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PROSPECTUS JUNE 11, 1996
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THE WOODWARD FUNDS
C/O NBD BANK
P.O. BOX 7058
TROY, MICHIGAN 48007-7058
24 HOUR YIELD AND PERFORMANCE INFORMATION
PURCHASE AND REDEMPTION ORDERS:
(800) 688-3350
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The Woodward Funds (the "Trust") is offering in this Prospectus shares in
the following seven investment portfolios (the "Funds"), divided into four
general fund types: Asset Allocation; Equity; Bond; and Municipal Bond.
ASSET ALLOCATION FUNDS BOND FUNDS
THE MANAGED ASSETS CONSERVATIVE FUND THE INCOME FUND
THE MANAGED ASSETS GROWTH FUND THE INTERNATIONAL BOND FUND
EQUITY FUNDS MUNICIPAL BOND FUND
THE EQUITY INCOME FUND THE INTERMEDIATE MUNICIPAL BOND FUND
THE SMALL-CAP OPPORTUNITY FUND
NBD Bank ("NBD") and First Chicago Investment Management Company ("FCIMCO")
serve as each Fund's investment advisers (collectively, the "Investment
Advisers").
BISYS Fund Services, Inc. (the "Distributor" or "BISYS") serves as each
Fund's distributor.
By this Prospectus, Class A shares, Class B shares and Class I shares of
each Fund are being offered. Class A shares are subject to a sales charge
imposed at the time of purchase. Class B shares are subject to a contingent
deferred sales charge imposed on redemptions made within up to six years of
purchase and a 12b-1 distribution fee. Class A and Class B shares are offered to
any investor. Class I shares are offered without a sales charge and are sold
only to qualified trust, custody and/or agency account clients of The First
National Bank of Chicago ("FNBC"), NBD, American National Bank and Trust Company
("ANB") or their affiliates and to certain qualified plans or other programs.
This Prospectus sets forth concisely information that a prospective investor
should consider before investing. Investors should read this Prospectus and
retain it for future reference. Additional information about the Trust,
contained in a Statement of Additional Information, has been filed with the
Securities and Exchange Commission (the "SEC") and is available upon request and
without charge by writing to the Trust at the above address. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.
Investors should recognize that the share price, yield and investment return
of each Fund fluctuate and are not guaranteed.
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SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, FIRST NATIONAL BANK OF CHICAGO,
THEIR PARENT COMPANY OR THEIR AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY
GOVERNMENTAL AGENCY. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
HIGHLIGHTS............................................................... i
EXPENSE TABLES........................................................... iii
DESCRIPTION OF THE FUNDS................................................. 1
HOW TO BUY SHARES........................................................ 12
SHAREHOLDER SERVICES..................................................... 19
HOW TO REDEEM SHARES..................................................... 22
MANAGEMENT OF THE FUNDS.................................................. 26
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS.............................. 31
DIVIDENDS AND DISTRIBUTIONS.............................................. 32
TAXES.................................................................... 33
PERFORMANCE INFORMATION.................................................. 35
GENERAL INFORMATION...................................................... 36
SUPPLEMENTAL INFORMATION................................................. A-1
<PAGE>
HIGHLIGHTS
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Each Fund's investment objective is set forth on page iv of this Prospectus.
The differences in objectives and policies among the Funds determine the types
of portfolio securities in which each Fund invests and can be expected to affect
each Fund's yield or rate of return and the degree of risk to which each Fund is
subject.
INVESTMENT ADVISERS
NBD and FCIMCO are the Investment Advisers to each of the Funds. Each Fund
has agreed to pay the Investment Advisers an annual fee as set forth under
"Management of the Funds."
ALTERNATIVE PURCHASE METHODS
Each Fund offers Class A shares, Class B shares and Class I shares. Each
share represents an identical pro rata interest in a Fund's investment
portfolio.
Class A shares are sold at net asset value per share plus an initial sales
charge imposed at the time of purchase. The initial sales charge may be reduced
or waived for certain purchases. Class A shares of each Fund are subject to a
shareholder servicing fee.
Class B shares are sold at net asset value per share with no initial sales
charge at the time of purchase; as a result, the entire purchase price is
immediately invested in the Fund. Class B shares may be subject to a contingent
deferred sales charge ("CDSC") and are subject to a distribution fee and
shareholder servicing fee.
Class I shares are sold at net asset value with no sales charge to qualified
trust, custody and/or agency account clients of FNBC, NBD, ANB or their
affiliates and to certain qualified benefit plans or other programs.
See "How to Buy Shares" and "How to Redeem Shares."
HOW TO BUY SHARES
First Data Investor Services Group, Inc. serves as the Trust's Transfer and
Dividend Disbursing Agent (the "Transfer Agent").
Orders for the purchase of Class A and Class B shares may be placed through
a number of institutions including the Investment Advisers, FNBC, ANB and their
affiliates, including First Chicago NBD Investment Services, Inc. ("FNIS"), a
registered broker-dealer, the Distributor and
i
<PAGE>
certain banks, securities dealers and other industry professionals such as
investment advisers, accountants and estate planning firms (collectively,
"Service Agents").
Investors purchasing Class I shares through their Fiduciary Accounts (as
defined under "How to Buy Shares") at the Investment Advisers, First Chicago NBD
Corporation ("FCN"), FNBC, ANB or their affiliates should contact such entity
directly for appropriate instructions, as well as for information about
conditions pertaining to the account and any related fees. Class I shares may be
purchased for a Fiduciary Account or Eligible Retirement Plan (as defined under
"How to Buy Shares" only by a custodian, trustee, investment manager or other
entity authorized to act on behalf of such Account or Plan.
The minimum initial investment is $1,000. All subsequent investments must be
at least $100.
See "How to Buy Shares."
SHAREHOLDER SERVICES
The Funds offer shareholders certain services and privileges including:
Exchange Privilege, Letter of Intent and Automatic Investment Plan. Certain
services and privileges may not be available through all Service Agents.
See "Shareholder Services."
HOW TO REDEEM SHARES
Generally, investors should contact their representatives at the Investment
Advisers, FNBC, ANB or appropriate Service Agent for redemption instructions.
Investors who are not clients of the Investment Advisers, FNBC, ANB or a Service
Agent may redeem Fund shares by written request to the transfer agent.
See "How to Redeem Shares."
ii
<PAGE>
EXPENSE TABLE
<TABLE><CAPTION>
Class A Class B
------------------------------------ --------------------
Income and Income and Class I
Intermediate International All Intermediate All --------
Municipal Bond Other Municipal Other All
Shareholder Transaction Expenses Bond Funds Fund Funds Bond Funds Funds Funds
- --------------------------------------- ------------ ------------- ----- ------------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price....................... 3.00% 4.50% 5.00% None None None
Sales Charge on Reinvested Dividends... None None None None None None
Maximum Deferred Sales Charge Imposed
On Redemptions (as a percentage of
the amount subject to charge)........ None* None* None* 3.00% 5.00% None
Redemption Fees........................ None None None None None None
Exchange Fees.......................... None None None None None None
</TABLE>
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* A contingent deferred sales charge of up to 1.00% may be assessed on certain
redemptions of Class A shares purchased without an initial sales charge as
part of an investment of $1 million or more.
iii
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
CLASS A SHARES
Management
Fees Total
After 12b-1 Other Operating
Waivers Fees Expenses* Expenses*1
---------- ----- --------- ----------
ASSET ALLOCATION FUNDS:
Managed Assets Conservative Fund. 0.55%(2) None 0.70% 1.25%
Managed Assets Growth Fund....... 0.54%(2) None 0.71% 1.25%
EQUITY FUNDS:
Equity Income Fund............... 0.50% None 0.54% 1.04%
Small-Cap Opportunity Fund....... 0.70% None 0.85% 1.55%
BOND FUNDS:
Income Fund...................... 0.40% None 0.50% 0.90%
International Bond Fund.......... 0.28%(2) None 1.20% 1.48%
MUNICIPAL BOND FUND:
Intermediate Municipal Bond Fund. 0.40% None 0.52% 0.92%
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* After expense reimbursements or fee waivers.
(1) See "How to Buy Shares," "Management of the Funds" and "Distribution Plans
and Shareholder Services Plans." Other Expenses and Total Operating Expenses
for each Fund are based on estimated amounts for the current fiscal year.
With respect to each Fund, the Investment Advisers have undertaken to waive
fees and reimburse expenses for the current fiscal year ending December 31,
1996 to the extent the total operating expenses applicable to Class A shares
of the Managed Assets Conservative, Managed Assets Growth, Equity Income,
Small-Cap Opportunity, Income, International Bond and Intermediate Municipal
Bond Funds exceed 1.25%, 1.25%, 1.14%, 1.75%, 1.09%, 1.48% and 0.99%,
respectively.
(2) Management fees without waivers would have been 0.65%, 0.65% and 0.70% with
respect to the Managed Assets Conservative, Managed Assets Growth and
International Bond Funds, respectively.
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
1 Year 3 Years
------ -------
Managed Assets Conservative Fund...................... $ 62 $88
Managed Assets Growth Fund............................ $ 62 $88
Equity Income Fund.................................... $ 60 $82
Small-Cap Opportunity Fund............................ $ 65 $97
Income Fund........................................... $ 39 $58
International Bond Fund............................... $ 59 $90
Intermediate Municipal Bond Fund...................... $ 39 $59
iv
<PAGE>
CLASS B SHARES
Management
Fees Total
After 12b-1 Other Operating
Waivers Fees Expenses* Expenses*1
---------- ----- --------- ----------
ASSET ALLOCATION FUNDS:
Managed Assets Conservative Fund. 0.55%(2) 0.75 % 0.70% 2.00%
Managed Assets Growth Fund....... 0.54%(2) 0.75 % 0.71% 2.00%
EQUITY FUNDS:
Equity Income Fund............... 0.50% 0.75 % 0.54% 1.79%
Small-Cap Opportunity Fund....... 0.70% 0.75 % 0.85% 2.30%
BOND FUNDS:
Income Fund...................... 0.40% 0.75 % 0.50% 1.65%
International Bond Fund.......... 0.28%(2) 0.75 % 1.20% 2.23%
MUNICIPAL BOND FUNDS:
Intermediate Municipal Bond Fund. 0.40% 0.75 % 0.52% 1.67%
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* After expense reimbursements or fee waivers.
** Assuming no redemption of Class B shares.
(1) See "How to Buy Shares," "Management of the Funds" and "Distribution Plans
and Shareholder Services Plans." Other Expenses and Total Operating Expenses
for each Fund are based on estimated amounts for the current fiscal year.
With respect to each Fund, the Investment Advisers have undertaken to waive
fees and reimburse expenses for the current fiscal year ending December 31,
1996 to the extent the total operating expenses applicable to Class B shares
of the Managed Assets Conservative, Managed Assets Growth, Equity Income,
Small-Cap Opportunity, Income, International Bond, Intermediate Municipal
Bond Funds exceed 2.00%, 2.00%, 1.89%, 2.50%, 1.84%, 2.23% and 1.74%,
respectively.
(2) Management fees without waivers would have been 0.65%, 0.65% and 0.70% with
respect to the Managed Assets Conservative, Managed Assets Growth and
International Bond Funds, respectively.
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
1 Year 3 Years
-------- ---------
Managed Assets Conservative Fund................. $71/$21* $ 93/$63*
Managed Assets Growth Fund....................... $71/$21* $ 93/$63*
Equity Income Fund............................... $68/$18* $ 87/$57*
Small-Cap Opportunity Fund....................... $74/$24* $103/$73*
Income Fund...................................... $47/$17* $ 72/$52*
International Bond Fund.......................... $73/$23* $100/$70*
Intermediate Municipal Bond Fund................. $47/$17* $ 73/$53*
* Assuming no redemption of Class B shares.
v
<PAGE>
CLASS I SHARES
Management
Fees Total
After 12b-1 Other Operating
Waivers Fees Expenses* Expenses*1
---------- ----- --------- ------------
ASSET ALLOCATION FUNDS:
Managed Assets Conservative Fund. 0.55%(2) None 0.30% 0.85%
Managed Assets Growth Fund....... 0.54%(2) None 0.30% 0.84%
EQUITY FUNDS:
Equity Income Fund............... 0.50% None 0.20% 0.70%
Small-Cap Opportunity Fund....... 0.70% None 0.24% 0.94%
BOND FUNDS:
Income Fund...................... 0.40% None 0.21% 0.61%
International Bond Fund.......... 0.28%(2) None 0.55% 0.83%
MUNICIPAL BOND FUNDS:
Intermediate Municipal Bond Fund. 0.40% None 0.20% 0.60%
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* After expense reimbursements or fee waivers.
(1) See "How to Buy Shares," "Management of the Funds" and "Distribution Plans
and Shareholder Services Plans." Other Expenses and Total Operating Expenses
for each Fund are based on estimated amounts for the current fiscal year.
