STATEMENT OF ADDITIONAL INFORMATION
CONCERT INVESTMENT SERIES
388 Greenwich Street
New York, NY 10013
February 28, 1999, as amended October 7, 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 (this "SAI") is not a Prospectus
but contains information in addition to and more detailed than that set
forth in the current Prospectuses of the Trust dated February 28, 1999 and
March 31, 1999, and should be read in conjunction with a Prospectus.
For purchases through PFS Investments Inc.:
A Prospectus dated February 28, 1999 may be obtained without charge by
writing PFS Shareholder Services at 3100 Breckinridge Boulevard, Bldg. 200,
Duluth, Georgia 30099-0001. PFS customers may call Customer Service at
(800) 625-4554 for information about the Funds.
For purchases through Citibank Investment Services or other Service Agents:
A Prospectus dated February 28, 1999, as amended March 31, 1999, may be
obtained without charge from your financial professional or by calling (800)
625-4554.
TABLE OF CONTENTS
Page
General Information 2
Goals and Investment Policies 2
Investment Practices 8
Risk Factors 20
Investment Restrictions 24
Trustees and Officers 28
Investment Advisory Agreements 30
Distributor 33
Portfolio Turnover 34
Distribution Plans 34
Portfolio Transactions and Brokerage 36
Determination of Net Asset Value 39
Purchase and Redemption of Shares 40
Exchange Privilege 50
Distributions and Federal Taxes 54
Other Information 58
Appendix A - Ratings of Municipal Bonds, Notes and Commercial Paper 63
GENERAL INFORMATION
SSBC Fund Management, Inc., formerly Mutual Management Corp. ("SSBC" or the
"manager"), 388 Greenwich Street, New York, NY 10013 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 January 31, 1999. The manager is an affiliate of Salomon Smith Barney
Inc. ("Salomon Smith Barney"). 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, SSB Citi Asset Management, Travelers Life & Annuity, and Travelers
Property Casualty.
CFBDS, Inc. (the "Distributor") is the distributor of the funds' shares.
Shares of the funds (each, a "Fund" and collectively, the "Funds") of
Concert Investment Series (the "Trust") are offered for sale by PFS
Investments Inc. ("PFS Investments") and other broker-dealers or financial
institutions that have entered into a dealer agreement with the Distributor
(collectively, "Other Service Agents"). Shares of the funds sold through
PFS Investments are held in accounts of PFS Shareholder Services, and are
referred to as "PFS Accounts" in this SAI. Shares sold through Other
Service Agents are held in accounts of First Data Investor Services, Inc.
("First Data"), the Trust's transfer agent (the "Transfer Agent"), and are
referred to as "Other Accounts" in this SAI.
PFS Investments is an indirect wholly-owned subsidiary of Citigroup. PFS
Shareholder Services, Inc. (the "Sub-Transfer Agent") performs services for
PFS Accounts as sub-transfer agent, and is a subsidiary of PFS Services,
Inc., an affiliate of Primerica Financial Services, Inc. ("Primerica
Financial").
For PFS Accounts, a Prospectus dated February 28, 1999 relating to the Class
1, Class A and Class B shares of the Trust (as amended from time to time,
the "PFS Prospectus") sets forth important information relevant to
shareholders purchasing through PFS Investments and/or holding their shares
through PFS Accounts and is the relevant Prospectus.
For Other Accounts, a Prospectus dated February 28, 1999, as amended March
31, 1999, relating to the Class A and Class B shares of the Trust (as
amended from time to time, the "Additional Prospectus") sets forth important
information relevant to shareholders purchasing through Other Service Agents
and/or holding their shares through Other Accounts.
The PFS Prospectus and the Additional Prospectus are sometimes referred to
generically in this SAI as the "Prospectus." Such references to the
Prospectus in this SAI should be understood as references to the relevant
Prospectus for a particular shareholder.
Two classes of shares are offered to PFS Accounts and Other Accounts
(collectively, "All Accounts"): Class A shares and Class B shares. In
addition, Class 1 shares are offered only to "Eligible Class 1 Purchasers"
through PFS Accounts. ("Eligible Class 1 Purchasers" consist of previously
established Class 1 shareholders or members of a family unit comprised of a
husband, wife and minor children, and Class 1 shareholders of a fund
exchanging their Class 1 shares for those of another fund.) Each class of
shares represents an interest in the same portfolio of securities of the
relevant Fund.
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.
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 therefore
may be changed by the Trustees without shareholder approval. Although each
Fund has a different goal which it pursues through separate investment
policies, 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 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 could 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
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 certain 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 that do not qualify them as medium sized at the time of the
Fund's investment.
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 a 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") and may also purchase 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.
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.
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 certain investment practices. The
Funds indicated may engage in these and any other practices not prohibited
by their investment restrictions. For further information about 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 Funds 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.
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".
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.
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") creates 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 Bond is 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 expects to 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.
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. 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, Mid Cap Fund and
Government 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 rated in the
fourth highest ratings category by an NRSRO, such as those 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 the fourth highest ratings category by an NRSRO,
including those rated below Baa by Moody's or BBB by S&P, are not
"investment grade," and may have more 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. 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 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. 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;
8. 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
9. 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.
