STATEMENT OF ADDITIONAL INFORMATION
CONCERT INVESTMENT SERIES
388 Greenwich Street
New York, NY 10013
February 28, 1999
Concert Investment Series (the "Trust") is a diversified,
open-end management investment company with seven separate
Funds which are discussed herein: the Emerging Growth Fund,
the International Equity Fund, the Mid Cap Fund, the Growth
Fund, the Growth and Income Fund, the Government Fund and
the Municipal Bond Fund (collectively, the "Funds"). 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 Shareholder Services (the "Sub-Transfer Agent") at 3100
Breckinridge Boulevard, Bldg. 200, Duluth, Georgia
30199-0001. Please call Customer Service at (800) 544-5445
for information about the Funds.
TABLE OF CONTENTS
P
a
g
e
General Information
2
Goals and Investment Policies
2
Risk Factors
20
Investment Restrictions
26
Trustees and Officers
30
Investment Advisory Agreements
32
Distributor
34
Portfolio Turnover
34
Distribution Plans
35
Portfolio Transactions and Brokerage
37
Determination of Net Asset Value
40
Dividends, Distributions and Federal Taxes
50
Other Information
57
Appendix A - Ratings of Municipal Bonds, Notes and
Commercial Paper 58
GENERAL INFORMATION
SSBC Fund Management, Inc., formerly Mutual Management Corp.
(the "manager"), was incorporated on March 12, 1968 and
renders investment management advice to investment companies
with aggregate assets under management in excess of
$115 billion as of November 30, 1998. The manager is an
affiliate of Salomon Smith Barney Inc. The manager and
Salomon Smith Barney are subsidiaries of Citigroup Inc., a
financial services company that uses diverse channels to
offer a broad range of financial services to consumer and
corporate customers around the world. Among these
businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset
Management, Travelers Life & Annuity, and Travelers Property
Casualty.
CFBDS, Inc. (the "Distributor") is the distributor of the
funds' shares. PFS Investments, Inc. ("PFS Investments"), a
selling agent of the fund, is an indirect wholly-owned
subsidiary of Citigroup. PFS Shareholder Services, the Sub-
Transfer Agent is a subsidiary of PFS Services, Inc., an
affiliate of Primerica Financial Services, Inc. ("Primerica
Financial").
As of November 30, 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
in the Prospectus and do not, standing alone, present a
complete and accurate explanation of the matters disclosed.
Readers must refer also to the Prospectus for a complete
presentation of the matters disclosed below.
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. Although each Fund has a different
goal which it pursues through separate investment policies
described below, each Fund, except the International Equity
Fund and the Mid Cap Fund, will not purchase any securities
issued by any company primarily engaged in the manufacture
of alcohol or tobacco.
Each of the Funds may depart from its principal investment
strategies in response to adverse market, economic or
political conditions by taking temporary defensive positions
in all types of money market and short-term debt securities.
If a Fund takes a temporary defensive position, it may be
unable to achieve its investment objective.
Emerging Growth Fund
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 the manager 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 the manager may
use to achieve such objective.
Under normal conditions, the Fund invests at least 65% of
its total assets in common stocks of small and medium sized
companies, both domestic and foreign, in the early stages of
their life cycle that the manager believes have the
potential to become major enterprises. Investments in such
companies may offer greater opportunities for growth of
capital than larger, more established companies, but also
may involve certain special risks. Emerging growth companies
often have limited product lines, markets, or financial
resources, and they may be dependent upon one or a few key
people for management. The securities of such companies may
be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the
market averages in general. While the Fund will invest
primarily in common stocks, to a limited extent, it may
invest in other securities such as preferred stocks,
convertible securities and warrants.
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 may hold a portion of its assets in high grade
short-term debt securities and high grade corporate or
government bonds in order to provide liquidity. 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.
International Equity Fund
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.
In seeking to achieve its goal, the Fund presently expects
to invest at least 65% and substantially all of its assets
in common stocks of established non-United States companies
which in the opinion of the manager have potential for
growth of capital. However, there is no requirement that the
Fund invest exclusively in common stocks or other equity
securities and, if deemed advisable, the Fund may invest up
to 35% of its assets in bonds, notes and other debt
securities (including securities issued in the Eurocurrency
markets or obligations of the United States or foreign
governments and their political subdivisions). When the
manager 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 holdings (up to a maximum of 35% of its assets) in such
debt securities. In determining whether the Fund will be
invested for capital appreciation or for income or any
combination of both, the manager regularly analyzes a broad
range of international equity and fixed income markets in
order to assess the degree of risk and level of return that
can be expected from each market.
The Fund generally invests its assets broadly among
countries and normally has represented in the portfolio
business activities in not less than three different foreign
countries. The Fund normally invests at least 65% of its
assets in companies organized or governments located in any
area of the world other than the United States, such as the
Far East (e.g., Japan, Hong Kong, Singapore, Malaysia),
Western Europe (e.g., United Kingdom, Germany, The
Netherlands, France, Italy, Switzerland), Eastern Europe
(e.g., Hungary, Poland, The Czech Republic and the countries
of the former Soviet Union), Central and South America
(e.g., Mexico, Chile and Venezuela), Australia, Canada and
such other areas and countries as the manager 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. Concentration 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.
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.
Mid Cap Fund
Mid Cap Fund seeks long-term growth of capital. The Fund
attempts to achieve its investment objective by investing,
under normal market conditions, substantially all of its
assets in equity securities and at least 65% of its total
assets in equity securities of medium-sized companies.
Medium sized companies are those whose market capitalization
is within the market capitalization range of companies in
the S&P MidCap Index at the time of the Fund's investment.
The size of the companies in the Index changes with market
conditions and the composition of the Index. As of January
29, 1999 the largest market capitalization of a company in
the Index was $11.4 billion and the smallest market
capitalization was $0.24 billion. Companies whose
capitalization falls outside this range after purchase
continue to be considered medium-sized companies for
purposes of the 65% policy. Investing in medium-
capitalization stocks may involve greater risk than
investing in large capitalization stocks since they can be
subject to more abrupt or erratic movements. However, they
tend to involve less risk than stocks of small
capitalization companies. The Fund may invest up to 35% of
its assets in equity securities of companies with market
capitalizations less than $1 billion or more than $12
billion. See "Risk Factors--Small Capitalization
Companies."
The Fund will normally invest in all types of equity
securities, including common stocks, preferred stocks,
securities that are convertible into common or preferred
stocks, such as warrants and convertible bonds, and
depository receipts for those securities. The Fund may
maintain a portion of its assets, which will usually not
exceed 10%, in U.S. Government securities, money market
obligations, and in cash to provide for payment of the
Fund's expenses and to meet redemption requests. It is the
policy of the Fund to be as fully invested in equity
securities as practicable at all times.
Consistent with its investment objective and policies
described above, the Fund may invest up to 25% of its total
assets in foreign securities, including both direct
investments and investments made through depository
receipts. The Fund may also invest in real estate investment
trusts; purchase or sell securities on a when-issued or
delayed-delivery basis; enter into forward commitments to
purchase securities; lend portfolio securities; purchase and
sell put and call options; and enter into interest rate
futures contracts, stock index futures contracts and related
options.
Growth Fund
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.
The Fund also may hold a portion of its assets in high grade
short-term debt securities and high grade corporate or
government bonds in order to provide liquidity. The amount
of assets the Fund may hold for liquidity purposes is based
on market conditions and the need to meet redemption
requests. A description of the ratings of commercial paper
and bonds is contained in the Appendix. Short-term
investments may include repurchase agreements with banks or
broker-dealers.
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. The Fund may also
invest up to 20% of its total assets in securities of
foreign issuers and in investment companies. Since the Fund
may take substantial risks in seeking its goal of capital
appreciation, it is not suitable for investors unable or
unwilling to assume such risks.
Growth and Income Fund
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 convertible into common and preferred
stocks.
Convertible securities rank senior to common stocks in a
corporation's capital structure. They are consequently of
higher quality and entail less risk than the corporation's
common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which
the convertible security sells above its value as fixed
income security. The Fund may purchase convertible
securities rated Ba or lower by Moody's Investors Service,
Inc. ("Moody's") or BB or lower by Standard & Poor's Ratings
Group ("S&P") or in non-rated securities considered by the
manager to be of comparable quality. Although the Fund
selects these securities primarily on the basis of their
equity characteristics, investors should be aware that debt
securities rated in these categories are considered high
risk securities; the rating agencies consider them
speculative, and payment of interest and principal is not
considered well assured. To the extent that such convertible
securities are acquired by the Fund, there is a greater risk
as to the timely payment of the principal of, and timely
payment of interest or dividends on, such securities than in
the case of higher rated convertible securities.
Although the portfolio turnover rate will not be considered
a limiting factor, the Fund does not intend to engage in
trading directed at realizing short-term profits.
Nevertheless, changes in the portfolio will be made promptly
when determined to be advisable by reason of developments
not foreseen at the time of the investment decision, and
usually without reference to the length of time the security
has been held.
The Fund may hold a portion of its assets in high grade
short-term debt securities and high grade corporate or
government bonds in order to provide liquidity. The amount
of assets the Fund may hold for liquidity purposes is based
on market conditions and the need to meet redemption
requests. Short-term investments may include repurchase
agreements with banks or broker-dealers. The Fund may also
invest up to 20% of its total assets in securities of
foreign issuers and in investment companies. The Fund may
engage in portfolio management strategies and techniques
involving options, futures contracts and options on futures.
Government Fund
Government 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. Securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities include:
(1) U.S. Treasury obligations, which differ in their
interest rates, maturities and times of issuance: U.S.
Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury
bonds (generally maturities of greater than ten years),
including the principal components or the interest
components issued by the U.S. Government under the Separate
Trading of Registered Interest and Principal of Securities
program (i.e. ''STRIPS''), all of which are backed by the
full faith and credit of the United States; and (2)
obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, including government guaranteed
mortgage-related securities, some of which are backed by the
full faith and credit of the U.S. Treasury, some of which
are supported by the right of the issuer to borrow from the
U.S. Government and some of which are backed only by the
credit of the issuer itself.
The Fund may enter into repurchase agreements with domestic
banks or broker-dealers deemed creditworthy by the manager
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.
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.
The Fund may engage in transactions involving obligations
issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U.S.
Government (such as Government National Mortgage Association
(''GNMA'') Certificates), (b) the right of the issuer to
borrow an amount limited to a specific line of credit from
the U.S. Government, (c) discretionary authority of the U.S.
Government agency or instrumentality, or (d) the credit of
the instrumentality. Agencies and instrumentalities include,
but are not limited to: Federal Land Banks, Farmers Home
Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks and
Federal National Mortgage Association (''FNMA'').
While the Fund has no policy limiting the maturities of the
debt securities in which it may invest, the manager seeks to
moderate market risk by generally maintaining a portfolio
duration within a range of approximately four to six years.
Duration is a measure of the expected life of a debt
security that was developed as a more precise alternative to
the concept of ''term to maturity.'' Duration incorporates a
debt security's yield, coupon interest payments, final
maturity and call features into one measure. 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 exposure of a
security. In these and other similar situations, the manager
will use more sophisticated analytical techniques that
incorporate the economic life of a security into the
determination of its interest rate exposure. The duration is
likely to vary from time to time as the manager pursues its
strategy of striving to maintain an active balance between
seeking to maximize income and endeavoring to maintain the
value of the Fund's capital. Thus, the objective of
providing high current return consistent with preservation
of capital to shareholders is tempered by seeking to avoid
undue market risk and thus provide reasonable total return
as well as high distributed return. There is, of course, no
assurance that the manager will be successful in achieving
such results for the Fund.
The Fund generally purchases debt securities at a premium
over the principal or face value in order to obtain higher
current income. The amount of any premium declines during
the term of the security to zero at maturity. Such decline
generally is reflected in the market price of the security
and thus in the Fund's net asset value. Any such decline is
realized for accounting purposes as a capital loss at
maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or
increased by changes in the value of the security due to
changes in interest rate levels.
The principal reason for selling call or put options is to
obtain, through the receipt of premiums, a greater return
than would be realized on the underlying securities alone.
By selling options, the Fund reduces its potential for
capital appreciation on debt securities if interest rates
decline. Thus, if market prices of debt securities increase,
the Fund 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. The purchase and sale of options may result in a high
portfolio turnover rate.
Municipal Bond Fund
Municipal Bond Fund seeks as high a level of current
interest income exempt from federal income tax as is
consistent with the preservation of capital.