With respect to each Fund, the Investment Advisers have undertaken to waive
fees and reimburse expenses for the current fiscal year ending December 31,
1996 to the extent the total operating expenses applicable to Class I shares
of the Managed Assets Conservative, Managed Assets Growth, Equity Income,
Small-Cap Opportunity, Income, International Bond and Intermediate Municipal
Bond Funds exceed 0.97%, 0.96%, 1.01%, 1.10%, 0.93%, 0.84% and 0.75%,
respectively.
(2) Management fees without waivers would have been 0.65%, 0.65% and 0.70% with
respect to the Managed Assets Conservative, Managed Assets Growth and
International Bond Funds, respectively.
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
1 Year 3 Years
------ -------
Managed Assets Conservative Fund........... $ 9 $27
Managed Assets Growth Fund................. $ 9 $27
Equity Income Fund......................... $ 7 $22
Small-Cap Opportunity Fund................. $ 10 $30
Income Fund................................ $ 6 $20
International Bond Fund.................... $ 9 $27
Intermediate Municipal Bond Fund........... $ 6 $19
THE AMOUNTS LISTED IN THE EXAMPLES SHOULD NOT BE CONSIDERED AS
REPRESENTATIVE OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE INDICATED. MOREOVER, WHILE EACH EXAMPLE ASSUMES A 5% ANNUAL RETURN, A
FUND'S ACTUAL PERFORMANCE MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
The purpose of the foregoing tables is to assist investors in understanding
the various costs and expenses that an investor in a Fund will bear, directly or
indirectly, the payment of which will reduce investors' return on an annual
basis. Long-term investors in Class B shares of a Fund could pay more in 12b-1
fees than the economic equivalent of paying a front-end sales charge. The
Investment Advisers, FNBC, ANB and their affiliates and certain Service Agents
may charge their clients fees which are not reflected in the foregoing table in
connection with an investment in the Funds.
vi
<PAGE>
THE WOODWARD FUNDS
ASSET ALLOCATION FUNDS
These Funds will follow an asset allocation strategy by investing in Equity
Securities (as defined above), Debt Securities (as defined above) and short-term
obligations issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, "high quality" money market instruments such as certificates
of deposit, bankers' acceptances, time deposits, repurchase agreements, reverse
repurchase agreements, short-term obligations issued by state and local
governmental issuers which carry yields that are competitive with those of other
types of high quality money market instruments, commercial paper, notes, other
short-term obligations and variable rate master demand notes of domestic and
foreign issuers ("Cash Equivalent Securities"). "High quality" money market
instruments are money market instruments which are rated at the time of purchase
within the two highest rating categories by a Rating Agency or which are unrated
at such time but are deemed by the Investment Advisers to be comparable in
quality to instruments that are so rated. Such investments may include
obligations of foreign banks and foreign branches of U.S. banks:
THE MANAGED ASSETS CONSERVATIVE FUND seeks to provide long-term total
return; capital appreciation is a secondary consideration.
THE MANAGED ASSETS GROWTH FUND seeks to achieve long-term total return;
current income is a secondary consideration.
EQUITY FUNDS
These Funds will invest principally in common stocks, preferred stocks and
convertible securities, including those in the form of depositary receipts, as
well as warrants to purchase such securities (collectively, "Equity
Securities"):
THE EQUITY INCOME FUND seeks to provide income; capital appreciation and
growth of earnings are secondary, but nonetheless important, goals. In seeking
to achieve its objective, this Fund will invest primarily in income-producing
Equity Securities of domestic issuers.
THE SMALL-CAP OPPORTUNITY FUND seeks long-term capital appreciation. In
seeking to achieve its objective, this Fund will invest primarily in Equity
Securities of companies with small capitalizations.
BOND FUNDS
These Funds will invest principally in a broad range of debt securities
("Debt Securities"). Debt Securities in which the Bond Funds normally invest
include: (i) obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; (ii) corporate, bank and commercial obligations;
(iii) securities issued or guaranteed by foreign governments, their agencies or
instrumentalities; (iv) securities issued by supranational banks; (v) mortgage
backed securities; (vi) securities representing interests in pools of assets;
and (vii) variable-rate bonds, zero coupon bonds, debentures, and various types
of demand instruments. Obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities may include mortgage backed securities, as
well as "stripped securities" (both interest-only and principal-only) and
custodial receipts for Treasury securities:
vii
<PAGE>
THE INCOME FUND seeks to provide as high a level of current income as is
consistent with relative stability of principal. In seeking to achieve its
objective, this Fund will invest primarily in a portfolio of U.S. dollar
denominated investment grade Debt Securities of domestic and foreign issuers
which, under normal market conditions, will have a dollar-weighted average
maturity expected to range between 3 and 10 years.
THE INTERNATIONAL BOND FUND seeks both long-term capital appreciation and
current income. In seeking to achieve its objective, the Fund will invest
primarily in investment grade Debt Securities of foreign issuers.
MUNICIPAL BOND FUND
This Fund will invest principally in obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their respective political subdivisions, agencies (including
multi-state agencies), instrumentalities and authorities, the interest from
which is, in the opinion of bond counsel for the issuers, exempt from regular
federal income tax ("Municipal Obligations"):
THE INTERMEDIATE MUNICIPAL BOND FUND seeks to provide as high a level of
current income exempt from federal income tax as is consistent with relative
stability of principal. In seeking to achieve its objective, this Fund will
invest primarily in a portfolio of investment grade Municipal Obligations which,
under normal conditions, will have a dollar-weighted average maturity expected
to range between 3 and 10 years.
viii
<PAGE>
DESCRIPTION OF THE FUNDS
GENERAL
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently
consists of 27 investment portfolios, each of which consists of a separate pool
of assets with separate investment objectives and policies. This prospectus,
however, contains only seven portfolios. Under the 1940 Act, each Fund is
classified as a diversified investment portfolio (the "Diversified Funds")
except for the International Bond and Intermediate Municipal Bond Funds (the
"Non-Diversified Funds"), which are each classified as a non-diversified
portfolio.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective is set forth on page vii of this
Prospectus. The investment objective of a Fund may not be changed without
approval of the holders of a majority (as defined in the 1940 Act) of such
Fund's outstanding voting securities. See "General Information." Except as noted
below under "Investment Limitations," a Fund's investment policies may be
changed without a vote of shareholders. There can be no assurance that a Fund
will achieve its objective.
The following section should be read in conjunction with "Certain Portfolio
Securities" in the Supplemental Information.
ASSET ALLOCATION FUNDS
Each Asset Allocation Fund follows an asset allocation strategy by investing
in Equity Securities, Debt Securities and Cash Equivalent Securities of domestic
and foreign issuers. For each Asset Allocation Fund, the asset classes, market
sectors, securities and portfolio strategies selected will be those that the
Investment Advisers believe prudent and offer the greatest potential for
achieving the relevant Asset Allocation Fund's investment objective. The
Investment Advisers have broad latitude in selecting investments and portfolio
strategies. See "Risk Factors-Foreign Securities" below.
The equity portion of each of the Asset Allocation Fund's investments will
be invested primarily in publicly traded stocks of companies incorporated in the
United States, although up to 25% of its total assets may be invested in the
Equity Securities of foreign issuers, either directly or through Depository
Receipts.
The Asset Allocation Funds invest the fixed income portion of their
portfolios of investments in a broad range of Debt Securities rated "investment
grade" or higher at the time of purchase, (i.e., no lower than Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group
("S&P"), Fitch Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff") (each a "Rating Agency")) or unrated investments deemed by the
Investment Advisers to be comparable in quality at the time of purchase to
instruments that are so rated. Most Debt Securities acquired by an Assets
Allocation Fund will be issued by companies or governmental entities located
within the United States. Up to 15% of the total assets of a Fund may, however,
be invested in dollar-denominated debt obligations (including Cash Equivalent
Securities) of foreign issuers, including, as described by
<PAGE>
this Prospectus and to the extent permitted under applicable law, shares of
investment companies which invest primarily in securities of foreign issuers.
An Asset Allocation Fund may also invest its cash balances in securities
issued by other investment companies. Under the 1940 Act, each Fund's investment
in such securities, subject to certain exceptions, currently is limited to (i)
3% of the total voting stock of any one investment company, (ii) 5% of the
Fund's net assets with respect to any one investment company and (iii) 10% of
the Fund's net assets in the aggregate. As a shareholder of another investment
company, an Asset Allocation Fund would bear, along with other shareholders, its
pro rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that an Asset Allocation Fund bears directly in connection with its own
operations.
The Asset Allocation Funds may also enter into futures contracts and related
options and utilize options as more fully described below.
The following table sets forth for each Asset Allocation Fund the asset
classes, benchmark percentages and asset class strategy ranges within which the
Investment Advisers generally intend to manage the Fund's assets:
<TABLE><CAPTION>
Managed Assets Managed Assets
Conservative Fund Growth Fund
------------------------- -------------------------
Benchmark Strategy Benchmark Strategy
Asset Class Percentage Range Percentage Range
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Equity Securities:.......................... 40% 25% to 55% 80% 65% to 95%
Debt Securities & Cash Equivalent
Securities:............................... 60% 45% to 75% 20% 5% to 35%
</TABLE>
Compliance with these percentage requirements may limit the ability of a
Fund to maximize total return. The actual percentage of assets invested in
Equity Securities, Debt Securities and Cash Equivalent Securities will vary from
time to time and may be outside the strategy range, depending on the judgment of
the Investment Advisers as to general market and economic conditions, trends in
yields, interest rates and changes in fiscal and monetary developments. The
Managed Assets Conservative Fund is deemed to be more "conservative" than the
Managed Assets Growth Fund because its benchmark and strategy have a heavier
weighting in Debt Securities and Cash Equivalent Securities and a lighter
weighting in Equity Securities than the Managed Assets Growth Fund.
Each Asset Allocation Fund also may engage in futures and options
transactions and other derivative instruments, such as interest rate and equity
index swaps and foreign exchange transactions, each of which involves risk. Each
Asset Allocation Fund may also lend its portfolio securities. Each Asset
Allocation Fund may also invest in foreign currency transactions and options on
foreign currency transactions for investment of hedging purposes and may invest
in currency futures and options on currency futures for investment or hedging
purposes. See "Risk Factors" below and "Certain Portfolio Securities" in the
Supplemental Information.
2
<PAGE>
EQUITY FUNDS
The Equity Income and Small-Cap Opportunity Funds invest primarily in
publicly traded common stocks of companies incorporated in the United States,
although each such Fund may also invest up to 25% of its total assets in the
securities of foreign issuers, either directly or through Depository Receipts.
See "Risk Factors-Foreign Securities" below. In addition, each Equity Fund may
invest in securities convertible into common stock, such as certain bonds and
preferred stocks, and may invest up to 5% of their respective net assets in
other types of securities having common stock characteristics (such as rights
and warrants to purchase equity securities). The Equity Funds may also enter
into futures contracts and related options and may utilize options and other
derivative instruments such as equity index swaps, each of which involves risk.
Each Equity Fund may also lend its portfolio securities. Under normal market
conditions, each Fund expects to invest at least 65% of the value of its total
assets in Equity Securities. Each Equity Fund may hold up to 35% of its total
assets in investment grade Debt Securities and Cash Equivalent Securities.
The EQUITY INCOME FUND will invest primarily in income-producing Equity
Securities of domestic issuers. The Investment Advisers will be particularly
alert to companies which pay above-average dividends, yet offer opportunities
for capital appreciation and growth of earnings. In addition, the Fund may
invest up to 35% of the value of its net assets in convertible securities that
generally have features similar to both common stocks and bonds and offer the
potential for current income and capital appreciation over time.
The SMALL-CAP OPPORTUNITY FUND invests in Equity Securities of small
domestic issuers with market capitalizations of $100 million to $1 billion. The
Investment Advisers will consider some of the following factors in making their
investment decisions: high quality management, significant equity ownership
positions by management, a leading or dominant position in a major product line,
a sound financial position and a relatively high rate of return on invested
capital. The Fund also may invest in companies that offer the possibility of
accelerating earnings growth because of management changes, new products or
structural changes in industry or the economy.
BOND FUNDS
Each of the Bond Funds will invest at least 65% of the value of its total
assets under normal market conditions in Debt Securities. When the Investment
Advisers believe it advisable for temporary defensive purposes or in
anticipation of otherwise investing cash positions, each Bond Fund may invest in
Cash Equivalent Securities. In addition, each Bond Fund may invest in custodial
receipts for Treasury securities and in "stripped securities" (both
interest-only and principal-only). Most obligations acquired by the Funds will
be issued by companies or governmental entities located within the United
States. Up to 15% of the total assets of the Income Fund may be invested in
dollar denominated debt obligations (including Cash Equivalent Securities) of
foreign issuers. The International Bond Fund has no such limitation on
investments in foreign issuers.