* Denotes a Trustee that is an "interested person" of the Trust within the
meaning of the 1940 Act.
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.
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 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 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.
TRUSTEE COMPENSATION
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
Name
EM INT G
G/I GVT MB
Retire-
ment
Benefit
s
Accrued
as Part
of Fund
Expense
s
(1)
Total
Compen-
sation
Paid From
Trust and
Fund
Complex
Dr. Donald M.
Carlton
$2,640
$478
$36,95
4
$12,58
4
$2,26
9
$1,074
- -
$56,000
Dr. A. Benton
Cocanougher
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Stephen Randolph
Gross
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Heath B. McLendon*
- -
- -
- -
- -
- -
- -
- -
- -
Dr. Alan G. Merten
2,472
443
33,555
11,491
2,062
976
- -
51,000
Dr. Steven
Muller(2)
614
116
11,957
3,923
709
329
- -
17,649
Dr. R. Richardson
Pettit
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Alan B. Shepard,
Jr.(2)
2,100
372
26,093
9,089
1,592
754
- -
40,000
*Designates an "Interested Person" of the Trust, 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.
INVESTMENT ADVISORY AGREEMENTS
Investment Manager. The manager provides investment advisory and management
services to the Trust, and to other investment companies affiliated with
Salomon Smith Barney.
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 investment
management fees at the following rates, based on the following amounts of
their average daily net assets:
? For Emerging Growth Fund, Growth Fund and Growth and Income Fund
(calculated separately for each Fund), 0.65% of the first $1 billion;
0.60% of the next $1 billion; 0.55% of the next $1 billion; 0.50% of the
next $1 billion; and 0.45% of the average daily net assets in excess of
$4 billion.
? For Mid Cap Fund, 0.75% of the Fund's average daily net assets.
? For International Equity Fund, 1.00% of the Fund's average daily net
assets.
? For the Government Fund, 0.60% of the first $1 billion; 0.55% of the next
$1 billion; 0.50% of the next $1 billion; 0.45% of the next $1 billion;
0.40% of the next $1 billion; and 0.35% of the Fund's average daily net
assets in excess of $5 billion.
? For the Municipal Bond Fund, 0.60% of the first $1 billion; 0.55% of the
next $1 billion; 0.50% of the next $1 billion; 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 fiscal year 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 until December 31, 1997, when the SSBC replaced VKAC as
the manager of each Fund. Prior to December 31, 1997, SSBC acted as the
Sub-Adviser to International Equity Fund.
Each Fund's Advisory Agreement 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 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. For PFS Accounts, 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. For Other
Accounts, you may request a copy from you financial professional or call
(800) 625-4554.
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 any Other Service Agent (collectively, "Service
Agents"), or any of their affiliates, may also pay for certain non-cash
sales incentives provided to PFS Investments registered representatives or,
as applicable, other financial professionals (collectively, "Financial
Professionals"). 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, Service Agents may, from time to time, pay
or allow additional reallowances or promotional incentives, in the form of
cash or other compensation to Financial Professionals 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") and with one or more
Other Service Agents giving the Service Agents 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, and prior to the date of this SAI, PFS was the sole Service
Agent.
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 and/or Service Agents bear 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 Trust has adopted two Distribution Plans (hereinafter referred to as the
''Class A Plan'' and the ''Class B Plan'') for its Class A shares and Class
B shares, respectively. The Rules of Conduct of the National Association of
Securities Dealers, Inc. (''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 a Fund may pay for such
distribution costs.
Under the Class A Plan, each Fund pays PFS Distributors, Inc. and Salomon
Smith Barney, as administrative agents for PFS Accounts and Other Accounts,
respectively (the "Administrative Agents") 0.25% per annum of its average
daily net assets attributable to such class of shares as a service fee. The
service fee is intended to cover shareholder and account maintenance
services provided to Class A shareholders of each Fund by Financial
Professionals.
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, which fees are paid to the Administrative Agents. Payments are made
by each Fund under the Class B Plan of 0.25% per annum, and distribution fee
payments of 0.75% per annum, of the aggregate average daily net assets
attributable to Class B shares. The distribution fee payments are used as
compensation for sales and promotional activities and marketing of the Class
B shares. The expenditures under the Class B Plan may consist of sales
commissions to Financial Professionals 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 is entitled to receive the proceeds of the initial sales
charge, if any, paid upon the purchase of Class A shares, and said amount is
paid to Financial Professionals. PFS and Salomon Smith Barney are entitled
to receive the contingent deferred sales charge paid upon certain
redemptions of Class B shares directly from the Fund, for PFS Accounts and
other Accounts, respectively, 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 fees as compensation for service (and for the
Class B Plan, distribution) activities, not as reimbursement for specific
expenses incurred. Thus, even if such expenses exceed service or
distribution fees paid by any Fund, the Fund will not be obligated to pay
more than those fees and, if expenses are less than such fees, the
Administrative Agents may retain the full fees and realize a profit. Each
Fund will pay the applicable service fees and distribution fees until either
the applicable Plan is terminated or not renewed. In that event, expenses in
excess of service fees and distribution fees received or accrued through the
termination date will be the sole responsibility of 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 by the Administrative Agents and
Service Agents under the Class B Plan for any given year are expected to
exceed the fees received by them form the Funds pursuant to the Class B Plan
and pursuant to contingent deferred sales charges. Such excess will not be
carried forward in future years. If the Class B Plan is terminated or is
not continued, the Fund would not be contractually obligated and has no
liability to pay for any expenses incurred that have not previously
reimbursed by the Fund or recovered through contingent deferred sales
charges.