The Fund seeks to achieve its objective by investing in a
diversified portfolio of obligations issued by or on behalf
of states, territories or possessions of the United States
and the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest
from which, in the opinion of bond counsel for the issuer,
is exempt from federal income tax (''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, S&P or
another nationally recognized statistical rating
organization ("NRSRO"). 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 within the highest three
categories by an NRSRO, i.e., rated ''A'' or higher. The
Fund may invest up to 25% of its total assets in Municipal
Bonds rated in the fourth highest category by an NRSRO (e.g.
those rated ''Baa'' by Moody's or ''BBB'' by S&P) or any
non-rated Municipal Bonds having characteristics similar to
Municipal Bonds so rated. Municipal Bonds rated in the
fourth highest category are still considered "investment
grade," but may have speculative characteristics so that
changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade
Municipal Bonds. The market prices of Municipal Bonds
generally fluctuate with changes in interest rates so that
the value of investments in such securities can be expected
to decrease as interest rates rise and increase as interest
rates fall. Because investment in lower rated securities
involves greater investment risks, achievement of the Fund's
goal may be more dependent on the manager's credit analysis
than would be the case if the Fund invested only in higher
rated securities. Non-rated Municipal Bonds are not
necessarily of lower quality than rated Municipal Bonds, but
the market for rated Municipal Bonds is often broader. The
Fund may seek to hedge against changes in interest rates
through transactions in listed futures contracts related to
U.S. Government securities, Municipal Bonds or to an index
of Municipal Bonds, and options on such contracts.
"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.
On a temporary basis, due to market conditions, the Fund may
invest in Municipal Notes. These securities 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
requisite ratings, as described above. 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 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 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.
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 interest and
principal on Municipal Bonds.
The Fund may invest up to 10% of its net assets in illiquid
securities. These securities may include Municipal Bonds
issued in limited offerings under which the Fund represents
that it is purchasing for investment purposes only
("restricted securities"), repurchase agreements maturing in
more than seven days, and other securities subject to legal
or contractual restrictions on resale. Municipal Bonds that
are restricted securities generally may be resold only in a
privately negotiated transaction or to one or more other
institutional investors. Restricted securities generally
must be sold 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. Such limitations 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.
Variations in the quality and maturity of the Fund's
portfolio investments can be expected to affect the Fund's
yield and the degree of market and financial risk to which
the Fund is subject. Generally, Municipal Bonds with longer
maturities tend to produce higher yields and are subject to
greater market fluctuations as a result of changes in
interest rates than Municipal Bonds with shorter maturities
and lower yields. The market value of Municipal Bonds
generally rises when interest rates decline and falls when
interest rates rise. It is also generally the case that
lower rated Municipal Bonds provide a higher yield than
higher rated Municipal Bonds of similar maturity, but are
subject to greater 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.
The Fund considers investments in Municipal Bonds not to be
subject to any concentration policy and may invest a
relatively high percentage of its assets in Municipal Bonds
issued by entities having similar characteristics. The
issuers may be located in the same geographic area or may
pay their interest obligations from revenue of similar
projects such as hospitals, utility systems and housing
finance agencies. This may make the Fund's investments more
susceptible to similar economic, political or regulatory
occurrences. As the similarity in issuers increases, the
potential for fluctuation in the Fund's per share net asset
value also increases. The Fund may invest more than 25% of
its total assets in industrial development revenue bonds,
but it does not intend to invest more than 25% of its assets
in industrial development revenue bonds issued for companies
in the same industry or state. Sizeable investments in such
obligations could involve an increased risk to the Fund
should any of such issuers of any such related projects or
facilities experience financial difficulties.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on Municipal
Bonds. It may be expected that similar proposals may be
introduced in the future. If any such proposals were to be
enacted, the ability of the Fund to pay ''exempt-interest''
dividends may be adversely affected and the Fund would re-
evaluate its investment objective and policies and consider
changes in its structure.
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 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. 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.
INVESTMENT PRACTICES
This section contains a discussion of various of the Funds'
investment practices. The Funds may engage in these and any
other practices not prohibited by their investment
restrictions. For further information regarding the risks
associated with these practices, see "Risk Factors" below.
EQUITY SECURITIES
Common Stocks (All Funds except Government Fund and
Municipal Bond Fund). Each Fund may purchase common stocks.
Common stocks are shares of a corporation or other entity
that entitle the holder to a pro rata share of the profits
of the corporation, if any, without preference over any
other shareholder or class of shareholders, including
holders of the entity's preferred stock and other senior
equity. Common stock usually carries with it the right to
vote and frequently an exclusive right to do so.
Preferred Stocks and Convertible Securities (All Funds
except Government Fund and Municipal Bond Fund). Each Fund
may invest in convertible debt and preferred stocks.
Convertible debt securities and preferred stock entitle the
holder to acquire the issuer's stock by exchange or purchase
for a predetermined rate. Convertible securities are
subject both to the credit and interest rate risks
associated with fixed income securities and to the stock
market risk associated with equity securities.
Warrants (All Funds except Government Fund and Municipal
Bond Fund). Each Fund may purchase warrants. Warrants
acquired by a Fund entitle it to buy common stock from the
issuer at a specified price and time. Warrants are subject
to the same market risks as stocks, but may be more volatile
in price. A Fund's investment in warrants will not entitle
it to receive dividends or exercise voting rights and will
become worthless if the warrants cannot be profitably
exercised before the expiration dates.
REITs (All Fund except Government Fund and Municipal Bond
Fund). Each Fund may invest in shares of real estate
investment trusts (REITs), which are pooled investment
vehicles that invest in real estate or real estate loans or
interests. Investing in REITs involves risks similar to
those associated with investing in equity securities of
small capitalization companies. REITs are dependent upon
management skills, are not diversified, and are subject to
risks of project financing, default by borrowers, self-
liquidation, and the possibility of failing to qualify for
the exemption from taxation on distributed amounts under the
Internal Revenue Code of 1986, as amended (the "Code").
Illiquid and Restricted Securities (All Funds except
Government Fund and Municipal Bond Fund). The Emerging
Growth Fund and the International Equity Fund may each
invest up to 15% of their net assets , the Mid Cap Fund may
invest up to 10% of its net 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 in restricted securities and other illiquid assets.
As used herein, restricted securities are those that have
been sold in the United States without registration under
the Securities Act of 1933 and are thus subject to
restrictions on resale. Excluded from the limitation,
however, are any restricted securities which are eligible
for resale pursuant to Rule 144A under the Securities Act of
1933 and which have been determined to be liquid by the
Trustees or by the manager pursuant to board-approved
guidelines. The determination of liquidity is based on the
volume of reported trading in the institutional secondary
market for each security. This investment practice could
have the effect of increasing the level of illiquidity in
each Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these
restricted securities. These difficulties and delays could
result in a Fund's inability to realize a favorable price
upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time
desired by the Fund impossible. Since market quotations are
not readily available for restricted securities, such
securities will be valued by a method that the Trustees
believe accurately reflects fair value.
Notwithstanding the foregoing, 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.
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 and the Mid Cap
Fund may invest up to 25% of the value of its total assets
in securities of foreign governments and companies of
developed and emerging markets countries.
Each Fund may also purchase foreign securities in the form
of American Depositary Receipts (''ADRs'') and European
Depositary Receipts (''EDRs'') or other securities
representing underlying shares of foreign companies. ADRs
are publicly traded on exchanges or over-the-counter in the
United States and are issued through ''sponsored'' or
''unsponsored'' arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to
pay some or all of the depositary's transaction fees,
whereas under an unsponsored arrangement, the foreign issuer
assumes no obligation and the depositary's transaction fees
are paid by the ADR holders. In addition, less information
is available in the United States about an unsponsored ADR
than about a sponsored ADR, and the financial information
about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. Each Fund may invest in
ADRs through both sponsored and unsponsored arrangements.
The Emerging Growth Fund, the International Equity Fund, the
Mid Cap Fund, the Growth Fund and the Growth and Income Fund
may invest in the securities of developing countries,
commonly known as "emerging markets" countries. See "Risk
Factors Securities of Developing /Emerging Market
Countries". See "Risk Factors - Securities of
Developing/Emerging Market Countries".
FIXED INCOME SECURITIES
Corporate Debt Obligations (All Funds). Each Fund may
invest in corporate debt obligations and zero coupon
securities issued by financial institutions and
corporations. Corporate debt obligations are subject to the
risk of an issuer's inability to meet principal and interest
payments on the obligations and may also be subject to price
volatility due to such factors as market interest rates,
market perception of the creditworthiness of the issuer and
general market liquidity. Zero coupon securities are
securities sold at a discount to par value and on which
interest payments are not made during the life of the
security.
U.S. Government Securities (All Funds). The U.S.
Government securities in which the Funds may invest include:
bills, certificates of indebtedness, and notes and bonds
issued by the U.S. Treasury or by agencies or
instrumentalities of the U.S. Government. Some U.S.
Government securities, such as U.S. Treasury bills and
bonds, are supported by the full faith and credit of the
U.S. Treasury; others are supported by the right of the
issuer to borrow from the U.S. Treasury; others are
supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still
others are supported only by the credit of the
instrumentality.
Mortgage Related Securities (Government Fund). 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. Mortgage loans made by banks, savings and
loan institutions, and other lenders are often assembled
into pools, which are issued or guaranteed by an agency or
instrumentality of the U.S. Government, though not
necessarily by the U.S. Government itself. Interests in such
pools are collectively referred to as ''mortgage-related
securities.''
Mortgage-related securities are characterized by monthly
payments to the holder, reflecting the monthly payments made
by the borrowers who received the underlying mortgage loans.
The payments to the securityholders (such as the Fund), like
the payments on the underlying loans, represent both
principal and interest. Although the underlying mortgage
loans are for specified periods of time, such as 20 or 30
years, the borrowers can, and typically do, pay them off
sooner. Thus, the securityholders frequently receive
prepayments of principal, in addition to the principal which
is part of the regular monthly payment. A borrower is more
likely to prepay a mortgage which bears a relatively high
rate of interest. This means that in times of declining
interest rates, some of the Fund's higher yielding
securities might be converted to cash, and the Fund will be
forced to accept lower interest rates when that cash is used
to purchase additional securities. The increased likelihood
of prepayment when interest rates decline also limits market
price appreciation of mortgage-related securities. If the
Fund buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a loss to
the Fund of up to the amount of the premium paid since only
timely payment of principal and interest is guaranteed.
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.
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. 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.
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.
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 GNMA 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.
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.
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.
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.
Forward Commitments (Government Fund). The Fund may
purchase or sell U.S. Government securities on a ''when-
issued'' or ''delayed delivery'' basis (''Forward
Commitments''). These transactions occur when securities are
purchased or sold by the Fund with payment and delivery
taking place in the future, frequently a month or more after
such transactions. The price is fixed on the date of the
commitment, and the seller continues to accrue interest on
the securities covered by the Forward Commitment until
delivery and payment take place. At the time of settlement,
the market value of the securities may be more or less than
the purchase or sale price.
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 Investment Company Act of 1940, as
amended (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.
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 Commitment with the Fund's
custodian in an aggregate amount equal to the amount of its
commitment as long as the obligation to purchase or sell
continues.
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 exceeding one year and in
either case upon no more than seven days' notice. The
interest rates are adjustable at intervals ranging from
daily (''floating rate'') to up to one year to some
prevailing market rate for similar investments, such
adjustment formula being calculated to maintain the market
value of the VRDN at approximately the par value of the VRDN
upon the adjustment date. The adjustments are typically
based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.
The Fund may also invest in VRDNs in the form of
participation interests (''Participating VRDNs'') in
variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank (''institution'').
Participating VRDNs provide the Fund with a specified
undivided interest (up to 100%) in the underlying obligation
and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDNs
from the institution upon a specified number of days'
notice, not to exceed seven days. The Fund has an undivided
interest in the underlying obligation and thus participates
on the same basis as the institution in such obligation
except that the institution typically retains fees out of
the interest paid on the obligation for servicing the
obligation and issuing the repurchase commitment.
Stand-by Commitments (Municipal Fund). The Fund may
acquire stand-by commitments with respect to Municipal Bonds
held by it. Under a stand-by commitment, a bank or dealer
from which Municipal Bonds are acquired agrees to purchase
from the Fund, at the Fund's option, the Municipal Bonds at
a specified price. Such commitments are sometimes called
''liquidity puts.''