Each Bond Fund also may engage in futures and options transactions and other
derivative instruments, such as interest rate swaps and forward contracts, and
the International Bond Fund may
3
<PAGE>
engage in foreign exchange transactions, each of which involves risk. Each Bond
Fund may also lend its portfolio securities. See "Risk Factors" below and
"Certain Portfolio Securities" in the Supplemental Information.
The Debt Securities in which the Income Fund may invest will be rated
investment grade, or if unrated, will be deemed by the Investment Advisers to be
comparable in quality at the time of purchase to instruments that are so rated.
By so restricting its investments, the Fund's ability to maximize total rate of
return will be limited. Under normal market conditions, at least 65% of the
value of the International Bond Fund's total assets will consist of Debt
Securities rated A or better by Moody's, S&P, Fitch or Duff. The remainder of
the International Bond Fund's assets may be invested in Debt Securities rated no
lower than B by Moody's, S&P, Fitch and Duff. The Fund also may invest in Debt
Securities which, while not rated, are determined by the Investment Advisers to
be of comparable quality to those rated securities in which the Fund may invest.
Obligations rated in the lowest of the top four rating categories (Baa by
Moody's or BBB by S&P, Fitch, Duff or IBCA) are considered to have less capacity
to pay interest and repay principal and have certain speculative
characteristics. See "Risk Factors--Lower Rated Securities" below.
The Investment Advisers manage the Bond Funds based on anticipated interest
rate changes and the use of active management strategies which may include
sector rotation, intra-sector adjustments and yield curve and convexity
considerations. Sector rotation involves the Investment Advisers selecting among
different economic or industry sectors based upon apparent or relative
attractiveness. Thus at times a sector offers yield advantages relative to other
sectors. An intra-sector adjustment occurs when the Investment Advisers
determine to select a particular issue within a sector. Yield curve
considerations involve the Investment Adviser attempting to compare the
relationship between time to maturity and yield to maturity in order to identify
the relative value in the relationship. Convexity considerations consist of the
Investment Advisers seeking securities that rise in price more quickly, or
decline in price less quickly, than the typical security of that price risk
level and therefore enable the Investment Advisers to obtain an additional
return when interest rates change dramatically.
In acquiring particular Debt Securities, the Investment Advisers may
consider, among other things, historical yield relationships between private and
governmental debt securities, intermarket yield relationships among various
industry sectors, current economic cycles and the attractiveness and
creditworthiness of particular issuers. Depending upon the Investment Advisers'
analysis of these and other factors, a Fund's holdings of issues in particular
industry sectors may be overweighted or underweighted when compared to the
relative industry weightings in recognized indices. The value of the Funds can
be expected to vary inversely with changes in prevailing interest rates.
The INCOME FUND invests in a portfolio of U.S. dollar denominated Debt
Securities of domestic and foreign issuers which, under normal market
conditions, will have a dollar-weighted average maturity expected to range
between 3 and 10 years.
The INTERNATIONAL BOND FUND will invest in Debt Securities of issuers
located throughout the world, except the United States. The Fund also may invest
in convertible preferred stocks. The Fund may hold foreign currency, and may
purchase debt securities or hold currencies in combination with forward
4
<PAGE>
currency exchange contracts. The Fund will be alert to opportunities to profit
from fluctuations in currency exchange rates. The Fund will be particularly
alert to favorable arbitrage opportunities (such as those resulting from
favorable interest rate differentials) arising from the relative yields of the
various types of securities in which the Fund may invest and market conditions
generally. The Fund may invest without restriction in companies in, or
governments of, developing countries. Developing countries have economic
structures that are generally less diverse and mature, and political systems
that are less stable, than those of developed countries. The markets of
developing countries may be more volatile than the markets of more mature
economies; however, such markets may provide higher rates of return to
investors. See "Risk Factors--Foreign Securities" below.
MUNICIPAL BOND FUND
The INTERMEDIATE MUNICIPAL BOND FUND invests in a portfolio of investment
grade Municipal Obligations which, under normal market conditions, will have a
dollar-weighted average maturity expected to range between 3 and 10 years.
It is a fundamental policy of the Fund to invest (except when maintaining a
temporary defensive position) at least 80% of the value of its net assets in
Municipal Obligations. From time to time, the Fund may invest in an amount not
to exceed 20% of the value of its net assets, or without limitation for
temporary defensive purposes, in taxable Cash Equivalent Securities. Dividends
paid by the Fund that are attributable to income earned by it from these
securities will be taxable to investors. See "Dividends, Distributions and
Taxes."
Municipal Obligations in which the Fund invests will be rated at least Baa,
MIG-2/VMIG-2 or Prime 2 (P-2) by Moody's, BBB, SP-2 or A-2 by S&P, BBB or F-2 by
Fitch or BBB or Duff-2 by Duff or, if unrated, determined by the Investment
Advisers to be comparable in quality to instruments that are so rated. The Fund
also may engage in futures and options transactions and other derivative
instruments transactions, such as interest rate swaps, each of which involves
risk. The Fund is also permitted to lend its portfolio securities. See "Risk
Factors" below and "Certain Portfolio Securities" in the Appendix.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. Except as noted,
the following investment limitations are matters of fundamental policy and may
not be changed with respect to a particular Fund without the affirmative vote of
the holders of a majority of the Fund's outstanding shares. Other investment
limitations that cannot be changed without a vote of shareholders are contained
in the Statement of Additional Information under "Investment Objectives,
Policies and Risk Factors."
Each Fund may not:
1. Purchase any securities which would cause 25% or more of the value of a
Fund's total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal
5
<PAGE>
business activities in the same industry, provided that (a) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions and repurchase agreements secured by such instruments,
(b) wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents, (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry, and (d) personal credit
and business credit businesses will be considered separate industries.
2. Make loans, except that each Fund may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment objective
and policies and may lend portfolio securities in an amount not exceeding
one-third of its total assets.
3. Borrow money, issue senior securities or mortgage, pledge or hypothecate
its assets except to the extent permitted under the 1940 Act.
The Diversified Funds may not purchase securities of any one issuer (other
than securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after such purchase, more than 5% of the
value of a Fund's total assets would be invested in the securities of such
issuer, or more than 10% of the issuer's outstanding voting securities would be
owned by a Fund, except that up to 25% of the value of a Fund's total assets may
be invested without regard to these limitations.
As a nonfundamental policy, for purposes of the Funds' investments in
borrowing, the 1940 Act currently permits borrowing up to 33 1/3% of the value
of a Fund's total assets. No Fund intends to purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
assets are outstanding. Securities held in escrow or separate accounts in
connection with its investment practises are not deemed to be pledging for
purposes of a Fund's limitation on borrowing.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of a Fund's portfolio securities will not constitute a
violation of such limitation for purposes of the 1940 Act.
In order to permit the sale of a Fund's shares in certain states, the Funds
may make commitments more restrictive than the investment policies and
limitations described above. Should a Fund determine that any such commitment is
no longer in the best interests of the Fund, it will revoke the commitment by
terminating sales of its shares in the state involved.
RISK FACTORS
General
Since each Fund can pursue different types of investments, the risks of
investing will vary depending on the Fund selected for investment. Before
selecting a Fund in which to invest, the investor should assess the risks
associated with the types of investments made by the Fund. The net asset value
6
<PAGE>
per share of each Fund is not fixed and should be expected to fluctuate.
Investors should consider each Fund as a supplement to an overall investment
program and should invest only if they are willing to undertake the risks
involved. See also the Appendix beginning on page A-1 for further discussion of
certain considerations.
Each Fund may engage in various investment techniques to the extent
described herein. The use of investment techniques such as engaging in financial
futures and options transactions, purchasing securities on a forward commitment
basis, and lending portfolio securities involves greater risk than that incurred
by many other funds with similar objectives that do not engage in such
techniques. See "Appendix--Investment Techniques." Futures and options
transactions involve the use of derivative instruments. Using these techniques
may produce higher than normal portfolio turnover and may affect the degree to
which a Fund's net asset value fluctuates. Higher portfolio turnover rates are
likely to result in comparatively greater brokerage commissions or transaction
costs. In addition, short-term gains realized from portfolio transactions are
taxable to shareholders as ordinary gains.
Equity Securities
(Asset Allocation and Equity Funds only) Investors should be aware that
Equity Securities fluctuate in value, often based on factors unrelated to the
value of the issuer of the securities, and that fluctuations can be pronounced.
Changes in the value of a Fund's portfolio securities will result in changes in
the value of such Fund's shares and thus the Fund's yield and total return to
investors.
The securities of smaller companies may be subject to more abrupt or erratic
market movements than larger, more established companies, both because the
securities typically are traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and prospects.
Debt Securities
(All Funds) Investors should be aware that even though interest-bearing
securities are investments which promise a stable stream of income, the prices
of such securities generally are inversely affected by changes in interest rates
and, therefore, are subject to the risk of market price fluctuations. The values
of Debt Securities also may be affected by changes in the credit rating or
financial condition of the issuing entities. Certain securities that may be
purchased by these Funds, such as those rated Baa by Moody's and BBB by S&P,
Fitch and Duff, may be subject to such risk with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
Debt Securities. See "Lower Rated Securities" below and "Supplemental
Information--Certain Portfolio Securities-- Ratings" and Supplemental
Information in the Statement of Additional Information.
Municipal Obligations
(Asset Allocation and Bond Funds and the Intermediate Municipal Bond Fund
only) Investors should be aware that when a Fund's assets are concentrated in
obligations payable from revenues of similar projects or issued by issuers
located in the same state, or in industrial development bonds, it will
7
<PAGE>
be subject to the particular risks (including legal and economic conditions)
relating to such securities to a greater extent than if its assets were not so
concentrated.
Payment on Municipal Obligations held by the Funds relating to certain
projects may be secured by mortgages or deeds of trust. In the event of a
default, enforcement of a mortgage or deed of trust will be subject to statutory
enforcement procedures and limitations on obtaining deficiency judgments.
Moreover, collection of the proceeds from that foreclosure may be delayed and
the amount of the proceeds received may not be enough to pay the principal or
accrued interest on the defaulted Municipal Obligations.
Lower Rated Securities
(International Bond Fund only) Investors should carefully consider the
relative risks of investing in the higher yielding (and, therefore, higher risk)
debt securities rated below investment grade by Moody's, S&P, Fitch or Duff
(commonly known as junk bonds). The International Bond Fund may invest up to 35%
of its net assets in debt securities rated as low as B by Moody's, S&P, Fitch
and Duff and unrated debt securities deemed by the Investment Advisers to be
comparable in quality at the time of purchase to instruments that are so rated.
The International Bond Fund intends to invest less than 35% of the value of its
net assets in such securities.
The market price and yield of securities rated Baa or lower by Moody's and
BBB or lower by S&P, Fitch or Duff are more volatile than those of higher rated
securities and involve speculative characteristics. Factors adversely affecting
the market price and yield of these securities will adversely affect the Fund's
net asset value. In addition, the retail secondary market for these securities
may be less liquid than that of higher rated securities; adverse conditions
could make it difficult at times for the Fund to sell certain securities or
could result in lower prices than those used in calculating such Fund's net
asset value.
The market values of certain lower rated debt securities tend to reflect
specific developments with respect to the issuer to a greater extent than do
higher rated securities, which react primarily to fluctuations in the general
level of interest rates, and tend to be more sensitive to economic conditions
than are higher rated securities. Issuers of such debt securities often are
highly leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities.
Securities rated below investment grade generally are not meant for
short-term investing and may be subject to certain risks with respect to the
issuing entity and to greater market fluctuations than certain lower yielding,
higher rated Debt Securities. Securities rated BBB by S&P, Fitch or Duff or Baa
by Moody's are judged to have speculative elements; their future cannot be
considered as well assured and often the protection of interest and principal
payments may be very moderate and may face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
Securities rated C by Moody's are regarded as having extremely poor prospects of
ever attaining any real investment standing. Securities rated D by S&P, Fitch
and Duff are in default and the payment of interest and/or repayment
8
<PAGE>
of principal is in arrears. Such securities, though high yielding, are
characterized by great risk. See Appendix in the Statement of Additional
Information for a general description of securities ratings.
The Investment Advisers will continually evaluate these securities and the
ability of the issuers of such securities to pay interest and principal. The
Fund's ability to achieve its investment objectives may be more dependent on the
Investment Advisers' credit analysis than might be the case for a fund that
invested in higher rated securities. See "Certain Portfolio Securities-Ratings"
in the Supplemental Information.
Foreign Securities
(Asset Allocation, Equity and Bond Funds) Foreign securities markets
generally are not as developed or efficient as those in the United States.
Investment in securities of foreign issuers, whether made directly or
indirectly, involve inherent risks, such as political or economic instability of
the issuer or the country of issue, the difficulty of predicting international
trade patterns, changes in exchange rates of foreign currencies, the possibility
of adverse changes in investment or exchange control regulations, and may be
less liquid and more volatile than securities of comparable U.S. issuers.