In reporting amounts expended under the Plans to the Trustees, expenses
attributable to the sale of both Class A and Class B shares will be
allocated 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
related service agreements were approved by the Board of 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 the Plans or in any agreements
related to each Plan ("Independent Trustees"). In doing so, the Board of
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 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
relevant class, for any Fund. Any change in any of the Plans that would
materially increase the distribution or service expenses borne by a class of
a Fund requires shareholder approval by the relevant 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 a Plan is in effect, the
selection or nomination of any additional Independent Trustees is committed
to the discretion of the Independent Trustees.
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 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 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 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 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 under the Plans.
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.
To the extent consistent with the NASD Rules, 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 Funds effect their 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 Funds. 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 Funds will not be
disproportionate to the benefits received by the Funds 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 Funds
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 Funds. In making such allocations
among the Trust and other advisory accounts, the main factors considered by
the manager over the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, and the size of investment commitments generally held.
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 (successor to
Smith Barney Inc. "Smith Barney") and Robinson Humphrey, Inc. ("Robinson
Humphrey"), because they are affiliated with the manager. For the periods
covered below (including those prior to December 31, 1997, when the manager
assumed investment advisory responsibilities from VKAC), Smith Barney and
Robinson Humphrey were affiliated with PFS Distributors, Inc., which was the
Distributor prior to October 8, 1998. 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 affiliated with the manager or the Distributor (or its
predecessor). The Board of Trustees has adopted procedures designed to
ensure that commissions paid to an affiliated broker on any transaction
would be comparable to that payable to a non-affiliated broker in a similar
transaction.
The Funds paid the following commissions to affiliated brokers during the
periods shown:
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 - -
Percentage of Transactions with
Affiliates to Total Transactions
Robinson Smith
Humphrey Barney
Emerging Growth 3.81% 6.31%
International Equity - 7.30%
Growth 0.52% 3.94%
Growth & Income 0.15% 9.12%
Government - -
Municipal Bond - -
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 - - - -
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
The assets attributable to the Class A, Class B and Class 1 shares of each
Fund reflect the value of separate interests in a single portfolio of
securities. 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 at 4:00 p.m., New York
time (or at the close of the New York Stock Exchange (the "Exchange"), if
earlier, on each business day on which the Exchange is open.
The value of equity securities is computed by (i) valuing listed or unlisted
securities for market quotations are readily available at the prices
reported by an independent pricing services, or as supplied by the National
Association of Securities Dealers Automated Quotations (NASDAQ) or by
broker-dealers, and (ii) 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 Board of 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).
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. 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 Board of Trustees, determines that the particular event
would materially affect net asset value. As a result, a Fund's net asset
value may be significantly affected by such trading on days when a
shareholder has no access to the Funds.
U.S. Government securities are traded in the over-the-counter market and
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. Debt securities having a
remaining maturity of 60 days or less are valued on an amortized cost basis
to the extent this approximates market value.
Municipal Bonds are valued by an independent pricing 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 AND REDEMPTION OF SHARES
Alternative Purchase Arrangements. Each Fund offers two Classes of shares
to investors purchasing through PFS Accounts and Other Accounts. 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. In
addition, the Funds offer Class 1 shares only to Eligible Class 1 Purchasers
through PFS Accounts.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the
shares are subject to lower ongoing expenses over the term of the
investment. As an alternative, Class B shares are sold without any initial
sales charge so the entire purchase price is immediately invested in a Fund.
Any investment return on these additional invested amounts may partially or
wholly offset the higher annual expenses of this Class. Because a Fund's
future return cannot be predicted, however, there can be no assurance that
this would be the case.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire
purchase price will be immediately invested in a Fund. In addition, Class A
share purchases of $500,000 or more will be made at net asset value with no
initial sales charge, but will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase. The $500,000 investment may be met by
adding the purchase to the net asset value of all Class A shares offered
with a sales charge held in funds listed below under "Exchange Privilege."
Class A share purchases also may be eligible for a reduced initial sales
charge. Because the ongoing expenses of Class A shares may be lower than
those for Class B shares, purchasers eligible to purchase Class A shares at
net asset value or at a value or at a reduced sales charge should consider
doing so.
Financial Professionals may receive different compensation for selling
different Classes of shares. Investors should understand that the purpose
of the CDSC on the Class B shares is the same as that of the initial sales
charge on the Class A shares.
How to Purchase Shares. The procedures for purchasing shares varies
according to whether you purchase through a PFS Account or Other Account:
PFS ACCOUNTS
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 30099-0062. 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.
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 $27.50
per returned purchase by PFS or the Sub-Transfer Agent.
