investor submits a Letter
of Intent to attain an investment goal within a 13-month
period, the Transfer Agent escrows shares totaling 5% 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 A or 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 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. 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 "Shareholder
Services -- 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.
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 Emerging Growth Fund, the International Equity Fund
and the Growth Fund distribute dividends and capital gains
annually; the Growth and Income Fund declares and pays
dividends quarterly. The Government Fund and the Municipal Bond
Fund declare and distribute dividends monthly substantially all
of their net investment income to shareholders. The per share
dividends on Class B shares of each Fund will be lower than the
per share dividends on Class A and 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.
Not later than 60 days after the close of its taxable
year, the Municipal Bond Fund will notify its shareholders of
the portion of the dividends paid by the Fund to the
shareholders for the taxable year which constitutes exempt
interest dividends. The aggregate amount of dividends so
designated cannot exceed, however, the excess of the amount of
interest exempt from tax under Section 103 of the Code received
by the Fund during the year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Since
the percentage of dividends which are "exempt-interest"
dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt
for any particular dividend may be substantially different from
the percentage of the Fund's income that was tax-exempt during
the period covered by the dividend.
Although exempt-interest dividends generally may be
treated by the Municipal Bond Fund's shareholders as items of
interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to
whether exempt-interest dividends retain this exclusion if the
shareholder should be treated as a "substantial user" or a
"related person" with respect to any of the tax-exempt
obligations held by the Fund. "Substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person
who regularly uses in his trade or business a part of any
facilities financed with the tax-exempt obligations and whose
gross revenues derived from such facilities exceed five percent
of the total revenues derived from the 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 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.
Each Fund is subject to a 4% 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, the Growth Fund and the Growth and Income Fund
qualify for the 70% dividends received deduction for
corporations. To qualify for the dividends received deduction,
a corporate shareholder must hold the shares on which the
dividend is paid for more than 45 days.
Dividends and distributions declared payable to
shareholders of record after September 30 of any year and paid
before February 1 of the following year are considered taxable
income to shareholders on December 31 even though paid in the
next year.
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. 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 their 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 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 average annual total return (computed in the manner
described in the Prospectus) and yield for each Fund are shown
in the table below. 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 each Fund's investment objectives and
policies as well as the risks incurred in each Fund's
investment practices.
Class 1 Class A Class B
Shares Shares Shares
Emerging Growth Fund
i) total return for one year period ended
10/31/97 9.01% 12.37% 12.94%
ii) total return for five year period ended
10/31/97 -- -- --
iii) total return since inception
(based on inception date of 2/21/95) -- 23.55% 24.46%
iv) total return since inception
(based on inception date of 8/08/96) 10.68% -- --
International Equity Fund
i) total return for one year period ended
10/31/97 0.66% 3.72% 3.93%
ii) total return for five year period ended
10/31/97 -- -- --
iii) total return since inception
(based on inception date of 3/17/95) -- 14.83% 15.60%
iv) total return since inception
(based on inception date of 8/08/96) 3.10% -- --
Growth Fund
i) total return for one year period ended
10/31/97 16.15%
19.66% 20.66%
ii) total return for five year period ended
10/31/97 15.03%
- --
- --
iii) Total return for the ten year period ended
10/31/97 15.00%
- -- --
iv) total return since inception
(based on inception date of 4/14/87) 12.02%
- -- --
v) total return since inception
(based on inception date of 5/03/94)
- -- 17.22% 17.86%
Class 1 Class A Class B
Shares Shares Shares
Growth and Income Fund
i) total return for one year period ended
10/31/97 16.54% 20.08% 21.08%
ii) total return for five year period ended
10/31/97 14.57% -- --
ii) total return since inception
(based on inception date of 4/14/87) 11.43% -- --
iv) total return since inception
(based on inception date of 5/03/94) --
16.86% 17.42%
Government Fund
i) total return for one year period ended
10/31/97 1.26% 3.19% 3.55%
ii) total return for five year period ended
10/31/97 4.80% -- --
iii) total return since inception
(based on inception date of 4/14/87) 6.93% -- --
iv) total return since inception
(based on inception date of 5/03/94) --
4.43% 4.29%
v) yield 5.42% 5.30% 4.79%
Municipal Bond Fund
i) total return for one year period ended
10/31/97 2.90% 2.93% 2.98%
ii) total return for five year period ended
10/31/97 6.24% -- --
iii) total return since inception
(based on inception date of 7/13/88) 7.20% -- --
iv) total return since inception
(based on inception date of 8/08/96) --
3.29% 3.22%
v) yield 4.05% 3.71% 3.23%
vi) tax equivalent yield 5.87% 5.38% 4.68%
* The Fund's equivalent taxable 30-day yield for a Class is
computed by dividing that portion of the Class' 30-day yield
which is tax-exempt by one minus a stated income tax rate and
adding the product to that portion, if any, of the Class' yield
that is not tax-exempt. The tax equivalent yield assumes the
payment of Federal income taxes at a rate of 31%.