Similarly, volume and liquidity in most foreign securities markets are less than
in the United States and, at times, volatility of price can be greater than in
the United States. In addition, there may be less publicly available information
about a non-U.S. issuer, and non-U.S. issuers generally are not subject to
uniform accounting and financial reporting standards, practices and requirements
comparable to those applicable to U.S. issuers. See "Certain Portfolio
Securities" in the Supplemental Information.
Foreign Currency Exchanges
(Asset Allocation Funds and International Bond Fund only) Currency exchange
rates may fluctuate significantly over short periods of time. They generally are
determined by the forces of supply and demand in the foreign exchange markets
and the relative merits of investments in different countries, actual or
perceived changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the United States or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading currencies on an
exchange. Since a forward currency contract is not guaranteed by an exchange or
clearinghouse, a default on the contract would deprive the Fund of unrealized
profits or force such Fund to cover its commitments for purchase or resale, if
any, at the current market price.
Foreign Commodity Transactions
(Asset Allocation Funds and International Bond Fund only) Unlike trading on
domestic commodity exchanges, trading on foreign commodity exchanges is not
regulated by the Commodity Futures Trading Commission (the "CFTC") and may be
subject to greater risks than trading on domestic exchanges. For example, some
foreign exchanges are principal markets so that no common clearing
9
<PAGE>
facility exists and an investor may look only to the broker for performance of
the contract. In addition, any profits that the Fund might realize in trading
could be eliminated by adverse changes in the exchange rate, or such Fund could
incur losses as a result of those changes. Transactions on foreign exchanges may
include both commodities which are traded on domestic exchanges and those which
are not.
Mortgage-Related Securities
(Asset Allocation and Bond Funds only) No assurance can be given as to the
liquidity of the market for certain mortgage-backed securities, such as
collateralized mortgage obligations and stripped mortgage-backed securities.
Determination as to the liquidity of interest-only and principal-only fixed
mortgage-backed securities issued by the U.S. Government or its agencies and
instrumentalities will be made in accordance with guidelines established by the
Board. Mortgage-related securities may be considered a derivative instrument.
See "Certain Portfolio Securities--Asset--Backed Securities" and "Illiquid
Securities" in the Supplemental Information.
Risk Factors Associated with Derivative Instruments
Each Fund may purchase certain "derivative instruments." Derivative
instruments are instruments that derive value from the performance of underlying
assets, interest or currency exchange rates, or indices, and include, but are
not limited to, futures contracts, options, forward currency contracts and
structured debt obligations (including collateralized mortgage obligations and
other types of asset backed securities, "stripped" securities and various
floating rate instruments, including inverse floaters).
Derivative instruments present, to varying degrees, market risk that the
performance of the underlying assets, exchange rates or indices will decline;
credit risk that the dealer or other counterparty to the transaction will fail
to pay its obligations; volatility and leveraging risk that, if interest or
exchange rates change adversely, the value of the derivative instrument will
decline more than the assets, rates or indices on which it is based; liquidity
risk that a Fund will be unable to sell a derivative instrument when it wants
because of lack of market depth or market disruption; pricing risk that the
value of a derivative instrument (such as an option) will not correlate exactly
to the value of the underlying assets, rates or indices on which it is based;
and operations risk that loss will occur as a result of inadequate systems and
controls, human error or otherwise. Some derivative instruments are more complex
than others, and for those instruments that have been developed recently, data
are lacking regarding their actual performance over complete market cycles.
The Investment Advisers will evaluate the risks presented by the derivative
instruments purchased by the Funds, and will determine, in connection with their
day-to-day management of the Funds, how they will be used in furtherance of the
Funds' investment objectives. It is possible, however, that the Investment
Advisers' evaluations will prove to be inaccurate or incomplete and, even when
accurate and complete, it is possible that the Funds will, because of the risks
discussed above, incur loss as a result of their investments in derivative
instruments.
10
<PAGE>
Other Investment Considerations
Investment decisions for each Fund are made independently from those of the
other investment companies or investment advisory accounts that may be advised
by the Investment Advisers. However, if such other investment companies or
managed accounts are prepared to invest in, or desire to dispose of, securities
in which a fund invests at the same time as the Fund, available investments or
opportunities for sales will be allocated equitably to each of them. In some
cases, this procedure may adversely affect the size of the position obtained for
or disposed of by a Fund or the price paid or received by a Fund.
The classification of the International Bond and Intermediate Municipal Bond
Funds as "non-diversified" investment companies means that the proportion of
each Fund's assets that may be invested in the securities of a single issuer is
not limited by the 1940 Act. A "diversified" investment company is required by
the 1940 Act generally, with respect to 75% of its total assets, to invest not
more than 5% of such assets in the securities of a single issuer and to hold not
more than 10% of the voting securities of any single issuer. Each
Non-Diversified Fund, however, intends to conduct its operations so as to
qualify as a "regulated investment company" for purposes of the Internal Revenue
Code of 1986, as amended (the "Code"), which requires that, at the end of each
quarter of its taxable year, (i) at least 50% of the market value of its total
assets be invested in cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets be invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies). Since a relatively high percentage of the Fund's assets may be
invested in the securities of a limited number of issuers, some of which may be
within the same industry or economic sector, its portfolio securities may be
more susceptible to any single economic, political or regulatory occurrence than
the portfolio securities of a diversified investment company.
11
<PAGE>
HOW TO BUY SHARES
ALTERNATIVE PURCHASE OPTIONS
This Prospectus offers investors three Classes of shares of each Fund for
investment, Class A, Class B and Class I shares, each of which represents an
identical pro rata interest in a Fund's investment portfolio. Class A shares and
Class B shares are offered to any investor. Orders for purchases of Class I
shares, however, may be placed only for certain eligible investors as described
below. An investor who is not eligible to purchase Class I shares may choose
either Class A or Class B shares based on which class best suits the investor's
needs, given the offering price, the length of time the investor expects to hold
the shares and any other relevant circumstances.
Class A shares are sold at net asset value per share plus an initial sales
charge imposed at the time of purchase. The initial sales charge may be reduced
or waived for certain purchases. Class A shares of each Fund are subject to a
shareholder servicing fee. Class B shares are sold at net asset value per share
with no initial sales charge at the time of purchase; as a result, the entire
purchase price is immediately invested in the Fund. Class B shares may be
subject to a CDSC and are subject to a distribution fee and shareholder
servicing fee.
Class A and Class B shares are offered to the general public and may be
purchased through a number of institutions, including FCN, the Investment
Advisers, ANB and their affiliates, other Service Agents, and directly through
the Distributor.
Class I shares are sold at net asset value with no sales charge and are sold
exclusively to qualified trust, custody and/or agency account clients of FNBC,
NBD or their affiliates ("Fiduciary Accounts"), to qualified plans with plan
assets of at least $100 million invested in shares of the Funds or other
investment companies or accounts advised by either NBD or FCIMCO ("Eligible
Retirement Plans"). Class I shares are not subject to an annual service fee or
distribution fee.
Class B shares will receive lower per share dividends and at any given time
the performance of Class B should be expected to be lower than for shares of
each other Class because of the higher expenses borne by Class B. Similarly,
Class A shares will receive lower per share dividends, and the performance of
Class A should be expected to be lower, than Class I shares because of the
higher expenses borne by Class A.
An investor who is not eligible to purchase Class I shares should consider
whether, during the anticipated life of the investor's investment in the Fund,
the accumulated distribution fee and CDSC on Class B shares prior to conversion
would be less than the initial sales charge, if any, on Class A shares purchased
at the same time, and to what extent, if any, such differential would be off-set
by the return of Class A. Additionally, investors qualifying for reduced initial
sales charges who expect to maintain their investment for an extended period of
time might consider purchasing Class A shares because the accumulated continuing
distribution fees on Class B shares may exceed the initial sales charge on Class
A shares during the life of the investment.
12
<PAGE>
INFORMATION APPLICABLE TO ALL PURCHASERS
When purchasing Fund shares, an investor must specify the Class of shares
being purchased. If no Class of shares is specified, Class A shares will be
purchased.
The minimum initial investment for each Class is $1,000. However, for IRAs
and other retirement plans, the minimum initial purchase is $250. All subsequent
investments must be at least $100. The initial investment must be accompanied by
the Account Application. The Investment Advisers and Service Agents may impose
initial or subsequent investment minimums which are higher or lower than those
specified above and may impose different minimums for different types of
accounts or purchase arrangements. The Funds reserve the right to reject any
purchase order.
If an order is received by the Transfer Agent by the close of trading on the
floor of the New York Stock Exchange (the "Exchange") on any Business Day (as
defined below), shares will be purchased at the public offering price determined
as of the close of trading on the floor of the Exchange (currently 4:00 p.m.,
New York time) on that day. Otherwise, shares will be purchased at the public
offering price determined as of the close of trading on the floor of the
Exchange on the next Business Day.
Federal regulations require that an investor provide a certified Taxpayer
Identification Number ("TIN") upon opening or reopening an account. See the
Statement of Additional Information for information concerning this requirement.
Failure to furnish a certified TIN to the Fund could subject an investor to a
$50 penalty imposed by the Internal Revenue Service (the "IRS").
Share certificates will not be issued. It is not recommended that the
Intermediate Municipal Bond Fund be used as a vehicle for Keogh, IRA or other
qualified retirement plans.
NET ASSET VALUE
As to each Fund, net asset value per share of each Class is computed by
dividing the value of the Fund's net assets represented by such Class (i.e., the
value of its assets less liabilities) by the total number of shares of such
Class outstanding.
Shares for each Fund are sold on a continuous basis at the public offering
price (i.e., net asset value plus the applicable sales load, if any, set forth
below). Net asset value per share of the Funds is determined as of the close of
trading on the floor of the Exchange (currently 4:00 p.m., New York time), on
each day the New York Stock Exchange is open for business (the "Business Days")
except: (i) those holidays which the Exchange (currently New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day); and (ii) those business days on which the
Exchange closes prior to the close of its regular trading hours ("Early Closing
Time") in which event the net asset value of each Fund will be determined and
its shares will be priced as of such Early Closing Time.
Securities held by the Funds which are traded on only over-the-counter
markets and securities for which there were no transactions are valued at the
average of the current bid and asked prices. Debt Securities held by the Funds
are valued according to the broadest and most representative market,
13
<PAGE>
which ordinarily will be the over-the-counter markets, whether in the United
States or in foreign countries. Such securities are valued at the average of the
current bid and asked prices. Securities for which accurate market quotations
are not readily available, and other assets are valued at fair value by the
Investment Advisers under the supervision of the Board of Trustees. Securities
may be valued on the basis of prices provided by independent pricing services
when the Investment Advisers believe such prices reflect the fair market value
of such securities. The prices provided by pricing services take into account
institutional size trading in similar groups of securities and any developments
related to specific securities. For valuation purposes, the value of assets and
liabilities expressed in foreign currencies will be converted to U.S. dollars
equivalent at the prevailing market rate on the day of valuation. A Fund's open
futures contracts will be "marked-to-market."
CLASS A SHARES
Class A shares are sold at net asset value per share plus a maximum initial
sales charge of 3.00% for the Income and Intermediate Municipal Bond Funds,
4.50% for the International Bond Fund and 5.00% for the remaining Funds of the
public offering price imposed at the time of purchase. Class A shares of each
Fund are subject to an annual service fee at the rate of up to 0.25% of the
value of the average daily net assets of Class A. See "Distribution Plans and
Shareholder Services Plans." Class A shares held by investors who after
purchasing Class A shares establish a Fiduciary Account will convert to Class I
shares automatically upon the establishment of such Account, based on the
relative net asset values for shares of each such Class.
The public offering price for Class A shares of each Fund is the net asset
value per share plus a sales load as shown below.
ASSET ALLOCATION FUNDS AND EQUITY FUNDS
<TABLE><CAPTION>
Total Sales Load
--------------------------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering price
--------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000..................................... 5.00 5.26 4.50
$50,000 to less than $100,000......................... 4.50 4.71 4.00
$100,000 to less than $250,000........................ 3.50 3.63 3.00
$250,000 to less than $500,000........................ 2.50 2.56 2.00
$500,000 to less than $1,000,000...................... 2.00 2.04 1.75
$1,000,000 and above.................................. none none none
</TABLE>
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<PAGE>
INTERNATIONAL BOND FUND
<TABLE><CAPTION>
Total Sales Load
--------------------------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering price
--------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000..................................... 4.50 4.71 4.00
$50,000 to less than $100,000......................... 4.00 4.17 3.50
$100,000 to less than $250,000........................ 3.00 3.09 2.50
$250,000 to less than $500,000........................ 2.00 2.04 1.50
$500,000 to less than $1,000,000...................... 1.50 1.52 1.25
$1,000,000 and above.................................. none none none
INCOME AND INTERMEDIATE MUNICIPAL BOND FUNDS
<CAPTION>
Total Sales Load
--------------------------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering price
--------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000..................................... 3.00 3.09 2.75
$50,000 to less than $100,000......................... 2.50 2.56 2.25
$100,000 to less than $250,000........................ 2.00 2.04 1.75
$250,000 to less than $500,000........................ 1.50 1.52 1.25
$500,000 to less than $1,000,000...................... 1.00 1.01 0.75
$1,000,000 and above.................................. none none none
</TABLE>
With respect to purchases of $1,000,000 or more of Class A shares or other
purchases of Class A shares made at net asset value (as described below) of each
Fund made through Service Agents, the Distributor may pay such Service Agents
from its own funds a fee of 1.00% for each Fund for the first $2 million of the
amount invested, 0.80% of the next $1 million and 0.50% thereafter to compensate
Service Agents for their distribution assistance in connection with such
purchases. In addition, at its expense, the Distributor may provide other
compensation to dealers in connection with sales of shares of the Funds. Such
compensation will include financial assistance to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising campaigns regarding one or more of the Funds, and/or other
special events sponsored by dealers. In some instances, this compensation will
be made available only to certain dealers whose representatives have sold a
significant amount of Shares. Compensation may also include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will also include the following types of non-cash compensation
offered through sales contests: (1) vacation trips, including the provision of
travel arrangements and lodging at luxury resorts at an exotic location, (2)
tickets for entertainment events (such as concerts, cruises, and sporting
events) and (3) merchandise (such as clothing, trophies, clocks, and pens).