The amount payable to the Fund upon its exercise of a stand-
by commitment is normally (i) the Fund's acquisition cost of
the Municipal Bonds (excluding any accrued interest which
the Fund paid on their acquisition), less any amortized
market premium or plus any amortized market or original
issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities
since the last interest payment date during that period.
Stand-by commitments generally can be acquired when the
remaining maturity of the underlying Municipal Bonds is not
greater than one year, and are exercisable by the Fund at
any time before the maturity of such obligations.
The Fund's right to exercise stand-by commitments is
unconditional and unqualified. A stand-by commitment
generally is not transferable by the Fund, although the Fund
can sell the underlying Municipal Bonds to a third party at
any time.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Fund
may pay for a stand-by commitment either separately in cash
or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same
securities). The total amount paid in either manner for
outstanding stand-by commitments held in the Fund will not
exceed one-half of one percent of the value of the Fund's
total 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
the manager's opinion, present minimal credit risks.
The Fund would acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes. The
acquisition of a stand-by commitment would not affect the
valuation of the underlying Municipal Bonds which would
continue to be valued in accordance with the method of
valuation employed by the Fund. Stand-by commitments
acquired by the Fund would be valued at zero in determining
net asset value. Where the Fund paid any consideration
directly or indirectly for a stand-by commitment, the cost
would be reflected as unrealized depreciation for the period
during which the commitment was held by the Fund.
Delayed Delivery and When-Issued Securities (Municipal
Fund). Municipal Bonds may at times be purchased or sold
on a ''delayed delivery'' or a ''when issued'' basis. These
transactions arise when securities are purchased or sold by
the Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The
payment obligation and the interest rate are each fixed at
the time the Fund enters into the commitment. The Fund will
only make commitments to purchase such securities with the
intention of actually acquiring the securities, but the Fund
may sell these securities prior to settlement date if it is
deemed advisable. Purchasing Municipal Bonds on a when-
issued basis involves the risk that the yields available in
the market when the delivery takes place may actually be
higher than those obtained in the transaction itself; if
yields so increase, the value of the when-issued obligation
will generally decrease. The Fund maintains a separate
account at its custodian bank consisting of 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.
Short-Term Investments (All Funds). In certain
circumstances the Funds may invest without limitation in all
types of short-term money market instruments, including U.S.
Government securities; certificates of deposit, time
deposits and bankers' acceptances issued by domestic banks
(including their branches located outside the United States
and subsidiaries located in Canada), domestic branches of
foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase
agreements. To the extent a Fund is investing in short-term
investments as a temporary defensive posture, the applicable
Fund's investment objective may not be achieved.
Commercial Paper (All Funds). 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) (10% in the case of the Mid Cap
Fund) of the value of the Fund's total assets would be
invested in such notes and other illiquid securities.
Commercial Bank Obligations (International Equity Fund).
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.
DERIVATIVE CONTRACTS
Options, Futures Contracts and Related Options (All Funds)
Selling Call and Put Options (Emerging Growth Fund,
International Equity Fund, Mid Cap Fund, Growth Fund, Growth
and Income Fund and Government Fund). 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. 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. Emerging
Growth Fund, International Equity Fund, Growth Fund and
Growth and Income Fund sell call options only on a covered
basis. 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, Government Fund may
sell options on U.S. Government securities or forward
commitments of such securities. An option is for
cross-hedging purposes (relative to Government Fund only) to
hedge against a security which the Fund owns or has the
right to acquire. In such circumstances, 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 manager wishes to purchase the underlying
security for the Fund's portfolio at a price lower than the
current market price of the security.
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.
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 (Emerging Growth Fund,
International Equity Fund, Mid Cap Fund, Growth Fund, Growth
and Income Fund and Government Fund). A Fund may purchase
call options to protect (e.g., hedge) against anticipated
increases in the prices of securities it wishes to acquire.
Alternatively, call options may be purchased for their
leverage potential. Since the premium paid for a call
option is typically a small fraction of the price of the
underlying security, a given amount of funds will purchase
call options covering a much larger quantity of such
security than could be purchased directly. By purchasing
call options, a Fund can benefit from any significant
increase in the price of the underlying security to a
greater extent than had it invested the same amount in the
security directly. However, because of the very high
volatility of option premiums, a Fund could bear a
significant risk of losing the entire premium if the price
of the underlying security did not rise sufficiently, or if
it did not do so before the option expired. Conversely, put
options may be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific
portfolio securities or of a Fund's assets generally.
Alternatively, put options may be purchased for capital
appreciation in anticipation of a price decline in the
underlying security and a corresponding increase in the
value of the put option. The purchase of put options for
capital appreciation involves the same significant risk of
loss as described above for call options. In any case, the
purchase of options for capital appreciation would increase
the Fund's volatility by increasing the impact of changes in
the market price of the underlying securities on the Fund's
net asset value. The Funds may purchase either listed or
over-the-counter options.
Options on Stock Indexes (Emerging Growth Fund,
International Equity Fund, Mid Cap Fund, Growth Fund and
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 ( International Equity Fund and Mid
Cap 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 manager
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.
The value of a foreign currency option is dependent upon the
value of the underlying foreign currency relative to the
U.S. dollar. As a result, the price of the option position
may vary with changes in the value of either or both
currencies and has no relationship to the investment merits
of a foreign security. Because foreign currency
transactions occurring in the interbank market (conducted
directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger
amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by
having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than
for round lots.
There is no systematic reporting of last sale information
for foreign currencies and there is no regulatory
requirement that quotations available through dealers or
other market sources be firm or revised on a timely basis.
Quotation information available is generally representative
of very large transactions in the interbank market and thus
may not reflect relatively smaller transactions (i.e., less
than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the
U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and
rate movements may take place in the underlying markets that
cannot be reflected in the options markets.
Futures Contracts (All Funds). Each Fund 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
Funds are exempt from registration as a "commodity pool".
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.
International Equity Fund may enter into futures contracts
for non-hedging purposes, subject to applicable law.
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.
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 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 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 manager.
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. International
Equity Fund may also enter into futures transactions for
non-hedging purposes, subject to applicable law.
A Fund pays commissions on futures contracts and options
transactions.
Options on Futures Contracts (All Funds). A Fund may also
purchase and sell options on futures contracts which are
traded on an Exchange. An option on a futures contract
gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time
during the option period. As a seller of an option on a
futures contract, a Fund is subject to initial margin and
maintenance requirements similar to those applicable to
futures contracts. In addition, net option premiums
received by a Fund are required to be included as initial
margin deposits. When an option on a futures contract is
exercised, delivery of the futures position is accompanied
by cash representing the difference between the current
market price of the futures contract and the exercise price
of the option. A Fund may purchase put options on futures
contracts in lieu of, and for the same purposes as, the sale
of a futures contract. The purchase of call options on
futures contracts in intended to serve the same purpose as
the actual purchase of the futures contract.
Forward Currency Contracts and Options on Currency
(International Equity Fund and Mid Cap 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 (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
manager 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 (All Funds).
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.
OTHER PRACTICES
Repurchase Agreements (All Funds). 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.
For the purpose of investing in repurchase agreements, the
manager may aggregate the cash that certain funds advised or
subadvised by the manager 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. The manager believes that
the joint account produces efficiencies and economies of
scale that may contribute to reduced transaction costs,
higher returns, higher quality investments and greater
diversity of investments for a Fund than would be available
to a Fund investing separately. The manner in which the
joint account is managed is subject to conditions set forth
in 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.
Reverse Repurchase Agreements (International Equity Fund and
Mid Cap Fund). International Equity Fund and Mid Cap Fund
may invest in reverse repurchase agreements. International
Equity Fund does not currently intend to commit more than 5%
of its net assets to reverse repurchase agreements. The
Funds 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 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 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 manager
believes it will be advantageous to the 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.
Short Sales Against the Box (Emerging Growth Fund,
International Equity Fund, Mid Cap 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 conversion or exchange of other securities
it owns. A short sale is ''against the box'' to the extent
that the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold
short. In a short sale, the Fund does not immediately
deliver the securities sold and does not receive the
proceeds from the sale. The Fund is said to have a short
position in the securities sold until it delivers the
securities sold, at which time it receives the proceeds of
the sale. The Fund may not make short sales or maintain a
short position if to do so would cause more than 25% of its
total assets, taken at market value, to be held as
collateral for such sales.
To secure its obligation to deliver the securities sold
short, the Fund will deposit in escrow in a separate account
with its custodian an equal amount of the securities sold
short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by
purchasing and delivering an equal amount of the securities
sold short, rather than by delivering securities already
held by the Fund, because the Fund may want to continue to
receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold
short. However, the Fund will not purchase and deliver new
securities to satisfy its short order if such purchase and
sale would cause the Fund to derive more than 30% of its
gross income from the sale of securities held for less than
three months.
Leverage (International Equity Fund). The Fund may borrow
from banks, on a secured or unsecured basis, up to 25% of
the value of its assets. If the Fund borrows and uses the
proceeds to make additional investments, income and
appreciation from such investments will improve its
performance if they exceed the associated borrowing costs
but impair its performance if they are less than such
borrowing costs. This speculative factor is known as
''leverage.'' Leverage creates an opportunity for increased
returns to shareholders of the Fund but, at the same time,
creates special risk considerations. For example, leverage
may exaggerate changes in the net asset value of the Fund's
shares and in the Fund's yield. Although the principal or
stated value of such borrowings will be fixed, the Fund's
assets may change in value during the time the borrowing is
outstanding. Leverage will create interest or dividend
expenses for the Fund which can exceed the income from the
assets retained. To the extent the income or other gain
derived from securities purchased with borrowed funds exceed
the interest or dividends the Fund will have to pay in
respect thereof, the Fund's net income or other gain will be
greater than if leverage had not been used. Conversely, if
the income or other gain from the incremental assets is not
sufficient to cover the cost of leverage, the net income or
other gain of the Fund will be less than if leverage had not
been used. If the amount of income from the incremental
securities is insufficient to cover the cost of borrowing,
securities might have to be liquidated to obtain required
funds. Depending on market or other conditions, such
liquidations could be disadvantageous to the Fund.
Loans of Portfolio Securities (All Funds). 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.
RISK FACTORS
General. Investors should realize that risk of loss is
inherent in the ownership of any securities and that each
Fund's net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions.
Fixed Income Securities. Investments in fixed income
securities may subject the Funds to risks, including the
following:
Interest Rate Risk. When interest rates decline, the
market value of fixed income securities tends to increase.
Conversely, when interest rates increase, the market value
of fixed income securities tends to decline. The volatility
of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income
securities are subject to the risk that the issuer of the
security could default on its obligations, causing a Fund to
sustain losses on such investments. A default could impact
both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities
may be subject to both call risk and extension risk. Call
risk exists when the issuer may exercise its right to pay
principal on an obligation earlier than scheduled, which
would cause cash flows to be returned earlier than expected.
This typically results when interest rates have declined and
a Fund will suffer from having to reinvest in lower yielding
securities. Extension risk exists when the issuer may
exercise its right to pay principal on an obligation later
than scheduled, which would cause cash flows to be returned
later than expected. This typically results when interest
rates have increased, and a Fund will suffer from the
inability to invest in higher yield securities.
Below Investment Grade Fixed Income Securities. Securities
which are rated BBB by S&P or Baa by Moody's are generally
regarded as having adequate capacity to pay interest and
repay principal, but may have some speculative
characteristics. Securities rated below Baa by Moody's or
BBB by S&P may have speculative characteristics, including
the possibility of default or bankruptcy of the issuers of
such securities, market price volatility based upon interest
rate sensitivity, questionable creditworthiness and relative
liquidity of the secondary trading market. Because high
yield bonds have been found to be more sensitive to adverse
economic changes or individual corporate developments and
less sensitive to interest rate changes than higher-rated
investments, an economic downturn could disrupt the market
for high yield bonds and adversely affect the value of
outstanding bonds and the ability of issuers to repay
principal and interest. In addition, in a declining
interest rate market, issuers of high yield bonds may
exercise redemption or call provisions, which may force a
Fund, to the extent it owns such securities, to replace
those securities with lower yielding securities. This could
result in a decreased return.
Small Capitalization Companies. Small companies may (i) be
subject to more volatile market movements than securities of
larger, more established companies; (ii) have limited
product lines, markets or financial resources; and (iii)
depend upon a limited or less experienced management group.