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 Salomon
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. Purchase orders received by the
Transfer Agent or 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.
Upon completion of certain automated systems, initial purchases of Fund
shares may be made by wire. The minimum investment that can be made by wire
is $10,000. Before sending the wire, the PFS Investments Inc. Registered
Representative must contact the Sub-Transfer Agent at (800) 665-8677 to
obtain proper wire instructions. Once an account is open, a shareholder may
make additional investments by wire. The shareholder should contact the
Sub-Transfer Agent at (800) 544-5445 to obtain proper wire instructions.
Upon completion of certain automated systems, shareholders who establish
telephone transaction authority on their account and supply bank account
information may make additions to their accounts at any time. Shareholders
should contact the Sub-Transfer Agent at (800) 544-5445 between 9:00 a.m.
and 6:00 p.m. eastern time any day that the NYSE is open. If a shareholder
does not wish to allow telephone subsequent investments by any person in his
account, he should decline the telephone transaction option on the account
application. The minimum telephone subsequent investment is $250 and can be
up to a maximum of $10,000. By requesting a subsequent purchase by
telephone, you authorize the Sub-Transfer agent to transfer funds from the
bank account provided for the amount of the purchase. A shareholder who has
insufficient funds to complete the transfer will be charged a fee of up to
$27.50 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 up to $27.50 by PFS or the Sub-
Transfer Agent. Subsequent investments by telephone may not be available if
the shareholder cannot reach the Sub-Transfer Agent 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 subsequent investment
procedure described above.
OTHER ACCOUNTS
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate prior written disclosure of any fees
that it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers. Your Service agent is the
shareholder of record for the shares of the Fund you own.
Investors may be able to establish new accounts in the fund under one of
several tax-sheltered plans. Such plans include IRAs, Keogh or Corporate
Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts, and
certain other qualified pension and profit-sharing plans. Investors should
consult with their Service Agent and their tax and retirement advisers.
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 or Service 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. For PFS
Accounts, a shareholder who has insufficient funds to complete the transfer
will be charged a fee of up to $25, and 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.
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 the Administrative Agent, which in turn pays Service
Agent to compensate their Financial Professionals 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. The initial sales charge does not apply to
Class A shares acquired through the reinvestment of dividends and capital
gains distributions.
PFS ACCOUNTS
Purchases of Class A shares through PFS Accounts may be made at net asset
value without a sales charge in the following circumstances:
(a) sales to Board Members and employees of Citigroup and its subsidiaries;
(b) sales to Board Members of the Smith Barney Mutual Funds or any other
mutual funds for which members of Citigroup act as investment advisor,
administrator or service agent (including retired Board Members); the
immediate families of such persons (including the surviving spouse of a
deceased Board Member); and to a pension, profit-sharing or other benefit
plan for such persons;
(c) sales to employees of member firms 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;
(d) issuance to any other investment company to effect the combination of
such company with the Fund by merger, acquisition of assets or otherwise;
(e) 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;
(f) purchases by accounts managed by registered investment advisory
subsidiaries of Citigroup;
(g) sales through Financial Professionals of Service Agents where the amounts
invested represent the redemption proceeds from other 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;
(h) direct rollovers by plan participants of distributions from a 401(k) plan
enrolled in the Salomon Smith Barney 401(k) Program (note: subsequent
investments will be subject to the applicable sales charge);
(i) purchases by separate accounts used to fund certain unregistered variable
annuity contracts; and
(j) purchases by investors participating in a Salomon Smith Barney fee based
arrangement.
PFS 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.
OTHER ACCOUNTS
In certain circumstances, the initial sales charge imposed on purchases of
Class A shares through Other Accounts, and the CDSC imposed upon sales of
Class A or Class B shares through Other Accounts, are waived. Waivers are
generally instituted in order to promote good will with persons or entities
with which Citibank or the Distributor or their affiliates have business
relationships, or because the sales effort, if any, involved in making such
sales is negligible, or, in the case of certain CDSC waivers, because the
circumstances surrounding the sale of Fund shares were not foreseeable or
voluntary. These sales charge waivers may be modified or discontinued at any
time.