Dealers may not use sales of shares to qualify for this compensation to the
extent such may be prohibited by the laws of any
15
<PAGE>
state or any self-regulatory agency, such as the NASD. None of the
aforementioned is paid for by the Funds or their respective shareholders.
Full-time employees of NASD member firms which have entered into an
agreement with the Distributor pertaining to the sale of Fund shares (or which
otherwise have a brokerage-related or clearing arrangement with an NASD member
firm with respect to sales of Fund shares), their spouses and minor children,
and accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary or custodian for accounts other than 401(k) and other defined
contribution or other retirement plan accounts, may purchase Class A shares for
themselves or itself, as the case may be, at net asset value, provided that they
have furnished the Distributor appropriate notification of such status at the
time of the investment and such other information as it may request from time to
time in order to verify eligibility for this privilege. In, addition, Class A
shares may be purchased at net asset value for accounts registered under the
Uniform Gifts to Minors Act or Uniform Transfers to Minors Act which are opened
through FNIS and 401(k) and other defined contribution or other retirement plan
accounts advised by FCN for which FNBC or ANB has served as custodian or trustee
since at least June 1, 1995 or NBD or its subsidiaries or affiliates, other than
FNBC or ANB, has served as administrator or Trustee since January 1, 1996. Class
A shares are also offered at net asset value to directors and full-time or
part-time employees of FCN, or any of its affiliates and subsidiaries, retired
employees of FCN, or any of its affiliates and subsidiaries, Board members of a
fund advised by the Investment Advisers, including members of the Funds' Board
of Trustees, or the spouses, children, grandchildren, siblings, parents,
grandparents and in-laws of any of the foregoing individuals.
Class A shares may be purchased at net asset value through certain
broker-dealers, registered investment advisers and other financial institutions
which have entered into an agreement with the Distributor, which includes a
requirement that such shares be sold for the benefit of clients participating in
a "wrap account" or a similar program under which such clients pay a fee to such
broker-dealer, registered investment adviser or other financial institution. The
Investment Advisers will pay a fee of up to 1.5% of the amount invested by a
participant in its Investment Architect Account or any other wrap account to
FNIS, FNBC or other third-parties.
Class A shares also may be purchased at net asset value, without a sales
charge, with the proceeds from the redemption of shares of an investment company
sold with a sales charge or commission or annuity contract or guaranteed
investment contract subject to a surrender charge. This also includes shares of
an investment company that were or would be subject to a contingent deferred
sales charge upon redemption. The purchase must be made within 60 days of the
redemption, and the Transfer Agent must be notified in writing by the investor
at the time the purchase is made.
Class A shares also will be offered at net asset value without a sales load
to employees participating in 401(k) and other defined contribution or other
retirement plan accounts where (i) the employers or affiliated employers
maintaining such plans or programs have a minimum of 200 employees eligible for
participation in such plans or programs or (ii) such plan's or program's assets
exceed one million dollars ("Eligible Benefit Plans").
16
<PAGE>
If an investor purchases Class A shares without an initial sales charge as
part of an investment of at least $1,000,000 or other method as described above,
and redeems those shares within a certain period after purchase, a CDSC will be
imposed at the time of redemption as described below unless the investor
qualifies for a waiver of the CDSC as described below under "Class B
Shares--Waiver of CDSC." The terms set forth under "How to Redeem
Shares--Contingent Deferred Sales Charge-- Class B" (other than the amount of
the CDSC and its time periods) are applicable to the Class A shares subject to a
CDSC. The following table sets forth the rates of such CDSC for the indicated
time periods:
CDSC as a % of
Amount Invested or Year Since Purchase
Redemption Proceeds Payment Was Made
- -------------------- --------------------
1.00% First
0.50% Second
CLASS B SHARES
The public offering price for Class B shares is the net asset value per
share of that Class. No initial sales charge is imposed at the time of purchase.
As a result, the entire purchase price is immediately invested in the Fund. A
CDSC is imposed, however, on certain redemptions of Class B shares, as described
under "How To Redeem Shares" below. Class B shares are subject to an annual
service fee and distribution fee. See "Distribution Plans and Shareholder
Services Plans."
The Distributor will compensate certain Service Agents for selling Class B
shares at the time of purchase from its own assets. Proceeds of the CDSC and
distribution fees payable to the Distributor, in part, would be used to defray
these expenses.
CLASS I SHARES
The public offering price for Class I shares is the net asset value per
share of that Class. No sales charge is imposed for Class I shares.
Class I shares held by investors who after purchasing Class I shares for
their Fiduciary Accounts withdraw from such Accounts will convert to Class A
shares automatically upon such withdrawal, based on the relative net asset
values for shares of each such Class, and will be subject to the annual service
fee charged to Class A shares.
RIGHT OF ACCUMULATION--CLASS A SHARES
Reduced sales loads apply to any purchase of Class A shares where the dollar
amount of shares being purchased, plus the value of shares of such Fund, shares
of other Funds and shares of certain other investment companies advised by the
Investment Advisers purchased with a sales load or acquired by a previous
exchange of shares purchased with a sales load (hereinafter referred to as
"Eligible Funds") held by an investor and any related "purchaser" as defined in
the Statement of Additional Information, is $50,000 or more. If, for example, an
investor previously purchased and still holds Class A shares of
17
<PAGE>
the Equity Income Fund, or of any other Eligible Fund or combination thereof,
with an aggregate current market value of $40,000 and subsequently purchases
Class A shares of such Fund or an Eligible Fund having a current value of
$20,000, the sales load applicable to the subsequent purchase would be reduced
to 4.50% of the offering price (4.71% of the net asset value). All present
holdings of Eligible Funds may be combined to determine the current offering
price of the aggregate investment in ascertaining the sales load applicable to
each subsequent purchase.
To qualify for reduced sales loads, at the time of a purchase an investor
must notify the Transfer Agent. The reduced sales load is subject to
confirmation of the investor's holdings through a check of appropriate records.
18
<PAGE>
SHAREHOLDER SERVICES
The Exchange Privilege and Automatic Investment Plan are available to
shareholders of any Class. The Letter of Intent is available only for Class A
shareholders, and the Reinstatement Privilege are available only for Class A and
Class B shareholders. Such services and privileges may not be available to
clients of certain Service Agents and some Service Agents may impose certain
conditions on their clients which are different from those described in this
Prospectus. Each investor should consult his Service Agent in this regard.
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for
shares of a Fund which have been owned for at least 30 days, shares of the same
Class of the other Funds or the other investment portfolios of the Trust. This
privilege may be expanded to permit exchanges between a Fund and other funds
that, in the future, may be advised by the Investment Advisers. Exchanges may be
made to the extent the shares being received in the exchange are offered for
sale in the shareholder's state of residence.
Shares of the same Class of Funds purchased by exchange will be purchased on
the basis of relative net asset value per share as follows:
A. Shares of Funds purchased with or without a sales load may be
exchanged without a sales load for shares of other Funds and investment
portfolios of the Trust sold without a sales load.
B. Shares of Funds purchased without a sales load may be exchanged for
shares of other Funds and investment portfolios of the Trust sold with a
sales load, and the applicable sales load will be deducted.
C. Shares of Funds purchased with a sales load, shares of Funds acquired
by a previous exchange from shares purchased with a sales load and
additional shares acquired through reinvestment of dividends or
distributions of any such Funds (collectively referred to herein as
"Purchased Shares") may be exchanged for shares of other Funds and other
investment portfolios of the Trust sold with a sales load (referred to
herein as "Offered Shares"), provided that, if the sales load applicable to
the Offered Shares exceeds the maximum sales load that could have been
imposed in connection with the Purchased Shares (at the time the Purchased
Shares were acquired), without giving effect to any reduced loads, the
difference will be deducted.
D. Shares of Funds subject to a CDSC that are exchanged for shares of
another Fund or investment portfolio of the Trust will be subject to the
higher applicable CDSC of the two funds, and for purposes of calculating
CDSC rates and conversion periods, if any, will be deemed to have been held
since the date the shares being exchanged were initially purchased.
E. A qualified or non-qualified employee benefit plan with assets of at
least $1 million or 200 eligible participants may be exchanged from Class B
shares to Class A shares on or after January 1 of the year following the
year of the plan's eligibility, provided that the sponsor of the plan has so
19
<PAGE>
notified the Service Agent of its eligibility and in turn, the Service Agent
has notified the Transfer Agent of such eligibility.
To accomplish an exchange under item C and E above, shareholders must notify
the Transfer Agent of their prior ownership of Fund shares and their account
number.
No fees currently are charged shareholders directly in connection with
exchanges although the Funds reserve the right, upon not less than 60 days'
written notice, to charge shareholders a nominal fee in accordance with rules
promulgated by the Securities and Exchange Commission. The Funds reserve the
right to reject any exchange request in whole or in part. The Exchange Privilege
may be modified or terminated at any time upon notice to shareholders.
The exchange of shares of one Fund for shares of another is treated for
federal income tax purposes as a sale of the shares given in exchange by the
shareholder and, therefore, an exchanging shareholder may realize a taxable gain
or loss.
LETTER OF INTENT--CLASS A SHARES
By signing a Letter of Intent form, available from the Transfer Agent, the
Investment Advisers, certain of their affiliates or certain Service Agents, an
investor becomes eligible for the reduced sales load applicable to the total
number of Eligible Fund shares purchased in a 13-month period (beginning up to
30 days before the date of execution of the Letter of Intent) pursuant to the
terms and conditions set forth in the Letter of Intent. A minimum initial
purchase of $10,000 is required. To compute the applicable sales load, the
offering price of shares the investor holds (on the date of submission of the
Letter of Intent) in any Eligible Fund that may be used toward "Right of
Accumulation" benefits described above may be used as a credit toward completion
of the Letter of Intent. However, the reduced sales load will be applied only to
new purchases.
The Transfer Agent will hold in escrow 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if the investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when the investor fulfills the terms of the Letter of Intent by
purchasing the specified amount. Assuming completion of the total minimum
investment specified under a Letter of Intent, an adjustment will be made to
reflect any reduced sales load applicable to shares purchased during the 30-day
period before submission of the Letter of Intent. In addition, if the investor's
purchases qualify for a further sales load reduction, the sales load will be
adjusted to reflect the investor's total purchase at the end of 13 months. If
total purchases are less than the amount specified, the investor will be
notified that a deduction from escrow to cover the difference between the sales
load actually paid and the sales load applicable to the aggregate purchases
actually made will be assessed. Signing a Letter of Intent does not bind the
investor to purchase, or the Trust to sell, the total amount indicated at the
sales load in effect at the time of signing, but the investor must complete the
intended purchase to obtain the reduced sales load. At the time an investor
purchases Class A shares, the investor must indicate his or her intention to do
so under a Letter of Intent.
20
<PAGE>
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan permits an investor to purchase shares in
amounts of at least $100 at regular intervals selected by the investor. Provided
the investor's bank or other financial institution allows automatic withdrawals,
shares may be purchased by transferring funds from the bank account designated
by the investor. At the investor's option, the account designated will be
debited in the specified amount, on any day between the first and the
twenty-fifth day of the month. Only an account maintained at a domestic
financial institution which is an Automated Clearing House member may be so
designated. To establish an Automatic Investment Plan account, the investor must
check the appropriate box and supply the necessary information on the Account
Application. Investors may obtain the necessary applications from the
Distributor. Investors should be aware that periodic investment plans do not
guarantee a profit and will not protect an investor against loss in a declining
market. An investor may cancel his or her participation in the Plan or change
the amount of purchase at any time by mailing written notification to the
Transfer Agent and such notification will be effective three business days
following receipt. The Funds may modify or terminate the Automatic Investment
Plan at any time or charge a service fee. No such fee currently is contemplated.