The securities of small companies may be traded only on the
over-the-counter market or on a regional securities exchange
and may not be traded daily or in the volume typical of
trading on a national securities exchange. Disposition by
the Fund of small company securities in order to meet
redemptions may require the Fund to sell these securities at
a discount from market prices, over a longer period of time
or during periods when disposition is not desirable.
Foreign Securities. Investments in securities of foreign
issuers involve certain risks not ordinarily associated with
investments in securities of domestic issuers. Such risks
include fluctuations in foreign exchange rates, future
political and economic developments, and the possible
imposition of exchange controls or other foreign
governmental laws or restrictions. Since each Fund will
invest heavily in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign
currency exchange rates will, to the extent the Fund does
not adequately hedge against such fluctuations, affect the
value of securities in its portfolio and the unrealized
appreciation or depreciation of investments so far as U.S.
investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation
of assets, confiscatory taxation, political or social
instability or diplomatic developments which could adversely
affect investments in those countries.
With respect to certain foreign countries, there is the
possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic
developments which could affect investment in those
countries. There may be less publicly available information
about a foreign security than about a security issued by a
U.S. company, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities.
In addition, certain foreign investments made by the Fund
may be subject to foreign withholding taxes, which would
reduce the Fund's total return on such investments and the
amounts available for distributions by the Fund to its
shareholders. See ''Dividends, Distributions and Taxes.''
Foreign financial markets, while growing in volume, have,
for the most part, substantially less volume than United
States markets, and securities of many foreign companies are
less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also
have different clearance and settlement procedures, and in
certain markets there have been times when settlements have
been unable to keep pace with the volume of securities
transactions making it difficult to conduct such
transactions. Delays in settlement could result in temporary
periods when assets of the Fund are not invested and no
return is earned thereon. The inability of each Fund to make
intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the
Fund due to subsequent declines in value of the portfolio
security or, if the Fund has entered into a contract to sell
the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign
securities, including custodial costs and foreign brokerage
commissions, are generally higher than with transactions in
United States securities. In addition, each Fund will incur
cost in connection with conversions between various
currencies. There is generally less government supervision
and regulation of exchanges, financial institutions and
issuers in foreign countries than there are in the United
States. These risks may be intensified in the case of
investments in developing or emerging markets. In many
developing markets, there is less government supervision and
regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United
States. The foreign securities markets of many of the
countries in which the Fund may invest may also be smaller,
less liquid, and subject to greater price volatility than
those in the United States. 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.
Currency Risks. The U.S. dollar value of securities
denominated in a foreign currency will vary with changes in
currency exchange rates, which can be volatile.
Accordingly, changes in the value of the currency in which a
Fund's investments are denominated relative to the U.S.
dollar will affect the Fund's net asset value. Exchange
rates are generally affected by the forces of supply and
demand in the international currency markets, the relative
merits of investing in different countries and the
intervention or failure to intervene of U.S. or foreign
governments and central banks. However, currency exchange
rates may fluctuate based on factors intrinsic to a
country's economy. Some emerging market countries also may
have managed currencies, which are not free floating against
the U.S. dollar. In addition, emerging markets are subject
to the risk of restrictions upon the free conversion of
their currencies into other currencies. Any devaluations
relative to the U.S. dollar in the currencies in which a
Fund's securities are quoted would reduce the Fund's net
asset value per share.
Special Risks of Countries in the Asia Pacific Region.
Certain of the risks associated with international
investments are heightened for investments in these
countries. For example, some of the currencies of these
countries have experienced devaluations relative to the U.S.
dollar, and adjustments have been made periodically in
certain of such currencies. Certain countries, such as
Indonesia, face serious exchange constraints.
Jurisdictional disputes also exist, for example, between
South Korea and North Korea. In addition, Hong Kong
reverted to Chinese administration on July 1, 1997. The
long-term effects of this reversion are not known at this
time.
Securities of Developing/Emerging Markets Countries. A
developing or emerging markets country generally is
considered to be a country that is in the initial stages of
its industrialization cycle. Investing in the equity markets
of developing countries involves exposure to economic
structures that are generally less diverse and mature, and
to political systems that can be expected to have less
stability, than those of developed countries. Historical
experience indicates that the markets of developing
countries have been more volatile than the markets of the
more mature economies of developed countries; however, such
markets often have provided higher rates of return to
investors.
One or more of the risks discussed above could affect
adversely the economy of a developing market or a Fund's
investments in such a market. In Eastern Europe, for
example, upon the accession to power of Communist regimes in
the past, the governments of a number of Eastern European
countries expropriated a large amount of property. The
claims of many property owners against those of governments
may remain unsettled. There can be no assurance that any
investments that a Fund might make in such emerging markets
would not be expropriated, nationalized or otherwise
confiscated at some time in the future. In such an event,
the Fund could lose its entire investment in the market
involved. Moreover, changes in the leadership or policies
of such markets could halt the expansion or reverse the
liberalization of foreign investment policies now occurring
in certain of these markets and adversely affect existing
investment opportunities.
Many of a Fund's investments in the securities of emerging
markets may be unrated or rated below investment grade.
Securities rated below investment grade (and comparable
unrated securities) are the equivalent of high yield, high
risk bonds, commonly known as "junk bonds." Such securities
are regarded as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve
major risk exposure to adverse business, financial,
economic, or political conditions.
Derivative Instruments. In accordance with its investment
policies, each Fund may invest in certain derivative
instruments which are securities or contracts that provide
for payments based on or "derived" from the performance of
an underlying asset, index or other economic benchmark.
Essentially, a derivative instrument is a financial
arrangement or a contract between two parties (and not a
true security like a stock or a bond). Transactions in
derivative instruments can be, but are not necessarily,
riskier than investments in conventional stocks, bonds and
money market instruments. A derivative instrument is more
accurately viewed as a way of reallocating risk among
different parties or substituting one type of risk for
another. Every investment by a Fund, including an
investment in conventional securities, reflects an implicit
prediction about future changes in the value of that
investment. Every Fund investment also involves a risk that
the portfolio manager's expectations will be wrong.
Transactions in derivative instruments often enable a Fund
to take investment positions that more precisely reflect the
portfolio manager's expectations concerning the future
performance of the various investments available to the
Fund. Derivative instruments can be a legitimate and often
cost-effective method of accomplishing the same investment
goals as could be achieved through other investment in
conventional securities.
Derivative contracts include options, futures contracts,
forward contracts, forward commitment and when-issued
securities transactions, forward foreign currency exchange
contracts and interest rate, mortgage and currency swaps.
The following are the principal risks associated with
derivative instruments:
Market risk: The instrument will decline in value or
that an alternative investment would have appreciated more,
but this is no different from the risk of investing in
conventional securities.
Leverage and associated price volatility: Leverage
causes increased volatility in the price and magnifies the
impact of adverse market changes, but this risk may be
consistent with the investment objective of even a
conservative Fund in order to achieve an average portfolio
volatility that is within the expected range for that type
of Fund.
Credit risk: The issuer of the instrument may default
on its obligation to pay interest and principal.
Liquidity and valuation risk: Many derivative
instruments are traded in institutional markets rather than
on an exchange. Nevertheless, many derivative instruments
are actively traded and can be priced with as much accuracy
as conventional securities. Derivative instruments that are
custom designed to meet the specialized investment needs of
a relatively narrow group of institutional investors such as
the Funds are not readily marketable and are subject to a
Fund's restrictions on illiquid investments.
Correlation risk: There may be imperfect correlation
between the price of the derivative and the underlying
asset. For example, there may be price disparities between
the trading markets for the derivative contract and the
underlying asset.
Each derivative instrument purchased for a Fund's portfolio
is reviewed and analyzed by the Fund's portfolio manager to
assess the risk and reward of each such instrument in
relation the Fund's portfolio investment strategy. The
decision to invest in derivative instruments or conventional
securities is made by measuring the respective instrument's
ability to provide value to the Fund and its shareholders.
Special Risks of Using Futures Contracts. The prices of
Futures Contracts are volatile and are influenced by, among
other things, actual and anticipated changes in interest
rates, which in turn are affected by fiscal and monetary
policies and national and international political and
economic events.
At best, the correlation between changes in prices of
Futures Contracts and of the securities or currencies being
hedged can be only approximate. The degree of imperfection
of correlation depends upon circumstances such as:
variations in speculative market demand for Futures and for
debt securities or currencies, including technical
influences in Futures trading; and differences between the
financial instruments being hedged and the instruments
underlying the standard Futures Contracts available for
trading, with respect to interest rate levels, maturities,
and creditworthiness of issuers. A decision of whether,
when, and how to hedge involves skill and judgment, and even
a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or interest rate
trends.
Because of the low margin deposits required, Futures trading
involves an extremely high degree of leverage. As a result,
a relatively small price movement in a Futures Contract may
result in immediate and substantial loss, as well as gain,
to the investor. For example, if at the time of purchase,
10% of the value of the Futures Contract is deposited as
margin, a subsequent 10% decrease in the value of the
Futures Contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if
the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin
deposit, if the Futures Contract were closed out. Thus, a
purchase or sale of a Futures Contract may result in losses
in excess of the amount invested in the Futures Contract. A
Fund, however, would presumably have sustained comparable
losses if, instead of the Futures Contract, it had invested
in the underlying financial instrument and sold it after the
decline. Where a Fund enters into Futures transactions for
non-hedging purposes, it will be subject to greater risks
and could sustain losses which are not offset by gains on
other Fund assets.
Furthermore, in the case of a Futures Contract purchase, in
order to be certain that each Fund has sufficient assets to
satisfy its obligations under a Futures Contract, the Fund
segregates and commits to back the Futures Contract an
amount of cash and liquid securities equal in value to the
current value of the underlying instrument less the margin
deposit.
Most U.S. Futures exchanges limit the amount of fluctuation
permitted in Futures Contract prices during a single trading
day. The daily limit establishes the maximum amount that
the price of a Futures Contract may vary either up or down
from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a
particular type of Futures Contract, no trades may be made
on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day
and therefore does not limit potential losses, because the
limit may prevent the liquidation of unfavorable positions.
Futures Contract prices have occasionally moved 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.
Economic and Monetary Union (EMU). EMU occurred on January
1, 1999, when 11 European countries adopted a single
currency - the euro. For participating countries, EMU means
sharing a single currency and single official interest rate
and adhering to agreed upon limits on government borrowing.
Budgetary decisions remain in the hands of each
participating country, but are subject to each country's
commitment to avoid "excessive deficits" and other more
specific budgetary criteria. A European Central Bank is
responsible for setting the official interest rate to
maintain price stability within the euro zone. EMU is
driven by the expectation of a number of economic benefits,
including lower transaction costs, reduced exchange risk,
greater competition, and a broadening and deepening of
European financial markets. However, there are a number of
significant risks associated with EMU. Monetary and
economic union on this scale has never been attempted
before. There is a significant degree of uncertainty as to
whether participating countries will remain committed to EMU
in the face of changing economic conditions. This
uncertainty may increase the volatility of European markets
and may adversely affect the prices of securities of
European issuers in the Funds' portfolios.
Year 2000. The investment management services provided to
each Fund by the manager depend on the smooth functioning of
its computer systems and those of its service providers.
Many computer 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
operations, including the handling of securities trades,
pricing and account services. The manager has advised each
Fund that it has been reviewing all of its computer systems
and actively working on necessary changes to its systems to
prepare for the year 2000 and expect that its systems will
be compliant before that date. In addition, the manager has
been advised by each Fund's custodian, distributor, transfer
agent sub-transfer agent and accounting service agent that
they are also in the process of modifying their systems with
the same goal. There can, however, be no assurance that the
manager 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. The foregoing
is a year 2000 readiness disclosure.
Portfolio Turnover. Each Fund may purchase or sell
securities without regard to the length of time the security
has been held and thus may experience a high rate of
portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced
in a period of one year. Under certain market conditions,
the Growth Fund and the Government Fund may experience a
high rate of portfolio turnover. This may occur, for
example, if the Fund writes a substantial number of covered
call options and the market prices of the underlying
securities appreciate. The rate of portfolio turnover is not
a limiting factor when the manager 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, Distributions and Taxes.''
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 except for Mid
Cap Fund:
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 Emerging Growth Fund and International Equity
Fund); provided, however, that with respect to Emerging
Growth Fund, International Equity Fund, Growth Fund, Growth
and Income Fund and 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 Emerging Growth Fund and 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 Emerging Growth Fund, International
Equity Fund, Growth Fund, Growth and Income Fund and
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 Emerging Growth Fund,
International Equity Fund, Growth Fund, Growth and Income
Fund and 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 Emerging Growth
Fund and 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
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 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
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.