Class A shares may be purchased through Other Accounts without a sales
charge by:
(a) tax exempt organizations under Section 501(c)(3-13) of the Internal
Revenue Code;
(b) trust accounts for which Citibank, N.A or any subsidiary or affiliate of
Citibank acts as trustee and exercises discretionary investment
management authority;
(c) accounts for which Citibank or any subsidiary or affiliate of Citibank
performs investment advisory services or charges fees for acting as
custodian;
(d) directors or trustees (and their immediate families), and retired
directors and trustees (and their immediate families), of any investment
company for which Citibank or any subsidiary or affiliate of Citibank
serves as the investment adviser or as a service agent;
(e) employees of Citibank and its affiliates, CFBDS, Inc. and its affiliates
or any Service Agent and its affiliates (including immediate families of
any of the foregoing), and retired employees of Citibank and its
affiliates or CFBDS, Inc. and its affiliates (including immediate
families of the foregoing);
(f) investors participating in a fee-based or promotional arrangement
sponsored or advised by Citibank or its affiliates;
(g) investors participating in a rewards program that offers Fund shares as
an investment option based on an investor's balances in selected
Citigroup Inc. products and services;
(h) employees of members of the National Association of Securities Dealers,
Inc., provided that 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;
(i) separate accounts used to fund certain unregistered variable annuity
contracts;
(j) direct rollovers by plan participants from a 401(k) plan offered to
Citigroup employees;
(k) shareholder accounts established through a reorganization or similar form
of business combination approved by a Fund's Board of Trustees or by the
Board of Trustees of any other CitiFund or mutual fund managed or advised
by Citibank (all of such funds being referred to herein as CitiFunds) the
terms of which entitle those shareholders to purchase shares of a Fund or
any other CitiFund at net asset value without a sales charge;
(l) employee benefit plans qualified under Section 401 of the Internal
Revenue Code, including salary reduction plans qualified under Section
401(k) of the Code, subject to minimum requirements as may be established
by CFBDS, Inc. with respect to the amount of purchase; currently, the
amount invested by the qualified plan in a Fund or in any combination of
CitiFunds must total a minimum of $1 million;
(m) accounts associated with Copeland Retirement Programs;
(n) investors purchasing $500,000 or more of Class A shares; in determining
whether a contingent deferred sales charge on Class A shares is payable,
see "Deferred Sales Charge Alternatives" below in this section;
(o) subject to appropriate documentation, investors where the amount invested
represents redemption proceeds from a mutual fund (other than a Concert
Investment Series Fund), if:
- - the redeemed shares were subject to an initial sales charge or a
deferred sales charge (whether or not actually imposed), and
- - the redemption has occurred no more than 60 days prior to the
purchase of Class A shares of the Fund;
(p) an investor who has a business relationship with an investment consultant
or other registered representative who joined a broker-dealer which has a
sales agreement with CFBDS, Inc. from another investment firm within six
months prior to the date of purchase by the investor, if:
- - the investor redeems shares of another mutual fund sold through the
investment firm that previously employed that investment consultant
or other registered representative, and either paid an initial sales
charge or was at some time subject to, but did not actually pay, a
deferred sales charge or redemption fee with respect to the
redemption proceeds
- - the redemption is made within 60 days prior to the investment in a
Fund, and
- - the net asset value of the shares of the Fund sold to that investor
without a sales charge does not exceed the proceeds of the redemption.
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, in the case
of PFS Accounts, 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.
PFS ACCOUNTS
Cumulative Purchase Discount. The reduced sales load reflected in the sales
charge tables applies to purchases of Class A and Class 1 shares of the
various Funds. An aggregate investment includes all shares of all of the
Funds (and any other eligible funds, as described above), plus the shares
being purchased. The current offering price is used to determine the value
of all such shares. The same reduction is applicable to purchases under a
Letter of Intent as described below. PFS Investments must notify the
Distributor at the time an order is placed for a purchase which would
qualify for the reduced charge on the basis of previous purchases. Similar
notification must be given in writing when such an order is placed by mail.
The reduced sales charge will not be applied if such notification is not
furnished at the time of the order. The reduced sales charge will also not
be applied unless the records of the Distributor or the Transfer Agent
confirm the investor's representations concerning his holdings.
OTHER ACCOUNTS
Reduced Sales Charge Plan. A qualified group may purchase shares as a
single purchaser under the reduced sales charge plan. The
purchases by the group are lumped together and the sales charge is based on
the lump sum. A qualified group
must:
(a) have been in existence for more than six months;
(b) have a purpose other than acquiring Fund shares at a discount;
(c) satisfy uniform criteria that enable CFBDS, Inc. to realize economies of
scale in its costs of distributing shares;
(d) have more than ten members;
(e) be available to arrange for group meetings between representatives of the
Funds and the members;
(f) agree to include sales and other materials related to the Funds in its
publications and mailings to members at reduced or no cost to the
distributor; and
(g) seek to arrange for payroll deduction or other bulk transmission of
investments to the Funds.
Letter of Intent. A Letter of Intent for amounts of $50,000 or more for
PFS Accounts, and $25,000 or more for other Accounts, 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, in the case of
PFS Accounts, 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 your Service Agent to
obtain a Letter of Intent application.
PFS ACCOUNTS
A Letter of Intent applies to purchases of Class A shares of all Funds 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 Service Agent or, if not paid, the
Service Agent 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.
OTHER ACCOUNTS
Subject to acceptance by CFBDS, Inc., the Funds' distributor, and the
conditions mentioned below, each purchase under a letter of intent will be
made at a public offering price applicable to a single transaction of the
dollar amount specified in the letter of intent.