REINSTATEMENT PRIVILEGE
The Reinstatement Privilege enables investors who have redeemed Class A or
Class B shares to purchase, within 120 days of such redemption, Class A shares
without the imposition of a sales load in an amount not to exceed the redemption
proceeds received. Class A shares so reinstated or purchased will be offered at
a purchase price equal to the then-current net asset value of Class A determined
after a reinstatement request and payment for Class A shares are received by the
Transfer Agent. This privilege also enables such investors to reinstate their
account for the purpose of exercising the Exchange Privilege. To use the
Reinstatement Privilege, an investor must submit a written reinstatement request
to the Transfer Agent. The reinstatement request and payment must be received
within 120 days of the trade date of the redemption. There currently are no
restrictions on the number of times an investor may use this privilege.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Systematic Withdrawal Plan permits investors who own shares of a Fund
having a minimum value of $15,000 at the time he elects under the Systematic
Withdrawal Plan to have a fixed sum distributed in redemption at regular
intervals. An application form and additional information regarding this service
may be obtained from an investor's financial institution or the Transfer Agent
by calling (800) 688-3350.
CROSS REINVESTMENT OF DIVIDEND PLAN
The Trust makes available to investors a Cross Reinvestment of Dividend Plan
pursuant to which an investor who owns shares of any Fund with a minimum value
of $10,000 at the time he elects may have dividends paid by such Fund
automatically reinvested into shares of another investment portfolio of the
Trust in which he has invested a minimum of $1,000. Investors may obtain an
application and
21
<PAGE>
additional information from their financial institutions or the Transfer Agent
by calling (800) 688-3350.
THE WOODWARD FUNDS INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
Class A and Class B shares may be purchased in conjunction with the Trust's
Individual Retirement Custodial Account Program ("IRA") where NBD acts as
custodian. Investors should consult their institutions or Distributor for
information as to applications and annual fees. The minimum investment for an
IRA is $250. Investors should also consult their tax advisers to determine
whether the benefits of an IRA are available or appropriate.
HOW TO REDEEM SHARES
IN GENERAL
An investor may request redemption of his shares at any time. Redemption
requests should be transmitted to the Transfer Agent as described below. An
investor who has purchased shares through his Fiduciary Account or as a
participant in an Eligible Retirement Plan must redeem shares by following
instructions pertaining to such Account or Plan. It is the responsibility of the
entity authorized to act on behalf of such Account or Plan to transmit the
redemption order to the Transfer Agent and credit the investor's account with
the redemption proceeds on a timely basis. When a request is received in proper
form, the Fund will redeem the shares at the next determined net asset value as
described below. If an investor holds Fund shares of more than one Class, any
request for redemption must specify the Class of shares being redeemed. If an
investor fails to specify the Class of shares to be redeemed, Class A shares
will be redeemed first. If an investor owns fewer shares of the Class than
specified to be redeemed, the redemption request may be delayed until the
Transfer Agent receives further instructions from the investor or his Service
Agent.
The Funds impose no charges when shares are redeemed. However, the Trust may
impose a CDSC as described below. Service Agents may charge a nominal fee for
effecting redemptions of Fund shares. The value of the shares redeemed may be
more or less than their original cost, depending upon the Fund's then-current
net asset value.
A Fund ordinarily will make payment for all shares redeemed within seven
days after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
HOWEVER, IF AN INVESTOR HAS PURCHASED FUND SHARES BY CHECK OR THROUGH THE
AUTOMATIC INVESTMENT PLAN AND SUBSEQUENTLY SUBMITS A WRITTEN REDEMPTION REQUEST
TO THE TRANSFER AGENT, THE REDEMPTION PROCEEDS WILL BE TRANSMITTED TO THE
INVESTOR PROMPTLY UPON BANK CLEARANCE OF THE INVESTOR'S PURCHASE CHECK OR
AUTOMATIC INVESTMENT PLAN ORDER, WHICH MAY TAKE UP TO EIGHT BUSINESS DAYS OR
MORE. IN ADDITION, THE FUND WILL NOT HONOR REDEMPTION CHECKS FOR A PERIOD OF
EIGHT BUSINESS DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE PURCHASE CHECK OR
AUTOMATIC INVESTMENT PLAN ORDER AGAINST WHICH SUCH REDEMPTION IS REQUESTED.
THESE PROCEDURES WILL NOT APPLY IF THE INVESTOR OTHERWISE HAS A SUFFICIENT
COLLECTED BALANCE IN HIS OR HER ACCOUNT TO COVER THE REDEMPTION REQUEST. PRIOR
TO THE TIME ANY REDEMPTION IS EFFECTIVE, DIVIDENDS ON SUCH SHARES WILL ACCRUE
AND BE PAYABLE, AND THE
22
<PAGE>
INVESTOR WILL BE ENTITLED TO EXERCISE ALL OTHER RIGHTS OF BENEFICIAL OWNERSHIP.
Fund shares will not be redeemed until the Transfer Agent has received the
investor's Account Application.
Each Fund reserves the right to redeem an investor's account at the Fund's
option upon not less than 60 days' written notice if, due to share redemptions,
the account's net asset value decreases to $1,000 or less and remains so during
the notice period.
CLASS B SHARES
Contingent Deferred Sales Charge
A CDSC payable to the Distributor may be imposed on redemptions of Class B
shares depending on the number of years such shares were held by the investor.
The following table sets forth the rates of the CDSC applied for the Funds:
<TABLE><CAPTION>
Income and Intermediate
Municipal Bond Funds All Other Funds
CDSC as a % of CDSC as a % of
Year Since Amount Invested or Amount Invested or
Purchase Payment Was Made Redemption Proceeds Redemption Proceeds
- ----------------------------------------------------- ------------------------ --------------------
<S> <C> <C>
First................................................ 3.00 5.00
Second............................................... 3.00 4.00
Third................................................ 2.00 3.00
Fourth............................................... 2.00 3.00
Fifth................................................ 1.00 2.00
Sixth................................................ None 1.00
Seventh.............................................. * None
Eighth............................................... N/A *
</TABLE>
- ----------------
* Conversion to Class A shares.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. Class B
shares redeemed will not be subject to a CDSC to the extent that the value of
such shares represents capital appreciation or reinvestment of dividends or
distributions. It will be assumed that the redemption is made first of Class B
shares acquired pursuant to the reinvestment of dividends and distributions or
representing any capital appreciation in the value of the Class B shares held by
the investor; then of Class B shares held for the longest period of time.
Waiver Of CDSC
The CDSC will be waived in connection with (a) redemptions made within one
year after the death of the shareholder, (b) redemptions by shareholders after
age 70 1/2 for purposes of the minimum required distribution from an IRA, Keogh
plan or custodial account pursuant to Section 403(b) of the Code, (c)
distributions from a qualified plan upon retirement or termination of
employment, (d)
23
<PAGE>
redemptions of shares acquired through a contribution in excess of permitted
amounts, (e) in-service withdrawals from tax qualified plans by participants and
(f) redemptions initiated by a Fund of accounts with net assets of less than
$1,000.
Conversion Of Class B Shares
Class B shares automatically convert to Class A shares (and thus become
subject to the lower expenses borne by Class A shares) at the beginning of the
eighth year (seventh year in the case of the Income and Intermediate Municipal
Bond Funds) after the date of purchase, together with the pro rata portion of
all Class B shares representing dividends and other distributions paid in
additional Class B shares. The conversion will be effected at the relative net
asset values per share of the two Classes on the first business day of the month
following the seventh anniversary (sixth anniversary in the case of the Income
and Intermediate Municipal Bond Funds) of the original purchase. If any
exchanges of Class B shares during the eight-year or seven-year, as the case may
be, period occurred, the holding period for the shares exchanged will be counted
toward the eight-year or seven-year, as the case may be, period. At the time of
the conversion the net asset value per share of the Class A shares may be higher
or lower than the net asset value per share of the Class B shares; as a result,
depending on the relative net asset values per share, a shareholder may receive
fewer or more Class A shares than the number of Class B shares converted.
Upon conversion to Class A shares, Class B shares will no longer be subject
to the distribution fee. Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted on a pro rata
basis together with other Class B shares, in the proportion that a shareholder's
Class B shares converting to Class A shares bears to the total Class B shares
not acquired through the reinvestment of dividends and distributions.
Each Fund reserves the right to cease offering Class B shares for sale at
any time or reject any order for the purchase of Class B shares and to cease
offering any services provided by a Service Agent.
REDEMPTION PROCEDURES
An investor who has purchased shares through his account at FCN, or its
other affiliates or a Service Agent must redeem shares by following instructions
pertaining to such account. If an investor has given his Service Agent authority
to instruct the Transfer Agent to redeem shares and to credit the proceeds of
such redemption to a designated account at the Service Agent, the investor may
redeem shares only in this manner and in accordance with a written redemption
request described below. It is the responsibility of FCN, the Investment
Advisers or the Service Agent, as the case may be, to transmit the redemption
order and credit the investor's account with the redemption proceeds on a timely
basis.
If you sell shares having a net asset value of $50,000 or more, the
signatures of registered owners or their legal representatives must be
guaranteed by a bank, broker-dealer or certain other financial institutions.
Contact the Transfer Agent for more information about where to obtain a
signature guarantee. If you want your redemption proceeds sent to an address
other than your address as it appears on the Transfer Agent's records, a
signature guarantee is required. The Transfer Agent usually
24
<PAGE>
requires additional documentation for the sale of shares by a corporation,
partnership, agent or fiduciary, or a surviving joint owner.
You may use the Transfer Agent's Telephone Redemption Privilege to redeem
shares from your account, unless you have notified the Transfer Agent of an
address change within the preceding 15 days. Unless an investor indicates
otherwise on the account application, the Transfer Agent will be authorized to
act upon redemption and transfer instructions received by telephone from a
shareholder, or any person claiming to act as his or her representative, who can
provide the Transfer Agent with his or her account registration and address as
it appears on the Transfer Agent's records. With the telephone redemption or
exchange privilege, an investor authorizes the Transfer Agent to act on
telephone instructions from any person representing himself or herself to be the
investor, or a representative of the investor's Service Agent, and reasonably
believed by the Transfer Agent to be genuine. The Trust will require the
Transfer Agent to employ reasonable procedures, such as requiring a form of
personal identification, to confirm that instructions are genuine and, if it
does not follow such procedures, the Trust or the Transfer Agent may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the Trust
nor the Transfer Agent will be liable for following telephone instructions
reasonably believed to be genuine.
During times of drastic economic or market conditions, an investor may
experience difficulty in contacting the Transfer Agent by telephone to request a
redemption or exchange of Fund shares. In such cases, investors should consider
using the other redemption procedures described herein. Use of these other
redemption procedures may result in the investor's redemption request being
processed at a later time than it would have been if telephone redemption had
been used. During the delay, the Fund's net asset value may fluctuate.
WRITTEN REDEMPTION REQUESTS
Investors may redeem shares by written request mailed to the Transfer Agent
at 4400 Computer Drive, Westborough, Massachusetts 01581-5120. Redemption
requests must be signed by each shareholder, including each owner of a joint
account, and each signature must be guaranteed for redemptions greater than
$50,000. The Transfer Agent has adopted standards and procedures pursuant to
which signature-guarantees in proper form generally will be accepted from
domestic banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP"), and the
Stock Exchanges Medallion Program.
25
<PAGE>
MANAGEMENT OF THE FUNDS
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for the management of the
business and affairs of the Trust. The Trustees and executive officers of the
Trust and their principal occupations for the last five years are set forth
below: Each Trustee has an address at the Trust, c/o NBD Bank, 611 Woodward
Avenue, Detroit, Michigan 48226.
*EARL I. HEENAN, JR., CHAIRMAN AND PRESIDENT
Director (since 1995) Vice Chairman (1988-1995) and President (1951-1988),
Detroit Mortgage & Realty Company; President (1989-1992) and Trustee (since
1966), Cottage Hospital of Grosse Pointe (affiliate of Henry Ford Health
System); Trustee, Henry Ford Health Sciences Center (since 1987); Trustee, Henry
Ford Continuing Care Corporation (since 1980); Trustee, Earhart Foundation
(since 1980); Trustee, The Woodward Variable Annuity Fund. He is 77 years old.
*EUGENE C. YEHLE, TRUSTEE AND TREASURER
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee (since
1977) and Chairman (since 1983), Charles J. Strosacker Foundation; Trustee
(1989-1993), Higgins Lake Foundation; Trustee, The Woodward Variable Annuity
Fund. He is 75 years old.
WILL M. CALDWELL, TRUSTEE
Retired; Executive Vice President, Chief Financial Officer and Director,
Ford Motor Company (1979-1985); Director, First Nationwide Bank (1986-1991);
Director, Air Products & Chemicals, Inc. (since 1985); Director, Zurich Holding
Company of America (since 1990); Director, The Batts Group, Ltd. (since 1986);
Trustee and Vice Chairman, Detroit Medical Center (1986-1991); Trustee Emeritus
and Chairman of the Pension Investment Sub-Committee, Detroit Medical Center
(since 1991); Trustee, The Woodward Variable Annuity Fund. He is 70 years old.