International Equity Fund may not mortgage or pledge its
assets except to secure borrowings permitted under this
restriction.
The following restrictions apply to Growth Fund, Growth and
Income Fund, Government Fund and Municipal Bond Fund:
Each of these Funds shall not:
1. Make any investment in real estate, commodities or
commodities contracts, or warrants except that Growth Fund,
Growth and Income Fund, Government Fund and Municipal Bond
Fund may engage in transactions in futures and related
options, Government Fund may purchase or sell securities
which are secured by real estate, and 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 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 manager 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 Growth Fund and 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 Growth Fund, Growth and Income Fund
and 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 Growth Fund, Growth and Income Fund and 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 manager 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 Growth Fund, Growth and
Income Fund and 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. Growth Fund and 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, Growth Fund
and 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. Growth Fund and
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.
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.
Municipal Bond Fund may engage in futures contracts and
related options as described herein.
The following restrictions apply to Emerging Growth Fund and
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 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 Emerging Growth Fund and 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 manager 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 Emerging Growth Fund and 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 Emerging Growth Fund and
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 Emerging Growth Fund and 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
manager 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 Emerging Growth Fund and
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 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. 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, Emerging
Growth Fund and International Equity Fund may purchase put
and call options which are purchased on an exchange in other
markets, or currencies and, as developed from time to time,
various futures contracts on market indices and other
instruments. Purchasing options may increase investment
flexibility and improve total return, but also risks loss of
the option premium if an asset the Fund has the option to
buy declines in value.
The following restrictions apply only to the Mid Cap Fund:
The Fund has adopted the following investment restrictions
for the protection of shareholders. Restrictions 1 through 7
below cannot be changed without approval by the holders of a
majority of the outstanding shares of the Fund, defined as
the lesser of (a) 67% or more of the Fund's shares present
at a meeting, if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (b)
more than 50% of the Fund's outstanding shares. The
remaining restrictions may be changed by the Fund's Board of
Trustees at any time. In accordance with these restrictions,
the Fund will not:
1. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Issue "senior securities" as defined in the 1940 Act,
and the rules, regulations and orders thereunder, except as
permitted under the 1940 Act and the rules, regulations and
orders thereunder.
3. Invest more than 25% of its total assets in
securities, the issuers of which conduct their principal
business activities in the same industry. For purposes of
this limitation, securities of the U.S. government
(including its agencies and instumentalities) and securities
of state or municipal governments and their political
subdivisions are not considered to be issued by members of
any industry.
4. Borrow money, except that (a) the Fund may
borrow from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption
requests which might otherwise require the untimely
disposition of securities, and (b) the Fund may, to the
extent consistent with its investment policies, enter into
reverse repurchase agreements, forward roll transactions
and similar investment strategies and techniques. To the
extent that it engages in transactions described in (a) and
(b), the Fund will be limited so that no more than 33 1/3%
of the value of its total assets (including the amount
borrowed), valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) valued at
the time the borrowing is made, is derived from such
transactions.
5. Make loans. This restriction does not apply to:
(a) the purchase of debt obligations in which the Fund may
invest consistent with its investment objective and
policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted under
the 1940 Act.
6. Engage in the business of underwriting securities
issued by other persons, except to the extent that the Fund
may technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of
portfolio securities.
7. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction
shall not prevent the Fund from: (a) investing in securities
of issuers engaged in the real estate business or the
business of investing in real estate (including interests in
limited partnerships owning or otherwise engaging in the
real estate business or the business of investing in real
estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate
received in connection with securities it holds or held; (c)
trading in futures contracts and options on futures
contracts (including options on currencies to the extent
consistent with the Funds' investment objective and
policies); or (d) investing in real estate investment trust
securities.
8. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of
purchases and sales of portfolio securities) or sell any
securities short (except "against the box"). For purposes of
this restriction, the deposit or payment by the Fund of
underlying securities and other assets in escrow and
collateral agreements with respect to initial or maintenance
margin in connection with futures contracts and related
options and options on securities, indexes or similar items
is not considered to be the purchase of a security on
margin.
9. Invest in oil, gas or other mineral exploration
or development programs.
10. Purchase or otherwise acquire any security if, as
a result, more than 15% of its net assets would be invested
in securities that are illiquid.
11. Invest for the purpose of exercising control of
management.
If any percentage restriction described above is complied
with at the time of an investment, a later increase or
decrease in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
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); 61.
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; 60.
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; 51.
HEATH B. McLENDON,* Trustee. Managing Director of Salomon
Smith Barney; President and Chairman of 59 investment
companies associated with SSB President and Director of the
manager and Travelers Investment Adviser, Inc. ("TIA");
Chairman of Smith Barney Strategy Advisers Inc.; 65.
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; 57.
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; 56.
* Such Trustees are "interested persons" of the Fund
within the meaning of the 1940 Act.
OFFICERS
Heath B. McLendon, President (See description under
"Trustees").
Lewis E. Daidone, Senior Vice President and Treasurer (Age
41). Managing Director of Salomon Smith Barney; Director
and Senior Vice President of the manager 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
38). Managing Director of Salomon Smith Barney. 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
47). Managing Director of Salomon Smith Barney; 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
51). Managing Director of Salomon Smith Barney; 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
47). Managing Director of Salomon Smith Barney; 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
41). Managing Director of Salomon 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
37 ). Managing Director of Salomon Smith Barney; Prior to
October 1997, Portfolio Manager of Newberger & Berman LLC;
Prior to 1995, Portfolio Manager of College Retirement
Equities Fund. His address is 388 Greenwich Street, New
York, New York 10013.
Christina T. Sydor, Secretary (Age 48). Managing Director
of Salomon Smith Barney; General Counsel and Secretary of
the manager 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 December 11, 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. As of
December 11, 1998, to the knowledge of the Trust and its
Trustees, no shareholder or "group" (as the term is used in
Section 13(d) of the Securities Act of 1933) beneficially
owned more than 5% of the outstanding shares of each Fund of
the Trust.
Information regarding compensation paid by the Funds to the
Trustees is set forth below. The compensation shown for the
Funds is for the calendar year ended December 31, 1998. Mr.
McLendon is not compensated for his service as Trustee,
because of his affiliation with the manager. With the
exception of Mr. McLendon, no Trustee serves on the Board of
any other investment company in the Smith Barney Fund
Complex. During this period, the Mid Cap Fund had not
commenced operations, therefore, the amounts shown reflect
only the other funds, as set forth below.
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
COMPENSATION TABLE
Name of Person
Aggregate Compensation
From Registrant (3)
EM INT G
G/I GVT MB
Pension
or
Retire-
ment
Benefit
s
Accrued
as Part
of Fund
Expense
s
(1)
Total
Compensati
on Paid
From Trust
and Fund
Complex
Dr. Donald M.
Carlton
$264
0
$478
$3695
4
$1258
4
$226
9
$107
4
- -
$56,000
Dr. A. Benton
Cocanougher
2640
478
36954
12584
2269
1074
- -
56,000
Stephen Randolph
Gross
2640
478
36954
12584
2269
1074
- -
56,000
Heath B. McLendon*
- -
- -
- -
- -
- -
- -
- -
- -
Dr. Alan G. Merten
2472
443
33555
11491
2062
976
- -
51,000
Dr. Steven
Muller(2)
614
116
11957
3923
709
329
- -
17649
Dr. R. Richardson
Pettit
2640
478
36954
12584
2269
1074
- -
56,000
Alan B. Shepard,
Jr.(2)
2100
372
26093
9089
1592
754
- -
40,000
*Designates an "Interested Person," as defined under the
1940 Act.
(1) The Trustees instituted a retirement plan effective
April 1, 1996. For the current Trustees who are not
"interested persons" of the Trust, the retirement benefits
payable, thereunder are payable for a ten year period
following retirement, with the annual payment to be 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 benefit. Total retirement
benefits accrued under the plan for the 1998 calendar year
were $14,481, $0, $932,542, $278,558, $88,194, and $0, for
the Emerging Growth Fund, International Equity Fund, Growth
Fund, Growth and Income Fund, Government Fund and Municipal
Bond Fund, respectively. The amount of benefits to be paid
upon retirement is therefore not currently determinable for
any current Trustee.
(2) Mr. Muller and Mr. Shepard are no longer Trustees of
the Trust.
(4) Retirement benefits accrued are $14,481, $0, $932,542,
$278,558, $88,194, and $0, per Emerging Growth Fund,
International Equity Fund, Growth Fund, Growth and Income
Fund, Government Fund and Municipal Bond Fund, respectively,
as part of each Fund's expenses.
Legal Counsel
Sullivan & Worcester LLP
INVESTMENT ADVISORY AGREEMENTS
Investment Manager. Effective December 31, 1997, the
manager replaced Van Kampen American Capital Asset
Management, Inc. ("VKAC") as investment adviser to each Fund
of the Trust. The manager provides investment advisory and
management services to investment companies affiliated with
Salomon Smith Barney and, prior to December 31, 1997 was the
Sub-Advisor to International Equity Fund.
The Trust and the manager 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
manager 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 manager to manage the
investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The manager
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 manager 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 manager 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 manager. 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 manager.
The Trust retains the manager 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 manager an annual fee for
Emerging Growth Fund, Growth Fund and 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 manager an annual fee for Mid Cap Fund at the rate of
0.75% of the Fund's average daily net assets. The Trust
pays the manager an annual fee for International Equity Fund
at the rate of 1.00% of the Fund's average daily net assets.
The Trust pays the manager an annual fee for 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 manager an annual
fee for 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 manager may, from time
to time, agree to waive its investment advisory fees or any
portion thereof or elect to reimburse a Fund for ordinary
business expenses in excess of an agreed upon amount.
The 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, 1998, 1997 and 1996. The Mid Cap Fund had not
commenced operations during these periods.
Emerging
Growth
Internatio
nal Equity
Growth
Growth &
Income
Governmen
t
Municipa
l Bond
October 31, 1998
Accounting
Services
- -
- -
- -
- -
- -
- -
Gross Advisory
Fees
$1,354,479
$376,585
$23,343,
634
$8,627,1
08
$1,523,61
3
$687,628
Contractual
Expense
Reimbursement
N/A
N/A
N/A
N/A
N/A
N/A
Voluntary
Expense
Reimbursement
N/A
N/A
N/A
N/A
N/A
N/A
October 31, 1997
Accounting
Services
$37,198
$21,601
$420,043
$161,748
$55,786
$39,999
Gross Advisory
Fees
904,959
267,897
20,533,5
44
7,574,20
9
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
17,148,5
60
6,017,20
4
1,883,666
728,210
Contractual
Expense
Reimbursement
-
130,149
-
-
-
-
Voluntary
Expense
Reimbursement
-
47,998
-
-
-
-
For the fiscal years ended October 31, 1997 and 1996 and for
the period from November 1, 1997 to December 31, 1997,
amounts paid by the Funds under the relevant investment
advisory agreements were paid to Van Kampen American Capital
Asset Management Inc. ("VKAC"). VKAC served as the Trust's
investment adviser.
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 manager will be
reduced by the amount of such excess and that, if a
reduction in and refund of the advisory fee is insufficient,
the manager 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 manager 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 manager 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.
Management's discussion and analysis and additional
performance information regarding the Funds during the
fiscal year ended October 31, 1998 is included in the Annual
Report dated October 31, 1998. 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 Trust at the address or phone number listed on
page one.
DISTRIBUTOR
CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408
(the "Distributor"), distributes shares of the Funds as
their principal underwriter, and as such conducts a
continuous offering pursuant to a "best efforts" arrangement
requiring the Distributor to take and pay for only those
securities sold to the public. Prior to October 8, 1998,
PFS Distributors, Inc. acted as Distributor.
The Distributor may be deemed to be an underwriter for
purposes of the Securities Act of 1933. From time to time,
the Distributor, or PFS Distributors, Inc. or its affiliates
may also pay for certain non-cash sales incentives provided
to PFS Investments Registered Representatives. Such
incentives do not have any effect on the net amount
invested. In addition to the reallowances from the
applicable public offering price described above, PFS may,
from time to time, pay or allow additional reallowances or
promotional incentives, in the form of cash or other
compensation to PFS Investments Registered Representatives
that sell shares of each Fund.
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 Distributors, Inc.
on behalf of PFS Investments (collectively, "PFS") giving
PFS the 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.
Initial Sales Charges - Class A and Class 1.