(a) The shareholder or, if the shareholder is a customer of a Service Agent,
his or her Service Agent must inform CFBDS that the letter of intent is
in effect each time shares are purchased;
(b) The shareholder makes no commitment to purchase additional shares, but if
his or her purchases within 13 months plus the value of shares credited
toward completion of the letter of intent do not total the sum specified,
an increased sales charge will apply as described below;
(c) A purchase not originally made pursuant to a letter of intent may be
included under a subsequent letter of intent executed within 90 days of
the purchase if CFBDS is informed in writing of this intent within the
90-day period;
(d) The value of shares of a Fund presently held, at cost or maximum offering
price (whichever is higher), on the date of the first purchase under the
letter of intent, may be included as a credit toward the completion of
the letter, but the reduced sales charge applicable to the amount covered
by the letter is applied only to new purchases;
(e) Instructions for issuance of shares in the name of a person other than
the person signing the letter of intent must be accompanied by a written
statement from the Transfer Agent or a Service Agent stating that the
shares were paid for by the person signing the letter;
(f) Neither income dividends nor capital gains distributions taken in
additional shares will apply toward the completion of the letter of
intent; and
(g) The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the letter of intent are
deducted from the total purchases made under the letter of intent.
If the investment specified in the letter of intent is not completed (either
prior to or by the end of the 13-month period), the Transfer Agent will
redeem, within 20 days of the expiration of the letter of intent, an
appropriate number of the shares in order to realize the difference between
the reduced sales charge that would apply if the investment under the letter
of intent had been completed and the sales charge that would normally apply
to the number of shares actually purchased. By completing and signing the
letter of intent, the shareholder irrevocably grants a power of attorney to
the Transfer Agent to redeem any or all shares purchased under the letter of
intent, with full power of substitution.
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 Conversion Feature. 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 shares acquired
through the reinvestment of dividends and distributions ("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.
Because the per share net asset value of the Class A shares may be higher
than that of the Class B shares at the time of conversion, a shareholder may
receive fewer Class A shares than the number of Class B shares converted,
although the dollar value will be the same.
Class B shares of a Fund purchased in PFS Accounts 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, 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.
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
Waiver of CDSC.
PFS ACCOUNTS
For PFS Accounts, 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.
OTHER ACCOUNTS
See "Initial Sales Charge Waivers-Other Accounts". There is no CDSC on
shares representing capital appreciation or on shares acquired through
reinvestment of dividends or capital gains distributions.
The CDSC will be waived for Other Accounts in connection with:
(a) a total or partial redemption made within one year of the death of the
shareholder; this waiver is available where the deceased shareholder is
either the sole shareholder or owns the shares with his or her spouse as
a joint tenant with right of survivorship, and applies only to redemption
of shares held at the time of death;
(b) a lump sum or other distribution in the case of an Individual Retirement
Account (IRA), a self-employed individual retirement plan (Keogh Plan) or
a custodian account under Section 403(b) of the Internal Revenue Code, in
each case following attainment of age 59 1/2;
(c) a total or partial redemption resulting from any distribution following
retirement in the case of a tax-qualified retirement plan;
(d) a redemption resulting from a tax-free return of an excess contribution
to an IRA; and
(e) redemptions made under a Fund's Systematic Withdrawal Plan.
Purchases of Class 1 Shares. Class 1 shares are offered only through PFS
Accounts, and only to Eligible Class 1 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
(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
(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 (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 Distributors, Inc. pays to PFS Investments a
promotional fee calculated as a percentage of the sales charge reallowed to
PFS. The percentage used in the calculation is 3%.
The Distributor may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, Service Agents or their
affiliates may also pay for certain non-cash sales incentives provided to
financial professionals. 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, Service Agents may, from time to time, pay
or allow additional reallowances or promotional incentives, in the form of
cash or other compensation to financial professionals that sell shares of
the Trust.
Class 1 shares 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
Exchange privilege - General.
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 funds eligible
for the exchange privilege 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 the Fund then owned, 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.
PFS ACCOUNTS
For PFS Accounts, 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 other Funds
of the Trust and in the following funds, to the extent shares are offered
for sale in the shareholder's state of residence. Exchanges of Class 1
shares into a fund that does not offer Class 1 shares 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.
- - Concert Peachtree Growth Fund
- - Concert Social Awareness Fund
- - Smith Barney Appreciation Fund Inc.
- - Smith Barney Concert Allocation Series Inc.-Balanced Portfolio
- - Smith Barney Concert Allocation Series Inc.-Conservative Portfolio
- - Smith Barney Concert Allocation Series Inc.- Growth Portfolio
- - Smith Barney Concert Allocation Series Inc.-High Growth Portfolio
- - Smith Barney Concert Allocation Series Inc.-Income Portfolio
- - Smith Barney Investment Grade Bond Fund
- - *Smith Barney Money Funds, Inc.-Cash Portfolio
- - **Smith Barney Exchange Reserve Fund
* Available for exchange with Class A shares of a Fund.
** Available for exchange with Class B shares of a Fund.
Upon completion of certain automated systems, shareholders who establish
telephone transaction authorization on their account may request an exchange
by telephone. If a shareholder does not wish to allow telephone exchanges
by any person in his account, he should decline the telephone transaction
option on the account application. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon
receipt of all supporting documents in proper form. Exchanges between funds
involving exact registrations do not require a signature guarantee.
OTHER ACCOUNTS
For Other Accounts, Class A and Class B shares of a Fund may be exchanged
for shares of the same class in any other Fund of the Trust, or for shares
of the same class of CitiFunds Cash Reserves.