NICHOLAS J. DE GRAZIA, TRUSTEE
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating Officer
and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance and
Treasurer, University of Detroit (1981-1990); President (1986-1990) and Director
(1986-1995), Polymer Technologies, Inc.; President, Florence Development Company
(1987-1990); Chairman (since 1994) and Director (1992-1995), Central Macomb
County Chamber of Commerce; Vice Chairman, Michigan Higher Education Facilities
Authority (since 1991); Trustee, The Woodward Variable Annuity Fund. He is 53
years old.
JOHN P. GOULD, TRUSTEE
Steven G. Rothmeier Professor (since January, 1996); Distinguished Service
Professor of Economics of the University of Chicago Graduate School of Business
(since 1984); Dean of the University of
26
<PAGE>
Chicago Graduate School of Business (1983-1993); Member of Economic Club of
Chicago and Commercial Club of Chicago; Director of Harpor Capital Advisors and
Dimensional Fund Advisors; Trustee, The Woodward Variable Annuity Fund and
Prairie Family of Funds. He is 57 years old.
MARILYN MCCOY, TRUSTEE
Vice President of Administration and Planning of Northwestern University
(since 1985); Director of Planning and Policy Development for the University of
Colorado (1981-1985); Member of the Board of Directors of Evanston Hospital,
Chicago Metropolitan YMCA, Chicago Network and United Charities; Member of the
Chicago Economics Club; Trustee, The Woodward Variable Annuity Fund and Prairie
Family of Funds. She is 48 years old.
JULIUS L. PALLONE, TRUSTEE
President, J.L. Pallone Associates, Consultants (since 1994); Chairman of
the Board (1974-1993), Maccabees Life Insurance Company; President and Chief
Executive Officer, Royal Financial Services (1991-1993); Director, American
Council of Life Insurance of Washington, D.C. (life insurance industry
association) (1988-1993); Director, Crowley, Milner and Company (department
store) (since 1988); Trustee, Lawrence Institute of Technology (since 1982);
Director, Detroit Symphony Orchestra (since 1985); Director, Oakland Commerce
Bank (since 1984) and Michigan Opera Theater (since 1981); Trustee, The Woodward
Variable Annuity Fund. He is 65 years old.
*DONALD G. SUTHERLAND, TRUSTEE
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis, Indiana;
Trustee, The Woodward Variable Annuity Fund. He is 67 years old.
DONALD L. TUTTLE, TRUSTEE
Vice President (since 1995) Senior Vice President (1992-1995), Association
for Investment Management and Research; Senior Professor of Finance, Indiana
University (1970-1991); Vice President, Trust & Investment Advisers, Inc.
(1990-1991); Director, Federal Home Loan Bank of Indianapolis (1981 to 1985);
Trustee, The Woodward Variable Annuity Fund. He is 61 years old.
W. BRUCE MCCONNEL, III, SECRETARY
Partner of the law firm Drinker Biddle & Reath, Philadelphia, Pennsylvania.
He is 53 years old, and his address is 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107.
- ----------------
* Denotes Interested Trustee.
-------------------
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of
the Board of Trustees they attend. Additional information about the officers of
the Trust and on the
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compensation paid by the Trust to its Trustees and officers is included in the
Statement of Additional Information.
INVESTMENT ADVISERS AND ADMINISTRATORS
First Chicago Investment Management Company, located at Three First National
Plaza, Chicago, Illinois 60670, and NBD Bank, located at 611 Woodward Avenue,
Detroit, Michigan 48226, are each Fund's Investment Advisers. FCIMCO is a
registered investment adviser and a wholly-owned subsidiary of The First
National Bank of Chicago ("FNBC"), which in turn is a wholly-owned subsidiary of
First Chicago NBD Corporation, a registered bank holding company. NBD is a
wholly-owned subsidiary of First Chicago NBD Corporation. NBD has been in the
business of providing such services since 1933. Included among NBD's accounts
are pension and profit sharing funds for major corporations and state and local
governments, commingled trust funds and a variety of institutional and personal
advisory accounts, estates and trusts. NBD also acts as investment adviser for
other registered investment company portfolios.
FCIMCO and NBD serve as Investment Advisers for the Trust pursuant to an
Investment Advisory Agreement dated as of April 12, 1996. Under the Investment
Advisory Agreement, FCIMCO and NBD provide the day-to-day management of each
Fund's investments, subject to the overall authority of the Trust's Board of
Trustees and in conformity with Massachusetts law and the stated policies of the
Trust, FCIMCO and NBD are responsible for making investment decisions for the
Trust, placing purchase and sale orders (which may be allocated to various
dealers based on their sales of Fund shares) and providing research, statistical
analysis and continuous supervision of each Fund's investment portfolio.
Under the terms of the Investment Advisory Agreement, the Investment
Advisers are entitled jointly to a monthly fee as a percentage of each Fund's
daily net assets. Each Fund's contractual advisory fee is set forth below.
Contractual
Advisory Fee
------------
ASSET ALLOCATION FUNDS:
Managed Assets Conservative Fund............................... 0.65%
Managed Assets Growth Fund..................................... 0.65%
EQUITY FUNDS:
Equity Income Fund............................................. 0.50%
Small-Cap Opportunity Fund..................................... 0.70%
BOND FUNDS:
Income Fund.................................................... 0.40%
International Bond Fund........................................ 0.70%
MUNICIPAL BOND FUND
Intermediate Municipal Bond Fund............................... 0.40%
CLAUDE B. ERB, First Vice President and Director of Investment Planning is
primarily responsible for the day-to-day management of the Managed Assets
Conservative, Managed Assets Growth and
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International Bond Funds. Mr. Erb has received his AB in Economics from the
University of California at Berkeley and MBA in Finance from the University of
California at Los Angeles and has served as Deputy Chief Investment Officer and
Senior Vice President of Trust Services of America and TSA Capital Management
from 1986 through 1992. Mr. Erb joined FCN in 1993.
CHRIS M. GASSEN, Vice President, and F. RICHARD NEUMANN, Vice President, are
primarily responsible for the day-to-day management of the Equity Income Fund.
Mr. Gassen joined FCN in 1985 after receiving an MBA in Finance from Indiana
University. Mr. Neumann joined FCN in 1981 after receiving an MBA in
Finance/Accounting from the University of Chicago.
RONALD L. DOYLE, Vice President, and JOSEPH R. GATZ, Second Vice President,
are primarily responsible for the day-to-day management of the Small-Cap
Opportunity Fund. Mr. Doyle joined FCN in 1982 after receiving his MBA in
Finance from Michigan State University. Mr. Gatz joined FCN in 1986 after
receiving an MBA from Indiana University.
RICARDO F. CIPICCHIO, Vice President, and MARK M. JACKSON, Vice President,
are primarily responsible for the day-to-day management of the Income Fund. Mr.
Cipicchio received his BS in Petroleum Engineering from West Virginia University
and MBA in Finance from the University of Michigan. Mr. Cipicchio joined FCN in
1989. Mr. Jackson received his BS in Finance from Miami University and has
served as portfolio manager for Alexander Hamilton Life Insurance Company,
1993-1996, and as portfolio manager for Public Employees Retirement System of
Ohio, 1988-1993.
ROBERT T. GRABOWSKI, First Vice President and manager of the municipal desk
at FCN, is the person primarily responsible for the day-to-day management of the
Intermediate Municipal Bond Fund. Mr. Grabowski has been the manager of the
municipal desk for ten years.
FCIMCO, NBD and BISYS serve as the Trust's Co-Administrators pursuant to an
Administration Agreement with the Trust. Under the Administration Agreement,
FCIMCO, NBD and BISYS generally assist in all aspects of the Trust's operations,
other than providing investment advice, subject to the overall authority of the
Trust's Board in accordance with Massachusetts law. Under the terms of the
Administration Agreement, FCIMCO, NBD and BISYS are entitled jointly to a
monthly administration fee at the annual rate of .15% of each Fund's average
daily net assets.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as investment
adviser, transfer agent, or custodian to such an investment company or from
purchasing shares of such a company as agent for and upon the order of a
customer. The Investment Advisers and the Trust believe that the Investment
Advisers may perform the advisory, administrative and custodial services for the
Trust described in this Prospectus, and that the Investment Advisers, subject to
such banking laws and regulations, may perform the shareholder services
contemplated by this Prospectus, without violation of such banking laws or
regulations. However, future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as future
interpretations of present requirements, could prevent the
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Investment Advisers from continuing to perform investment advisory or custodial
services for the Trust or require the Investment Advisers to alter or
discontinue the services provided by them to shareholders.
If the Investment Advisers were prohibited from performing investment
advisory or custodial services for the Trust, it is expected that the Board of
Trustees would recommend that shareholders approve new agreements with another
entity or entities qualified to perform such services and selected by the Board.
If the Investment Advisers or their affiliates were required to discontinue all
or part of its shareholder servicing activities, their customers would be
permitted to remain the beneficial owners of Fund shares and alternative means
for continuing the servicing of such customers would be sought. The Trust does
not anticipate that investors would suffer any adverse financial consequences as
a result of these occurrences.
DISTRIBUTOR
BISYS, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, serves as
the Trust's principal underwriter and distributor of the Funds' shares.
TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN
First Data Investor Services Group, Inc., 4400 Computer Drive, Westborough,
Massachusetts, 01581-5120, serves as the Trust's Transfer and Dividend
Disbursing Agent. NBD serves as the Trust's Custodian.
EXPENSES
All expenses incurred in the operation of the Trust are borne by such
company, except to the extent specifically assumed by the Trust's service
providers. The expenses borne by the Trust include: organizational costs, taxes,
interest, loan commitment fees, interest and distributions paid on securities
sold short, brokerage fees and commissions, fees of Board members, Securities
and Exchange Commission fees, state Blue Sky qualification fees, advisory fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, outside auditing and legal
expenses, costs of maintaining each Fund's existence, costs of independent
pricing services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of shareholders' reports
and meetings, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
shareholders, and any extraordinary expenses. In addition, Class B shares are
subject to an annual distribution fee for advertising, marketing and
distributing such shares and Class A and Class B shares are subject to an annual
service fee for ongoing personal services relating to shareholder accounts and
services related to the maintenance of shareholder accounts. See "Distribution
and Shareholder Services Plans." Expenses attributable to a particular Fund or
Class are charged against the assets of that Fund or Class, respectively; other
expenses of the Trust are allocated among such Funds on the basis determined by
the Board, including, but not limited to, proportionately in relation to the net
assets of each such Fund.
The imposition of the advisory fee, as well as other operating expenses,
including the fees paid under any Distribution Plan and Shareholder Services
Plan, will have the effect of reducing the total
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return to investors. From time to time, the Investment Advisers may waive
receipt of their fees and/or voluntarily assume certain expenses of a Fund,
which would have the effect of lowering that Fund's overall expense ratio and
increasing total return to investors at the time such amounts are waived or
assumed, as the case may be. The Fund will not pay the Investment Advisers at a
later time for any amounts which may be waived, nor will the Fund reimburse the
Investment Advisers for any amounts which may be assumed.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
Class B shares of each Fund are subject to an annual distribution fee
pursuant to a Distribution Plan. Class A and Class B shares of each Fund are
subject to an annual service fee pursuant to a Shareholder Services Plan.
DISTRIBUTION PLAN
(Class B only) Under a Distribution Plan adopted pursuant to Rule 12b-1
under the 1940 Act, the Trust has agreed to pay the Distributor for advertising,
marketing and distributing shares of a Fund at an aggregate annual rate not to
exceed .75% of the value of the average daily net assets of Class B shares. The
Distributor may pay one or more Service Agents in respect of these services. The
Investment Advisers and their subsidiaries and affiliates may act as Service
Agents and receive fees under the Distribution Plan. The Distributor determines
the amount, if any, to be paid to Service Agents under the Distribution Plan and
the basis on which such payments are made. The fees payable under the
Distribution Plan are payable without regard to actual expenses incurred.
SHAREHOLDER SERVICES PLAN
(Class A and Class B) Under a Shareholder Services Plan, the Trust pays the
Distributor for the provision of certain services to the holders of Class A and
Class B shares a fee at an annual rate of .25% of the value of the average daily
net assets of such shares. The services provided may include personal services
relating to shareholder accounts, such as answering shareholder inquiries
regarding the Fund and providing reports and other information and services
related to the maintenance of shareholder accounts. Under the Shareholder
Services Plan, the Distributor may make payments to Service Agents in respect of
these services. The Investment Advisers and their subsidiaries and affiliates
may act as Service Agents and receive fees under the Shareholder Services Plan.
The Distributor determines the amounts to be paid to Service Agents.