The following table shows commissions paid as initial sales
charges on Class A and Class 1 shares, amounts retained by
the Distributor and amounts received by PFS Investments
during the periods ended October 31, 1998, 1997 and 1996.
Prior to October 8, 1998, PFS Distributors, Inc. acted as
Distributor.
Emerging
Growth
Interna-
tional
Equity
Growth
Growth &
Income
Govern-
ment
Municipa
l Bond
October 31, 1998
Total Underwriting
Commissions*
$3,282,9
07
$490,027
$17,475,
434
$6,769,9
89
$732,992
$810,575
Amount Retained By
Distributor
187,397
21,062
2,349,25
5
656,152
67,974
79,312
Amount Received By PFS
Investments
3,095,51
0
468,965
15,126,1
79
6,113,83
7
665,018
731,263
October 31, 1997
Total Underwriting
Commissions
$3,846,0
82
$608,726
$18,002,
508
$6,979,9
66
$808,858
$487,303
Amount Retained By
Distributor
251,247
37,018
2,787,42
3
825,118
98,702
87,157
Amount Received By PFS
Investments
3,594,83
5
571,708
15,215,0
88
6,154,84
8
710,156
400,146
October 31, 1996
Total Underwriting
Commissions
$1,519,3
51
$235,791
$19,303,
603
$5,144,5
00
$950,019
$1,029,1
47
Amount Retained By
Distributor
124,777
21,437
3,405,10
4
888,760
162,072
124,395
Amount Received By PFS
Investments
1,394,57
4
214,354
15,898,4
99
4,255,74
0
1,173,86
7
904,752
*For the period November 1, 1997 through October 7, 1998 and
for the period October 8, 1998 through October 31, 1998, the
commissions were as follows:
Name of Fund
11/01/97
through
10/07/98+
10/08/98
through
10/31/98++
Growth
$16,442,770
$1,032,664
Growth & Income
$6,490,528
$279,461
Emerging Growth
$3,169,461
$113,446
International Equity
$471,895
$18,132
Government
$694,243
$38,749
Municipal Bond
$745,848
$64,727
+The entire amount was paid to PFS Distributors, Inc.
++ The following amounts were paid to PFS Distributors,
Inc.: $929,398, $251,515, $102,101, $16,319, $34,874 and
$58,254, for the above listed funds, respectively.
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
Rule 12b-1 adopted by the SEC under the 1940 Act permits an
investment company to directly or indirectly pay expenses
associated with the distribution of its shares
(''distribution expenses'') and servicing its shareholders
in accordance with a plan adopted by the investment
company's board of directors and approved by its
shareholders. Pursuant to such Rule, the Trustees of the
Trust, and the shareholders of 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 Conduct of the National Association of Securities
Dealers, Inc. (''NASD Rules'') applicable to mutual fund
sales charges. The NASD Rules limit the annual distribution
costs and service fees that a mutual fund may impose on a
class of shares. The NASD Rules also limit the aggregate
amount which the Fund may pay for such distribution costs.
Under the Class A Plan, a Fund pays 0.25% per annum of its
average daily net assets attributable to such class of
shares to 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
maintenance 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 aggregate 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 under the Class B Plan may consist of sales
commissions to PFS Investments for selling Class B shares,
compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in
its sales and promotional activities, including advertising
expenditures related to the Class B shares of a Fund and the
costs of preparing and distributing promotional materials
with respect to such Class B shares.
The Distributor receives the proceeds of the initial sales
charge, if any, paid upon the purchase of Class A shares and
pays said amount to PFS. PFS receives the contingent
deferred sales charge paid upon certain redemptions of Class
B shares directily formt he Fund, 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 compensation 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 distribution fees to PFS until either the
applicable Plan is terminated or not renewed. In that event,
PFS expenses in excess of service fees and distribution fees
received or accrued through the termination date will be PFS
sole responsibility and not obligations of a Fund. In their
annual consideration of the continuation of each Fund's
Plans, the Trustees will review each Plan and the
corresponding expenses for each class separately.
Actual distribution expenditures incurred under the Class B
Plan 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 not be carried forward in future years.
If the Class B Plan was terminated or not continued, the
Fund would not be contractually obligated and has no
liability to pay for any expenses not previously reimbursed
by the Fund or recovered through contingent deferred sales
charges.
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 that the Trustees be provided 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 PFS under each
Plan in that PFS would receive service fees and distribution
fees and the manager 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, 1998, the aggregate
expenses for the Emerging Growth Fund under the Fund's
Class A Plan were $277,226 or 0.25%, respectively, of the
Class A shares' average net assets. For the fiscal year
ended October 31, 1998, the Fund's aggregate expenses under
the Class B Plan were $903,219 or 1.00% of the Class B
shares' average net assets. Such expenses include $226,993
for commissions and transaction fees and $674,800 for fees
paid to for servicing Class B shareholders and administering
the Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate
expenses for the International Equity Fund under the Fund's
Class A Plan were $47,690 or 0.25%, respectively, of the
Class A shares' average net assets. For the fiscal year
ended October 31, 1998, the Fund's aggregate expenses under
the Class B Plan were $166,306 or 1.00% of the Class B
shares' average net assets. Such expenses included $41,290
for commissions and transaction fees and $123,371 for fees
paid for servicing Class B shareholders and administering
the Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate
expenses for the Growth Fund under the Class A Plan were
$372,160 or 0.25%, respectively, of the Class A shares'
average net assets. For the fiscal year ended October 31,
1998, the Fund's aggregate expenses under the Class B Plan
were $1,589,474 or 1.00% of the Class B shares' average net
assets. Such expenses included $390,858 for commissions and
transaction fees and $1,164,573 for fees for servicing
Class B shareholders and administering the Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate
expenses for the Growth and Income Fund under the Fund's
Class A Plan were $262,767 or 0.25%, respectively, of the
Class A shares' average net assets. For the fiscal year
ended October 31, 1998, the Fund's aggregate expenses under
the Class B Plan were $1,219,023 or 1.00% of the Class B
shares' average net assets. Such expenses included $300,735
for commissions and transaction and $896,931 for fees paid
for servicing Class B shareholders and administering the
Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate
expenses for the Government Fund under the Fund's Class A
Plan were $38,540 or 0.25%, respectively, of the Class A
shares' average net assets. For the fiscal year ended
October 31, 1998, the Fund's aggregate expenses under the
Class B Plan were $134,001 or 1.00% of the Class B shares'
average net assets. Such expenses included $32,944 for
commissions and transaction fees and $98,333 for fees paid
to for servicing Class B shareholders and administering the
Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate
expenses for the Municipal Bond Fund under the Fund's Class
A Plan were $30,259 or 0.25%, respectively, of the Class A
shares' average net assets. For the fiscal year ended
October 31, 1998, the Fund's aggregate expenses under the
Class B Plan were $38,339 or 1.00% of the Class B shares'
average net assets. Such expenses included $9,074 for
commissions and transaction fees and $27,221 for fees paid
to for servicing Class B shareholders and administering the
Class B Plan.
The Mid Cap Fund did not begin operations in the fiscal year
ended October 31, 1998, and, thus, had no expenses.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The manager 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 manager
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 manager
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
manager. In selecting broker/dealers and in negotiating
commissions, the manager 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 that also provide research services to the Trust or
the manager.
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 manager or the Subadviser in fulfilling
their investment-decision making responsibilities.
Pursuant to provisions of the relevant Advisory Agreement,
the Trustees have authorized the manager 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 manager. The manager 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
manager undertakes that such higher commissions will not be
paid by the Trust unless (a) the manager 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 manager'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 manager, 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
manager's receipt of research services. During the fiscal
year ended October 31, 1998, the Trust directed the payment
of $519,062 in brokerage commissions to brokers because of
research services provided.
Consistent with the Rules of Conduct of the National
Association of Securities Dealers, Inc. and subject to
seeking best execution and such other policies as the
Trustees may determine, the manager may consider sales of
shares of the Trust as a factor in the selection of firms to
execute portfolio transactions for the Trust.
The manager 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 manager in
servicing all of its accounts; not all of such services may
be used by the manager in connection with the Trust. In the
opinion of the manager, the benefits from research services
to the Funds of the Trust and to the accounts managed by the
manager 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
manager, such costs to the Trust will not be
disproportionate to the benefits received by the Trust on a
continuing basis.
The manager 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
manager 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 manager 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 (except Mid Cap
Fund, which had not commenced operations during the relevant
periods) the total brokerage commissions paid.
Fiscal
Year
Ended
10/31
Emerging
Growth
Internationa
l Equity
Growth
Growth &
Income
Governmen
t
Municipal
Bond
1998
$348,867
$142,261
$8,191,23
7
$1,123,715
- -
- -
1997
$185,242
$115,016
$10,105,4
82
$2,428,087
$140,190
- -
1996
$99,218
$94,895
$10,114,6
47
$2,273,725
$160,181
- -
The Funds may from time to time place brokerage transactions
with brokers that may be considered affiliated persons of
the manager or the Distributor. Such affiliated persons
currently include Salomon 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 manager or the
Distributor (or its predecessor). 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 commission to affiliated
brokers during the periods shown:
Salomon
Robinson Smith
Fiscal 1998 Commissions Humphrey Barney
Emerging Growth $12,679 $29,294
International Equity -0- 9,442
Growth 34,230 363,234
Growth & Income 3,300 99,771
Government - -
Municipal Bond - -
Fiscal 1998 Percentage
Emerging Growth 3.63% 8.40%
International Equity N/A 6.60%
Growth 0.42% 4.43%
Growth & Income 0.29% 8.88%
Government - -
Municipal Bond - -
Salomon
Robinson Smith
Humphrey Barney
Percentage of Transactions with
Affiliates to Total Transactions
Emerging Growth 3.81% 6.31%
International Equity - 7.30%
Growth 0.52% 3.94%
Growth & Income 0.15% 9.12%
Government - -
Municipal Bond - -
Salomon
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 - - - -
Percentage of Transactions with
Affiliates to Total Transactions
Emerging Growth - - - -
International Equity - - 1.43% -
Growth - 0.04% - 0.28%
Growth & Income - - - -
Government - 2.34% - -
Municipal Bond - - - -
Salomon
Robinson Smith
Fiscal 1996 Commissions Humphrey Barney
Emerging Growth - $1,835
International Equity - -
Growth $7,200 240,982
Growth & Income 2,400 92,761
Government - 28,322
Municipal Bond - -
Fiscal 1996 Percentages
Emerging Growth - 1.87%
International Equity - -
Growth 0.07% 2.38%
Growth & Income 0.10% 4.08%
Government - 17.68%
Municipal Bond - -
Percentage of Transactions with
Affiliates to Total Transactions
Emerging Growth - -
International Equity - -
Growth - 0.002%
Growth & Income - 0.027%
Government - 4.65%
Municipal Bond - 5.35%
DETERMINATION OF NET ASSET VALUE
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. The net asset value of
the shares of each Fund is determined as of the close of the
New York Stock Exchange (the "Exchange") (normally
4:00 p.m., New York time) on each business day on which the
Exchange is open.
Emerging Growth Fund, International Equity Fund, Growth
Fund, Mid Cap Fund and Growth and Income Fund
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 manager,
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
U.S. Government securities are traded in the
over-the-counter market and are valued at the last available
bid price. Such valuations are based on quotations of one
of more dealers that make markets in the securities as
obtained from such dealers or from a pricing service.
Options and interest rate futures contracts and options
thereon, which are traded on exchanges, are valued at their
last sales or settlement price as of the close of such
exchanges, or, if no sales are reported, at the mean between
the last reported bid and asked prices. Securities with a
remaining maturity of 60 days or less are valued on an
amortized cost basis which approximates market value.
Securities and assets for which market quotations are not
readily available are valued at fair value as determined in
good faith by or under the direction of the Trustees. Such
valuations and procedures will be reviewed periodically by
the Trustees.
Municipal Bond Fund
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.
Purchase of Shares
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 contingent
deferred sales charge ("CDSC") payable upon certain
redemptions. As of May 20, 1996, all of the previously
outstanding shares of Growth Fund, Growth and Income Fund,
Government Fund, and 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 International Equity Fund. Each
Fund offers Class 1 shares only to Eligible Class 1
Purchasers. Each class of shares represents an interest in
the same portfolio of investments of a Fund. See the
Prospectus for a discussion of factors to consider in
selecting which Class of shares to purchase.
Initial purchases of shares of each Fund must be made
through a PFS Investments Registered Representative by
completing the appropriate application 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.