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
other funds eligible for the exchange privilege, and the shareholder would
be expected to maintain such investment 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 for PFS Accounts, 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 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
Redemption-General. In all cases, the redemption price is the net asset
value per share of the Fund next determined after the request for redemption
is received in proper form by the Transfer Agent (in the case of PFS
Accounts, the Sub-Transfer Agent). Payment for shares redeemed will be made
by check mailed within three days after acceptance by the Transfer Agent (in
the case of PFS Accounts, 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 Transfer Agent (in the case of PFS Accounts, 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.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of a Fund more than seven days during any period when (a)
trading in the markets a Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the SEC exists making
disposal of the Fund's investments or determination of its net asset value
not reasonably practicable; (b) the New York Stock Exchange is closed (other
than customary weekend and holiday closings); or (c) the SEC has by order
permitted such suspension.
PFS ACCOUNTS
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 30099-0062. 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.
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 Telephone Redemption
service to redeem his or her account as long as they have authorized the
telephone redemption option. If a shareholder does not wish to allow
telephone redemptions by any person in his account, he should decline the
telephone transaction option on the account application. The telephone
redemption option can be used only if: (a) the redemption proceeds are to be
mailed to the address of record and there has been no change of address of
record within the preceding 45 days; (b) the shares to be redeemed are not
in certificate form; (c); the person requesting the redemption can provide
proper identification information; and (d) the proceeds of the redemption do
not exceed $50,000. 403(b)(7) accounts and accounts not registered in the
name of individual(s) are not eligible for the telephone redemption option.
Telephone redemption requests can be made by contacting the Sub-Transfer
Agent at (800) 544-5445 between 9:00 a.m. and 6:00 p.m. eastern time any day
that the NYSE is open. Telephone redemption may not be available if the
shareholder cannot reach the Sub-Transfer Agent 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.
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.
After following the redemption guidelines stated in the Prospectus and SAI,
a shareholder may elect to have the redemption proceeds transferred via Wire
or ACH directly to the shareholder's bank account of record (defined as a
currently established pre-authorized draft on the shareholder's account
included with the application or with no changes within the previous 30
days) as long as the bank account is registered in the same name(s) as the
account with the Fund. Redemption proceeds can be sent by check to the
address of record or by wire transfer to a bank account designated on the
application. A shareholder will be charged a $25 service fee for wire
transfers and a nominal service fee for transfers made directly to the
shareholder's bank by the Automated Clearing House (ACH). If the proceeds
are not to be transferred to the bank account of record or mailed to the
registered owner, the request must be submitted in writing and a signature
guarantee will be required from all shareholders. Redemption proceeds will
normally be sent 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 his/her bank within 48 to 72 hours for wire
transfers and 72 to 96 hours for ACH transfers.
OTHER ACCOUNTS
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate prior written disclosure of any fees
that it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders for its customers.
Shareholders may redeem or exchange Fund shares by telephone, if their
account applications so permit, by calling the transfer agent or, if they
are customers of a Service Agent, their Service Agent. During periods of
drastic economic or market changes or severe weather or other emergencies,
shareholders may experience difficulties implementing a telephone exchange
or redemption. In such an event, another method of instruction, such as a
written request sent via an overnight delivery service, should be
considered. The Fund, the transfer agent and each Service Agent will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. These procedures may include recording of the telephone
instructions and verification of a caller's identity by asking for his or
her name, address, telephone, Social Security number, and account number. If
these or other reasonable procedures are not followed, the Fund, the
transfer agent or the Service Agent may be liable for any losses to a
shareholder due to unauthorized or fraudulent instructions. Otherwise, the
shareholder will bear all risk of loss relating to a redemption or exchange
by telephone.
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 a specified
amount.
PFS ACCOUNTS
For PFS Accounts, the amount of each withdrawal must be 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.
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. 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.
OTHER ACCOUNTS
For shareholders who hold shares through Other Accounts, there is a limit of
one withdrawal per month under the plan.
If you redeem Class A or Class B shares under the plan that are subject to a
CDSC, you are not subject to any CDSC applicable to the shares redeemed, but
the maximum amount that you can redeem under the Plan in any year is limited
to 10% of the average daily balance in your account. You may receive your
withdrawals by check, or have the monies transferred directly into your bank
account. Or you may direct that payments be made directly to a third party.
To participate in the plan, you must complete the appropriate forms provided
by your Service Agent.
Additional Purchase and Sale Information.
PFS ACCOUNTS
Neither the Series or its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The
Series reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at
any time following at least seven (7) days prior notice to shareholders.
This option is available for non-retirement plan accounts that are not
subject to a contingent deferred sales charge in the Concert Investment
Series Government Fund, Concert Investment Series Municipal Bond Fund (A
Shares and Class 1 Shares only).
OTHER ACCOUNTS
Each Service Agent has agreed to transmit to its customers who are
shareholders of a Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers.
Investors may be able to establish new accounts in the Funds under one of
several tax-sheltered plans. Such plans include IRAs, Keogh or Corporate
Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts, and
certain other qualified pension and profit-sharing plans. Investors should
consult with their Service Agent and their tax and retirement advisers.