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 and the
Municipal Bond Fund are computed separately for each class
of 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 adjusted gross income reaches certain
levels ($35,000 for a single individual, $50,000 for married
individuals filing jointly and $10,000 for married individuals
filing separately) and the deduction is phased out ratably if
his adjusted gross income falls within certain ranges ($25,000-
$35,000 for a single individual, $40,000-$50,000 for married
individuals filing jointly and $0-$10,000 for married
individuals filing separately). IRA contributions, up to the
annual limit, remain fully deductible for all single
individuals with less than $25,000 of annual adjusted gross
income and all married individuals with less than $40,000 of
annual adjusted gross income. Individuals who are disqualified
from making deductible IRA contributions can make
non-deductible contributions to their IRAs, subject to the same
limitation on maximum annual contribution discussed above.
In addition, any individual, regardless of age, may
establish a rollover IRA to receive an eligible rollover
distribution from an employer-sponsored plan.
Simplified Employee Pension Plan (SEP) and Salary
Reduction Simplified Employee Pension Plan (SARSEP). A
SEP/SARSEP is a means for an employer to provide retirement
contributions to IRAs for all employees, without the
complicated reporting and record keeping involved in a
qualified plan. Employees covered by a SEP/SARSEP can use the
same IRA to receive their own allowable IRA contribution.
Section 403(b)(7) Plan. Employees of certain exempt
organizations and schools can have a portion of their
compensation set aside, and income taxes attributable to such
portion deferred, in a Section 403(b)(7) plan. Teachers, school
administrators, ministers, employees of hospitals, libraries,
community chests, funds, foundations, and many others may be
eligible. The employer must be an organization described in
Section 501(c)(3) of the Internal Revenue Code and must be
exempt from tax under Section 501(a) of the Code. In addition,
any employee of most public educational institutions is
eligible if his employer is a state or a political subdivision
of a state, or any agency or instrumentality of either. The
employee is not taxed on the amount set aside or the earnings
thereon until the funds are withdrawn, normally at retirement.
Custody of Assets
Effective December 31, 1997, 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 PNC Bank, National Association, located
at 17th and Chestnut Streets, Philadelphia, PA 19103, as
Custodian for each Fund other than the International Equity
Fund. Chase Manhattan Bank, located at Chase Metrotech Center,
Brooklyn, NY 11245 serves as Custodian for the International
Equity Fund.
Shareholder Reports
Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent
accountants.
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, 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 and Officers
are not liable for actions or failure to act; however, they are
not protected from liability by reason of their willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office. The
Trust will provide indemnification to its Trustees and Officers
as authorized by its By-Laws and by the 1940 Act and the rules
and regulations thereunder.
FINANCIAL STATEMENTS
The Trust's Annual Report for the fiscal year ended
October 31,1997 is incorporated herein by reference in its
entirety.
APPENDIX A
RATINGS OF MUNICIPAL BONDS, NOTES AND COMMERCIAL PAPER
Description of Four Highest Municipal Bond Ratings
Moody's Investors Service, Inc. ("Moody's"):
Aaa - Bonds that 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 that 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 that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Baa - Bonds that are rated Baa are considered 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.
Standard & Poor's Ratings Group ("S&P"):
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 higher-rated issues
only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB - Debt rated BBB is regarded as having adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
Description of State and Local Government Municipal Note
Ratings
Notes are assigned distinct rating symbols in recognition of
the differences between short-term and long-term credit risk.
Factors affecting the liquidity of the borrower and short-term
cyclical elements are critical in short-term ratings, while
other factors of major importance in bond risk-- long-term
secular trends for example-- may be less important over the
short run.
Moody's Investors Service, Inc.:
Moody's ratings for state and municipal notes and other short-
term loans are designated Moody's Investment Grade ("MIG"). A
short-term rating may also be assigned on an issue having a
demand feature, a variable-rate demand obligation. Such
ratings will be designated as "VMIG." Short-term ratings on
issues with demand features are differentiated by the use of
the VMIG symbol to reflect such characteristics as payment upon
periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Additionally, investors should
be alert to the fact that the source of payment may be limited
to the external liquidity with no or limited legal recourse to
the issuer in the event the demand is not met. Symbols used
are as follows:
MIG/VMIG 1 - Loans bearing this designation are of the best
quality, enjoying strong protection from established cash flows
of funds, superior liquidity support or demonstrated broad-
based access to the market for refinancing.
MIG 2/VMIG 2 - Loans bearing this designation are of high
quality, with margins of protection ample although not so large
as in the preceding group.
Standard & Poor's Ratings Group:
SP-1 - Very strong or strong capacity to pay principal
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
Description of Highest Commercial Paper Ratings
Moody's Investors Service, Inc.:
Prime-1 - Issuers (or related supporting institutions) rated
Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of
return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-
established access to a range of financial markets and assured
sources of alternate liquidity.
Standard & Poor's Ratings Group:
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
8