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.
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 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
Investment 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
Citigroup and its subsidiaries, including Smith Barney,
Directors or Trustees of any of the Smith Barney Mutual
Funds, and their spouses and children. The Trust 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 regular 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 preauthorized transfers of $25 or more
to charge the regular bank account or other financial
institution indicated by the shareholder on a monthly basis
to provide 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, Mid Cap
Fund, Growth Fund and Growth and Income Fund are as follows:
Sales
Charge
Dealers'
Reallowance as %
of
Offering
Price
Amount of
Investment
% of
Offering
Price
% of
Amount
Invested
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
*
*
*
The sales charges applicable to purchases of Class A shares
of Government Fund and Municipal Fund are as follows:
Sales
Charge
Dealers'
Reallowance as %
of
Offering
Price
Amount of
Investment
% of
Offering
Price
% of
Amount
Invested
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
*
*
*
* 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 applicable 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
Fund as defined in the Securities Act of 1933, as amended.
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 Citigroup and its
subsidiaries and any of the Smith Barney Mutual Funds
(including retired Board Members and employees); the
immediate 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
Association of Securities Dealers, Inc., provided such sales
are made upon the assurance 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 combination of such company
with the Fund by merger, acquisition of assets or otherwise;
(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 redemption; (d) purchases by accounts
managed by registered investment advisory subsidiaries of
Citigroup; (e) sales through PFS Investments Registered
Representatives 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 Salomon Smith Barney401(k) Program (note: subsequent
investments will be subject to the applicable sales charge;
(g) purchases by separate accounts used to fund certain
unregistered variable annuity contracts; and (h) purchases
by investors participating in a Salomon Smith Barneyfee
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 distributed by an entity other than
PFS Investments. 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
Retirement Income Security Act of 1974, as amended
(''ERISA''). Class A shares so purchased are purchased for
investment purposes and may not be resold except by
redemption or repurchase by or on behalf of the 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 Trust, and the shareholder paid an initial
sales charge and was not subject to a deferred sales charge
on the redeemed account. Class A shares are offered at net
asset value to such persons because of anticipated economies
in sales efforts and sales related expenses. The Trust may
terminate, or amend the terms of, offering shares of the
Trust at net asset value to such persons at any time. PFS
may pay PFS Investments 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 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 certain other
Concert and Smith Barney mutual funds. 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
entity. 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 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 applicable 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.
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.
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 purchase payment,
all purchase payments made during a month will be aggregated
and deemed to have been made on the last day of the
preceding statement month. The following table sets forth
the rates of the charge for redemptions of Class B shares by
shareholders.
Years Since
Purchase
Payment Was
Made
CDSC
Applicable to
Emerging Growth
Fund, Mid Cap
Fund,
International
Equity Fund,
Growth
Fund and Growth
and Income Fund
CDSC
Applicable to
Government
Fund and Municipal
Fund
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
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
proportion 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.
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 purposes, 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 additional 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.
For the year ended October 31, 1998, CDSCs paid for Class B
shares were approximately:
Fund CDSC
Emerging Growth: $445,331
Government: $75,664
Growth: $552,399
Growth and Income: $458,157
International Equity: $63,366
Municipal Bond: $27,338
The Mid Cap Fund had not commenced operations during the
relevant period.
Waiver of CDSC
The CDSC generally is waived on exchanges and 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 Sub-Transfer Agent 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 manager
The Trust may waive the CDSC when a total or partial
redemption is made by the manager with respect to its
investments in a Fund.
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, Mid Cap
Fund, Growth Fund and Growth and Income Fund
Size of Investment
As % of
Net Amount
Invested
As % of
Offering
Price
Reallowed
to PFS
Investments
(as a % of
Offering
Price)*
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%
Government Fund
Size of Investment
As % of
Net Amount
Invested
As % of
Offering
Price
Reallowed
to PFS
Investments
(as a % of
Offering
Price)*
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%
Municipal Bond Fund
Size of Investment
As % of
Net Amount
Invested
As % of
Offering
Price
Reallowed
to PFS
Investments
(as a % of
Offering
Price)*
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%
* 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%.
The Distributor or PFS may be deemed to be an underwriter
for purposes of the Securities 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
Representatives. Such incentives do not have any effect on
the net amount invested. In addition to the reallowances
from the applicable public offering price described above,
PFS may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash
or other compensation to PFS Investments Registered
Representatives that sell shares of the Trust.
Class 1 shares of the Trust 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 Distributor, if such
redemption has occurred no more than 60 days prior to the
purchase of shares of the Trust and the shareholder paid an
initial sales charge and was not subject to a deferred sales
charge on the redeemed account. Shares are offered at net
asset value to such persons because of anticipated economies
in sales efforts and sales related expenses. The Trust may
terminate, or amend the terms of, offering shares of the
Trust at net asset value to such persons at any time. 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 distributed
by an entity other than the Distributor. 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 entitled to reduced sales charges. The
circumstances under which such investors may pay reduced
sales charges are the same as those described above under
''Purchases 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 subject to minimum
investment requirements and all shares are subject to the
other requirements of the fund into which exchanges are
made.
o Concert Peachtree Growth Fund
o Concert Social Awareness Fund
o Smith Barney Appreciation Fund Inc.
o Smith Barney Concert Allocation Series Inc.-Balanced
Portfolio
o Smith Barney Concert Allocation Series Inc.-
Conservative Portfolio
o Smith Barney Concert Allocation Series Inc.- Growth
Portfolio
o Smith Barney Concert Allocation Series Inc.-High
Growth Portfolio
o Smith Barney Concert Allocation Series Inc.-Income
Portfolio
o Smith Barney Investment Grade Bond Fund
o *Smith Barney Money Funds, Inc.-Cash Portfolio
o **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.
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 Trust 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 Trust may, at its
discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination by
the Trust, the Trust 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 Barney 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.
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.
Redemption 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 signature guarantee is required. An
exchange involves a redemption of shares, which is a taxable
transaction. Before exchanging shares, investors should read
the current prospectus describing the shares to be acquired.
Each Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to
shareholders.
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 30095-0062. 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 registration. 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
shareholder(s) has had an address change in the past 45
days, or if the shareholder(s) is a corporation, sole
proprietor, partnership, trust or fiduciary, signature(s)
must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national
securities exchange, registered securities association or
clearing agency; a savings and loan association; or a
federal savings bank.
Generally, a properly completed 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
administrator. Additionally, if a shareholder requests a
redemption from a Retirement Plan account (IRA, SEP or
403(b)(7)), such request must state whether or not federal
income tax is to be withheld from the proceeds of the
redemption check.
A shareholder may utilize the Sub-Transfer Agent's FAX to
redeem the shareholder's 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. A
redemption of shares is a taxable transaction for the
shareholder.
After following the above-stated redemption guidelines, a
shareholder(s) may elect to have the redemption proceeds
wire-transferred directly to the shareholder's bank account
of record (defined as a currently established pre-authorized
draft on the shareholder's account with no changes within
the previous 45 days), as long as the bank account is
registered in the same name(s) as the account with the
Trust. 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 shareholder
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
Trust 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
Trust, however, will not redeem shares based solely on
market reductions in net asset value. Before the Trust
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.
DISTRIBUTIONS AND FEDERAL TAXES
Emerging Growth Fund, International Equity Fund, Mid Cap
Fund and Growth Fund distribute dividends and capital gains
annually; Growth and Income Fund declares and pays dividends
quarterly. Government Fund and 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 and certain other
transaction during the year over its total losses on such
sales and transactions, 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 complying with
certain requirements regarding the sources and distribution
of its income and the diversification of its assets. By so
qualifying, a Fund will not be subject to federal income tax
on amounts paid by it as dividends and distributions to
shareholders in compliance with the Code's timing and other
requirements. 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. A Fund would be subject to a
nondeductible, 4% federal excise tax if it fail to meet
certain distribution requirements with respect to each
calendar year, generally applicable to its ordinary
(taxable) income for that year and the excess of its capital
gains over its capital losses for the one-year period ended
on October 31 of that year. The Funds intend generally to
make distributions sufficient to avoid or minimize any
liability for the excise tax. Each Fund expects to be
treated as a separate entity for purposes of determining its
federal tax treatment.
Municipal Bond Fund
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 interest income as
"exempt-interest dividends". In order for 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 obligations that pay interest exempt from
taxation under Section 103(a) of the Code. In addition, the
Fund must distribute at least (i) 90% of the excess of its
tax-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 gain over any
net long-term capital loss) recognized by the Fund during
the taxable year.
Not later than 60 days after the close of its taxable year,
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-exempts 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. Shareholders are required to report their receipt
of tax-exempt interest, including exempt-interest dividends,
on their Federal income tax returns.
Although exempt-interest dividends generally may be treated
by 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.
Interest on indebtedness incurred by a shareholder to
purchase or carry shares of Municipal Bond Fund is not
deductible for federal income tax purposes to the extent it
is treated as related to exempt-interest dividends paid as
such shares. If a shareholder receives an exempt-interest
dividend any capital loss on the sale or exchange of the
shares with respect to which the dividend is received will
be disallowed to the extent of the amount of such
exempt-interest dividend if the shares are not held for more
than six months.
Although Municipal Bond Fund does not intend to acquire
bonds the interest on which is a specific item of tax
preference for alternative minimum tax purposes, its exempt-
interest dividends may nevertheless result in or increase a
corporate shareholder's liability for the corporate
alternative minimum tax, because tax-exempt interest,
including exempt-interest dividends that are not items of
tax preference, is taken into account in determining a
corporation's potential liability for this tax.
The Code also requires a shareholder who receives exempt-
interest dividends to, in some cases, treat as taxable
income a portion of certain otherwise non-taxable social
security or railroad retirement benefits.
Shareholders should also consider, in determining when to
redeem any shares of Municipal Bond Fund, that the Fund
declares and distributes its exempt-interest dividends
monthly. The net asset value of shares redeemed shortly
before the end of a month will include tax-exempt interest
accrued for that month but not yet declared as an exempt-
interest dividend. The amount of the redemption proceeds
attributable to this accrued tax-exempt interest will not be
treated as tax-exempt interest, but instead will be part of
the shareholder's redemption proceeds potentially subject to
taxation.
If, during any taxable year, Municipal Bond Fund realizes
net capital gain (the excess of net long-term capital gain
over net short-term capital loss) 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 gain 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 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 gain". For example, income or gains from
certain taxable investments or transactions, including sales
of securities, options and futures transactions, repurchase
agreements, securities lending, the recognition of accrued
market discount, and the disposition of rights to when-
issued securities prior to issuance, are included in
investment company taxable income or net capital gain.
Distributions of investment company taxable income are
taxable as ordinary income, and distributions of net capital
gain are taxable as long-term capital gains.
All Funds
Dividends from net investment income and any excess of net
short-term capital gain over net long-term capital loss are
taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income paid by Emerging Growth
Fund, International Equity Fund, Mid Cap Fund, Growth Fund
and Growth and Income Fund may qualify for the 70% dividends
received deduction for corporations. Qualifying dividends
include only dividends attributable to dividends a Fund
receives from U.S. domestic corporations with respect to
stock for which the Fund satisfies applicable holding period
requirements.
The portion of the dividends received from a Fund which
qualifies for the dividends-received deduction for
corporations will be reduced to the extent that the Fund
holds dividend-paying stock for less than 46 days (91 days
for certain preferred stock). The Fund's holding period
requirement must be satisfied separately for each dividend
during a prescribed period before and after the ex-dividend
date and will not include any period during which the Fund
has reduced its risk of loss from holding the stock by
purchasing an option to sell, granting an option to buy, or
entering into a short sale of substantially identical stock
or securities, such as securities convertible into the
stock. The holding period for stock may also be reduced if
the Fund diminishes its risk of loss by holding one or more
positions in substantially similar or related property. The
dividends-received deduction will be allowed only with
respect to dividends on Fund shares for which a corporate
shareholder satisfies the same holding period rules
applicable to the Fund.
Receipt of dividends that qualify for the dividends-received
reduction may increase a corporate shareholder's liability,
if any, for the alternative minimum tax. Such a shareholder
should also consult its tax adviser regarding the
possibility that its federal tax basis in its Fund shares
may be reduced by the receipt of "extraordinary dividends"
from the Fund and, to the extent such basis would be reduced
below zero, current recognition of income would be required.