Shareholders may redeem or exchange Fund shares by telephone, if their
account applications so permit, by calling the transfer agent or, if they
are customers of a Service Agent, their Service Agent. During periods of
drastic economic or market changes or severe weather or other emergencies,
shareholders may experience difficulties implementing a telephone exchange
or redemption. In such an event, another method of instruction, such as a
written request sent via an overnight delivery service, should be
considered. The Funds, the transfer agent and each Service Agent will employ
reasonable procedures to confirm that instructions communicated
by telephone are genuine. These procedures may include recording of the
telephone instructions and verification of a caller's identity by asking for
his or her name, address, telephone, Social Security number, and account
number. If these or other reasonable procedures are not followed, the Funds,
the transfer agent or the Service Agent may be liable for any losses to a
shareholder due to unauthorized or fraudulent instructions. Otherwise, the
shareholder will bear all risk of loss relating to a redemption or exchange
by telephone.
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. 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 transactions 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 fails 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. 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 gains
(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 Fund's 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.
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 transactions in options, futures contracts, or options on futures
contracts 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 their 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
total return since inception
(based on inception date of 2/21/95) -- 15.88%
15.02%
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 for PFS Accounts. The Sub-
Transfer Agent is located at 3100 Breckinridge Blvd., Bldg 200, Duluth,
Georgia 30099-0062.
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.
PFS ACCOUNTS
An Account Transcript is available at a shareholder's request, which
identifies 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.
Legal Counsel
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036
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.
As of December 31, 1997, the name of the Trust was changed from the Common
Sense Funds Trust to Concert Investment Series.
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.
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.
Other Information about Certain Banking Laws
The Glass-Steagall Act prohibits certain financial institutions, such as
Citibank, from underwriting securities of open-end investment companies,
such as the Fund. Citibank believes that its services under the Management
Agreements and the activities performed by it or its affiliates as Service
Agents are not under-writing and are consistent with the Glass-Steagall Act
and other relevant federal and state laws. However, there is no controlling
precedent regarding the performance of the combination of investment
advisory, share-holder servicing and administrative activities by banks.
State laws on this issue may differ from applicable federal law, and banks
and financial institutions may be required to register as dealers pursuant
to state securities laws. Changes in either federal or state statutes or
regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the Manager or Service Agent,
the Fund would seek alternative means for obtaining these services. The Fund
does not expect that shareholders would suffer any adverse financial
consequences as a result of any such occurrence.
FINANCIAL STATEMENTS
The Trust's Annual Report for the fiscal year ended October 31, 1998 is
incorporated herein by reference in its entirety.
APPENDIX A
RATINGS OF MUNICIPAL BONDS, NOTES AND COMMERCIAL PAPER
Moody's Investors Service, Inc.
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 edged." 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 that 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 that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's
AAA - Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A- Debt rated "A" has a strong capacity to pay interest and repay principal
although 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 an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated 'BB', 'B', 'CCC', 'CC' or 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
'BB' indicates the lowest degree of speculation and 'C' the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Plus (+) or Minus (-): The ratings from
'AA' to 'B' may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.
L - The letter "L" indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully
insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp.
+ - Continuance of the rating is contingent upon S&P's receipt of closing
documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Fitch IBCA, Inc.
AAA - Bonds rated AAA by Fitch have the lowest expectation of credit risk.
The obligor has an exceptionally strong capacity for timely payment of
financial commitments which is highly unlikely to be adversely affected by
foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial
commitment. This capacity is not significantly vulnerable to foreseeable
events.
A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be strong, but may be more vulnerable to changes in economic
conditions and circumstances than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to impair this capacity. This is the lowest
investment grade category assigned by Fitch.
BB - Bonds rated BB by Fitch carry the possibility of credit risk
developing, particularly as the result of adverse economic change over time.
Business or financial alternatives may, however, be available to allow
financial commitments to be met. Securities rated in this category are not
considered by Fitch to be investment grade.
B - Bonds rated B by Fitch carry significant credit risk, however, a limited
margin of safety remains. Although financial commitments are currently being
met, capacity for continued payment depends upon a sustained, favorable
business and economic environment.
CCC, CC, C - Default on bonds rated CCC, CC, and C by Fitch is a real
possibility. The capacity to meet financial commitments depends solely on a
sustained, favorable business and economic environment. Default of some kind
on bonds rated CC appears probable, a C rating indicates imminent default.
Plus and minus signs are used by Fitch to indicate the relative position of
a credit within a rating category. Plus and minus signs however, are not
used in the AAA category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment 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 changes and high internal cash
generation; well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Standard & Poor's
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issuers determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2 - Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.
Fitch IBCA, Inc.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet financial commitment in a timely
manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payments of financial commitments. The "+" denotes an
exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for timely
payment of financial commitments, but the margin of safety is not as great
as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non investment grade.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty of timely payment: short-term
liquidity is clearly outstanding, and safety is just below risk-free United
States Treasury short-term obligations.
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment: liquidity factors and
company fundamentals are sound. The Thomson BankWatch ("TBW")
TBW-1 - Indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely repayment of principal
and interest is strong, the relative degree of safety is not
as high as for issues rated TBW-1.
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