For federal income tax purposes, dividends declared by a
Fund in October, November or December as of a record date in
such a month and which are actually paid in January of the
following year will be treated as if they were paid on
December 31 of the year in which they are declared. These
dividends will be taxable to shareholders as if actually
received on December 31 rather than in the year in which
shareholders actually receive the dividends.
A capital gain dividend (i.e., a dividend from the excess of
a funds net long-term capital gain over its net short-term
capital loss) received after the purchase of the shares of
any of the Funds reduces the net asset value of the shares
by the amount of the distribution and will nevertheless be
subject to income taxes. The same is true of dividends
treated as ordinary income, as described above. Investors
may therefore wish to avoid purchasing Fund shares shortly
before an anticipated dividend (other than an exempt-
interest dividend from Municipal Bond Fund) or capital gain
dividend in order to avoid being taxed on a distribution
that is economically a return of a portion of the purchase
price. These capital gain dividends are taxable to
shareholders as long-term capital gains, regardless of how
long the shareholder has held Fund shares. Any loss on the
sale of Fund shares held for six months or less is treated
as a long-term capital loss to the extent of any capital
gain dividend paid on such shares. All dividends and
distributions are taxable to the shareholder in the same
manner 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 a Fund purchased subject to a sales charge are
sold or exchanged within 90 days of acquisition, and shares
of the same or another mutual fund are acquired, to the
extent the sales charge on the initial purchase 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. Additionally, any loss
realized on a redemption or exchange of Fund shares may be
disallowed under "wash sale" rules to the extent the shares
disposed of are replaced with other shares of the same Fund
within a period of 61 days, beginning 30 days before and
ending 30 days after such disposition, such as pursuant to
reinvestment of dividends in Fund shares.
It should be noted that periodic withdrawals under the
systematic withdrawal plan involve redemptions of shares,
which may result in tax liability for the redeeming
shareholder. Additionally, any redemption of shares is a
potentially taxable transaction, even if a reinvestment
privilege is later exercised.
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. Each Fund 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 Fund shares with respect to any
shareholder who is not exempt from withholding and who fails
to furnish the Fund 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 a
Fund may write, purchase or sell. Such options and contracts
are generally 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, equity options, and certain other options or future
comments are not classified as Section 1256 contracts and
are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses 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 a
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 a 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 effect of the tax rules described above with respect to
options and futures contracts may be to change the amount,
timing and character of a Fund's income, gains and losses
and therefore of its distributions to shareholders.
These rules also generally apply to options, futures and
forward contracts relating to foreign currency, except that
(1) options, futures and forward contracts on certain
foreign currencies are not governed by Section 1256, (2)
gains and losses on foreign currency forward contracts are
generally treated as ordinary income and losses, and (3)
gains and losses on a Fund's foreign currency options and
futures contracts that are not governed by Section 1256, if
any, are generally treated as ordinary income and loss.
Additionally, under the Code gains or losses attributable to
fluctuations in exchange rates between the time a Fund
accrues income or receivables or expenses or other
liabilities denominated in a foreign currency and the time
the Fund actually collects such income or pays such
liabilities, are treated as ordinary income or ordinary
loss. Similarly, gains or losses on the disposition of debt
securities denominated in foreign currency, to the extent
attributable to fluctuations in exchange rates between the
acquisition and disposition dates, are treated as ordinary
income or loss.
If a Fund purchases shares in certain foreign investment
entities, referred to as "passive foreign investment
companies," the Fund itself may be subject to U.S. federal
income tax and an additional charge in the nature of
interest on a portion of any "excess distribution" from such
company or gain from the disposition of such shares, even if
the distribution or gain is distributed by the Fund to its
shareholders in a manner that satisfies the distribution
requirements referred to above. If a Fund were able and
elected to treat a passive foreign investment company as a
"qualified electing fund," in lieu of the treatment
described above, the Fund would be required each year to
include in income, and distribute to shareholders in
accordance with the distribution requirements described
above, the Fund's pro rata share of the ordinary earnings
and net capital gains of the company, whether or not
actually received by the Fund. A Fund generally should be
able to make an alternative election to mark these
investments to market annually, resulting in the recognition
of ordinary income (rather than capital gain) or ordinary
loss, subject to limitations on the ability to use any such
loss.
A Fund may be required to treat amounts as taxable income or
gain, subject to the distribution requirements referred to
above, even though no corresponding amounts of cash are
received concurrently, as a result of (1) mark to market,
constructive sale or other rules applicable to passive
foreign investment companies, partnerships or trusts in
which the Fund invests or to certain options, futures,
forward contracts, or "appreciated financial positions" or
(2) the inability to obtain cash distributions or other
amounts due to currency controls or restrictions on
repatriation imposed by a foreign country with respect to
the Fund's investments in issuers in such country or (3) tax
rules applicable to debt obligations acquired with "original
issue discount," including zero-coupon or deferred payment
bonds and pay-in-kind debt obligations, or to market
discount if an election is made with respect to such market
discount. A Fund may therefore be required to obtain cash
to be used to satisfy these distribution requirements by
selling portfolio securities at times that it might not
otherwise be desirable to do so or borrowing the necessary
cash, thereby incurring interest expenses.
Dividends or other income (including, in some cases, capital
gains) received by a Fund from sources within foreign
countries may be subject to withholding and other taxes
imposed by such countries. Tax conventions between certain
countries and the United States may reduce or eliminate such
taxes in some cases. If eligible, the International Equity
Fund will determine whether to make an election to treat any
qualified foreign income taxes paid by it as paid by its
shareholders. In determining whether to make this election,
the Fund will take into consideration such factors as the
amount of foreign taxes paid and the administrative costs
associated with making the election. If the election is
made, shareholders of the Fund would be required to include
their respective pro rata portions of such qualified foreign
taxes in computing their taxable income and would then
generally be entitled to credit such amounts against their
United States federal income taxes due, if any, provided
that certain holding period requirements are satisfied, or
to include such amounts in their itemized deductions, if
any. For any year for which it makes such an election, the
International Equity Fund will report to its shareholders
(shortly after the close of its fiscal year) the amount per
share of such foreign taxes that must be included in the
shareholder's gross income and will be potentially available
as a credit or deduction, subject to the limitations
generally applicable under the Code. The other Funds will
not qualify to make this election, and consequently their
shareholders will not report on their own tax returns their
shares of the foreign taxes paid by these Funds.
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 "Investment
Practices - Stand-By Commitments." 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, and no attempt is made to describe
special tax rules that may be applicable to certain
categories of shareholders, such as tax-exempt or tax-
deferred entities or retirement plans, insurance companies,
and financial institutions. 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
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
1, 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 the 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 investments 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. 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 dividend return may vary from time to
time depending on market conditions, the composition of the
investment portfolio and its operating expenses. These
factors and possible differences in the methods used in
calculating current dividend 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.
The average annual total return (computed in the manner
described in the Prospectus) and yield for each Fund are
shown in the table below (except Mid Cap Fund, which had not
commenced operations during the relevant period). 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
(7.52)% (7.81)% (8.45)%
10/31/98
iii) total return since inception
(based on inception date of 2/21/95) --
15.88% 15.02%
iii) total return since inception
(based on inception date of 8/08/96) 6.26%
-- --
International Equity Fund
i) total return for one year period ended
10/31/98 4.96%
4.41% 3.54%
ii) total return since inception
(based on inception date of 2/21/95) --
13.62% 12.78%
iii) total return since inception
(based on inception date of 8/08/96) 8.16%
-- --
Class 1
Class A Class B
Shares
Shares Shares
Growth Fund
i) total return for one year period ended
10/31/98 12.54%
12.27% 11.43
ii) total return for five year period ended
10/31/98 16.75%
-- --
iii) Total return for the ten year period ended
10/31/98 15.62%
-- --
iv) total return since inception
(based on inception date of 4/14/87) 12.93%
-- --
v) total return since inception
(based on inception date of 8/18/96) --
17.58 16.77%
Growth and Income Fund
i) total return for one year period ended
10/31/98 10.90%
10.63% 9.85%
ii) total return for five year period ended
10/31/98 15.95%
-- --
iii) total return for ten year period ended
10/31/98 14.88%
-- --
iv) total return since inception
(based on inception date of 4/14/87) 12.23%
-- --
v) total return since inception
(based on inception date of 8/18/96) --
16.92% 16.07%
Government Fund
i) total return for one year period ended
10/31/98 7.29%
7.00% 6.20%
ii) total return for five year period ended
10/31/98 5.64%
-- --
iii) total return for ten year period ended
10/31/98 8.05%
-- --
iv) total return since inception
(based on inception date of 4/14/87) 7.60%
-- --
v) total return since inception
(based on inception date of 8/08/96) --
6.15% 5.36%
vi) yield 5.04% 4.91%
4.41%
Municipal Bond Fund
i) total return for one year period ended
10/31/98 7.20%
6.93% 6.10%
ii) total return for five year period ended
10/31/98 6.00%
-- --
iii) total return for ten year period ended
10/31/98 7.49%
-- --
iv) total return since inception
(based on inception date of 7/13/88) 7.70%
-- --
v) total return since inception
(based on inception date of 8/18/96) --
7.10% 6.28%
vi) yield 3.58% 3.36%
2.77%
vii) tax equivalent yield 5.19%
4.87% 4.01%
* 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 an individual's annual contribution
to an IRA is the lesser of 100% of compensation or $2,000.
The Small Business Job Protection Act of 1996 changed the
eligibility requirements for participants in Individual
Retirement Accounts ("IRAs"). Under these new provisions,
if you or your spouse have earned income, each of you may
establish an IRA and make maximum annual contributions equal
to the lesser of earned income or $2,000. As a result of
this legislation, married couples where one spouse is non-
working may now contribute a total of $4,000 annually to
their IRAs.
The Taxpayer Relief Act of 1997 changed the requirements for
determining whether or not you are eligible to make a
deductible IRA contribution. Under the new rules effective
beginning January 1, 1998, if you are considered an active
participant in an employer-sponsored retirement plan, you
may still be eligible for a full or partial deduction
depending upon your combined adjusted gross income ("AGI").
For married couples filing jointly for 1998 a full deduction
is permitted if your combined AGI is $50,000 or less
($30,000 for unmarried individuals); a partial deduction
will be allowed when AGI is between $50,000-$60,000
($30,000-$40,000 for an unmarried individual); and no
deduction is available when AGI is above $60,000 ($40,000
for an unmarried individual). However, if you are married
and your spouse is covered by an employer-sponsored
retirement plan, but you are not, you will be eligible for a
full deduction if your combined AGI is $150,000 or less. A
partial deduction is permitted if your combined AGI is
between $150,000-160,000, and no deduction is permitted when
AGI is above $160,000.
The rules applicable to so-called "Roth IRAs" differ from
those described 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.
Transfer Agent
First Data Investor Services Group, Inc. is located at
Exchange Place, Boston, Massachusetts 02109. The Trust has
engaged the services of PFS Shareholder Services as the Sub-
Transfer Agent. The Sub-Transfer Agent is located at 3100
Breckinridge Blvd., Bldg 200, Duluth, Georgia 30095-0062.
Custody of Assets
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 International Equity Fund. Chase Manhattan Bank,
located at Chase Metrotech Center, Brooklyn, NY 11245
serves as Custodian for International Equity Fund.
Shareholder Reports
Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent
accountants. Also available at the shareholder's request,
is an Account Transcript identifying every financial
transaction in an account since it was opened. To defray
administrative expenses involved with providing multiple
years worth of information, 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.
Independent Auditors
Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, 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.
About the Trust
The Trust was organized on January 29, 1987 under the laws
of The Commonwealth of Massachusetts and is a business
entity commonly known as a ''Massachusetts business trust.''
It is a diversified, open-end management investment company
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 fractional votes for fractional shares held in
the election of Trustees (to the extent hereafter provided)
and on other matters submitted to the vote of shareholders.
Each class of shares represents 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 purpose
of electing Trustees unless and until such time as less than
a majority of the Trustees holding office have been elected
by shareholders, at which time the Trustees then in office
will call a shareholders' meeting for the election of
Trustees. Shareholders may, in accordance with the
Declaration of Trust, cause a meeting of shareholders to be
held for the purpose of voting on the removal of Trustees.
Except as set forth above, the Trustees shall continue to
hold office and appoint successor Trustees.
FINANCIAL STATEMENTS
The Trust's Annual Report for the fiscal year ended October
31, 1998 is incorporated herein by reference in its
entirety.
APPENDIX
ARATINGS OF MUNICIPAL BONDS, NOTES AND COMMERCIAL PAPER
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.
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