DIVIDENDS AND DISTRIBUTIONS
THE MANAGED ASSETS GROWTH AND SMALL-CAP OPPORTUNITY FUNDS declare and pay
dividends from net investment income quarterly, usually on the last Business Day
of the quarter. THE BOND FUNDS AND THE MANAGED ASSETS CONSERVATIVE, EQUITY
INCOME AND INTERMEDIATE MUNICIPAL BOND FUNDS declare and pay dividends from net
investment income monthly, usually on the last Business Day of the month.
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Each Fund will make distributions from net realized securities gains, if
any, once a year, but may make distributions on a more frequent basis to comply
with the distribution requirements of the Code, in all events in a manner
consistent with the provisions of the 1940 Act. Dividends are automatically
reinvested in additional Fund shares of the same Class from which they were paid
at net asset value, unless payment in cash is requested. If cash payment is
requested, checks will be mailed within five days.
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<PAGE>
TAXES
FEDERAL
Each Fund intends to qualify as a "regulated investment company" under the
Code. Such qualification generally will relieve the Funds of liability for
federal income taxes to the extent their earnings are distributed in accordance
with the Code.
Qualification as a regulated investment company under the Code for a taxable
year requires, among other things, that each Fund distribute to its shareholders
an amount equal to at least the sum of 90% of its investment company taxable
income and 90% of its net tax-exempt interest income for such year. In general,
a Fund's investment company taxable income will be its taxable income, subject
to certain adjustments and excluding the excess of any net long-term capital
gain for the taxable year over the net short-term capital loss, if any, for such
year. Each Fund intends to distribute as dividends substantially all of its
investment company taxable income and any net tax-exempt interest income each
year. Most such dividends will be taxable as ordinary income to each Fund's
shareholders who are not currently exempt from federal income taxes regardless
of whether a distribution is received in cash or reinvested in additional
shares. (Federal income taxes for distributions to an IRA are deferred under the
Code.) Such ordinary income distributions will qualify for the dividends
received deduction for corporations to the extent of the total qualifying
dividends received by the distributing Fund from domestic corporations for the
taxable year.
Dividends derived from tax-exempt interest income ("exempt-interest
dividends") paid by the Intermediate Municipal Bond Fund may be treated by its
shareholders as items of interest excludable from their gross income under
Section 103(a) of the Code, unless under the circumstances applicable to the
particular shareholder the exclusion would be disallowed. (See Statement of
Additional Information under "Additional Information Concerning Taxes.") An
exempt-interest dividend is any dividend or part thereof (other than a capital
gain dividend) paid by the Intermediate Municipal Bond Fund and designated as an
exempt-interest dividend in a written notice mailed to its shareholders not
later than sixty days after the close of such Fund's taxable year that when
combined with all other such distributions does not exceed the net Municipal
Obligations interest received by the Fund for the taxable year.
If the Intermediate Municipal Bond Fund holds certain so-called "private
activity bonds," shareholders will need to include as an item of tax preference
for purposes of the Federal alternative minimum tax that portion of the
dividends paid by the Fund derived from interest received on such bonds. In
addition corporate shareholders will need to take into account all
exempt-interest dividends paid by the Intermediate Municipal Bond Fund in
determining certain adjustments for the Federal alternative minimum tax.
Substantially all of each Fund's net realized long-term capital gains, if
any, will be distributed at least annually to its shareholders. The Funds
generally will have no tax liability with respect to such gains, and the
distributions will be taxable to Fund shareholders who are not currently exempt
from federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the shares and whether such gains are received in cash or
reinvested in additional shares.
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Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed for
federal tax purposes to have been paid by the Fund and received by the
shareholders and paid by a Fund on December 31 of such year, if such dividends
are paid during January of the following year.
Prior to purchasing shares of a Fund, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any such dividend or distribution,
although in effect a return capital, is subject to tax.
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of shares of a Fund depending upon the tax basis and their
price at the time of redemption, transfer or exchange. If a shareholder has held
shares for six months or less and during that time received an exempt-interest
dividend attributable to those shares, any loss realized on the sale or exchange
of those shares will be disallowed to the extent of the exempt-interest
dividend. If a shareholder has held shares for six months or less and during
that time received a distribution taxable as a long-term capital gain, then any
loss the shareholder might realize on the sale of those shares will be treated
as a long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase of
Fund shares in his tax basis for such shares for the purpose of determining gain
or loss on a redemption, transfer or exchange of such shares. However, if the
shareholder effects an exchange of such shares for shares of another Fund within
90 days of the purchase and is able to reduce the sales charges applicable to
the new shares (by virtue of the Trust's exchange privilege), the amount equal
to such reduction may not be included in the tax basis of the shareholder's
exchanged shares but may be included under certain circumstances in the tax
basis of the new shares.
It is expected that dividends and certain interest income earned by the
International Bond Fund from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Fund's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Fund may elect, for U.S. federal income
tax purposes, to treat certain foreign taxes paid by it, including generally any
withholding taxes and other foreign income taxes, as paid by its shareholders.
The Fund may make this election. As a consequence, the amount of such foreign
taxes paid by the Fund will be included in its shareholders' income pro rata (in
addition to taxable distributions actually received by them), and each
shareholder will be entitled (a) to credit his proportionate amounts of such
taxes against his U.S. federal income tax liabilities, or (b) if he itemizes his
deductions, to deduct such proportionate amounts from his U.S. income.
Shareholders will be advised at least annually as to the federal income tax
consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important tax considerations
generally affecting the Funds and their shareholders and is not intended as a
substitute for careful tax planning. Accordingly, potential investors in the
Funds should consult their tax advisers with specific reference to their own tax
situation.
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STATE AND LOCAL
Distributions of net income may be taxable to investors as dividend income
under other state or local laws even though a substantial portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes.
MISCELLANEOUS
The Trust may be subject to state or local taxes in jurisdictions in which
the Trust may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of the Trust and its
shareholders under such laws may differ from treatment under federal income tax
laws. Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes, which may have different consequences from
those of the federal income tax law described above.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance of the Funds may be compared to the performance of other mutual
funds with similar investment objectives and to stock and other relevant indices
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of a Fund's shares may be compared to data prepared by Lipper
Analytical Services, Inc. In addition, the performance of the Funds may be
compared to the Standard & Poor's 500 Index, an index of unmanaged groups of
common stocks, the Consumer Price Index, or the Dow Jones Industrial Average, a
recognized unmanaged index of common stocks of thirty industrial companies
listed on the New York Stock Exchange. Performance data as reported in national
financial publications such as Money Magazine, Forbes, Barron's, The Wall Street
Journal and The New York Times, or in publications of a local or regional
nature, may also be used in comparing the performance of a Fund.
A Fund's "yield" refers to the income generated by an investment in a Fund
over a thirty-day period for the Asset Allocation Fund, Bond Fund and
Intermediate Municipal Bond Fund identified in the advertisement. This income is
then "annualized," i.e., the income generated by the investment during the
respective period is assumed to be earned and reinvested at a constant rate and
compounded semi-annually and is shown as a percentage of the investment. The
Intermediate Municipal Bond Fund may from time to time advertise a
"tax-equivalent yield" to demonstrate the level of taxable yield necessary to
produce an after-tax yield equivalent to that achieved by the Fund. The
"tax-equivalent yield" will be computed by dividing the tax-exempt portion of
the Fund's yield by a denominator consisting of one minus a stated federal
income tax rate and adding the product to that portion, if any, of the Fund's
yield which is not tax-exempt.
The Funds calculate their total returns on an "average annual total return"
basis for various periods from the date they commenced investment operations and
for other periods as permitted under the rules of the SEC. Average annual total
return reflects the average annual percentage change in value of an investment
in the Funds over the measuring period. Total returns may also be calculated on
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<PAGE>
an "aggregate total return basis" for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return also reflect changes in the price of a
Fund's shares and assume that any dividends and capital gain distributions made
by the Fund during the period are reinvested in Fund shares. When considering
average total return figures for periods longer than one year, it is important
to note that a Fund's annual total return for any one year in the period might
have been greater or less than the average for the entire period.
Performance of the Funds is based on historical earnings and will fluctuate
and is not intended to indicate future performance. The investment performance
of an investment in the Funds will fluctuate so that a shareholder's shares,
when redeemed, may be worth more or less than their original cost. A Fund's
performance data may not provide a basis for comparison with bank deposits and
other investments which provide a fixed yield for a stated period of time.
Performance data should also be considered in light of the risks associated with
a Fund's portfolio composition, quality, maturity, operating expenses and market
conditions. Any fees charged by financial institutions directly to their
customer accounts in connection with investments in Fund shares will not be
reflected in a Fund's performance calculations.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on April 21, 1987
under a Declaration of Trust. The Trust is a series fund having twenty-seven
series of shares of beneficial interest, each of which evidences an interest in
a separate investment portfolio. The Declaration of Trust permits the Board of
Trustees to issue an unlimited number of full and fractional shares and to
create an unlimited number of series of shares ("Series") representing interests
in a portfolio and an unlimited number of classes of shares within a Series. In
addition to the Funds described herein, the Trust offers the following
investment portfolios: the Managed Assets Balanced, Growth, Mid-Cap Opportunity,
Intrinsic Value, Growth and Value, Equity Index, International Equity,
Intermediate Bond, Bond, Short Bond, Municipal Bond, Michigan Municipal Bond,
Money Market, Government, Treasury Money Market, Municipal Money Market,
Michigan Municipal Money Market, Cash Management, U.S. Government Securities
Cash Management and Treasury Prime Cash Management Funds.
Each Fund other than the Funds contained herein offer two Classes of shares
(Retail and Institutional Shares) other than the Cash Management, U.S.
Government Cash Management and Treasury Prime Cash Management Funds which offer
Class S and Class I Shares. A sales person and any other person or institution
entitled to receive compensation for selling or servicing shares may receive
different compensation with respect to different classes of shares in the
Series. Each share has $.10 par value, represents an equal proportionate
interest in the related Fund with other shares of the same class outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such Fund as are declared in the discretion of the Board
of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
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<PAGE>
Trustees determines that the matter to be voted on affects only the interests of
shareholders of a particular Series. In addition, shareholders of each of the
Series have equal voting rights except that only shares of a particular class
within a Series are entitled to vote on matters affecting only that class.
Voting rights are not cumulative, and accordingly the holders of more than 50%
of the aggregate number of shares of all Trust portfolios may elect all of the
Trustees.
As of the date of this Prospectus, the Distributor owned all the outstanding
shares of each Fund. It is contemplated that the public offering of the shares
of the Funds will reduce the Distributor's holdings to less than 5% of the total
shares outstanding of each such Fund.
Because NBD serves the Trust as both Custodian and as an Investment Adviser,
the Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the Custodian
Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's By-Laws
provide that special meetings of shareholders of any Series shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
of a Series entitled to be cast at such meeting. The Trust also stands ready to
assist shareholder communications in connection with any meeting of shareholders
as prescribed in Section 16(c) of the 1940 Act.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE FUNDS'
OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE FUNDS' SHARES,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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SUPPLEMENTAL INFORMATION
CERTAIN PORTFOLIO SECURITIES
Ratings--The ratings of Moody's, S&P, Fitch and Duff represent their
opinions as to the quality of the obligations which they undertake to rate. It
should be emphasized, however, that ratings are relative and subjective and,
although ratings may be useful in evaluating the safety of interest and
principal payments, they do not evaluate the market value risk of such
obligations. Therefore, although these ratings may be an initial criterion for
selection of portfolio investments, the Investment Advisers also will evaluate
such obligations and the ability of their issuers to pay interest and principal.
Each Fund will rely on the Investment Advisers' judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this evaluation,
the Investment Advisers will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
the quality of the issuer's management and regulatory matters. It also is
possible that a Rating Agency might not timely change the rating on a particular
issue to reflect subsequent events. Once the rating of a security held by a Fund
has been changed, the Investment Advisers will consider all circumstances deemed
relevant in determining whether such Fund should continue to hold the security.
Short-Term Investments--Each Fund may hold the types of short-term U.S.
Government obligations described under Asset Allocation Funds above.
U.S. Government Obligations--The Funds may invest in all types of U.S.
Government securities, including U.S. Treasury bonds, notes and bills, and
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, Federal National Mortgage Association,
General Services Administration, Student Loan Marketing Association, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, Tennessee Valley Authority, Resolution Funding
Corporation and Maritime Administration. The Funds may also invest in interests
in the foregoing securities, including collateralized mortgage obligations
guaranteed by a U.S. Government agency or instrumentality, and in
Government-backed trusts which hold obligations of foreign governments that are
guaranteed or backed by the full faith and credit of the United States.
Obligations of certain U.S. agencies and instrumentalities such as those of
the Government National Mortgage Association, are supported by the full faith
and credit of the U.S. Treasury; others, such as the Export-Import Bank of the
United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
Bank Obligations--Bank obligations in which the Funds may invest include
certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions. With respect to
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such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Fund may be subject to additional investment risks that are different
in some respects from those incurred by a fund which invests only in debt
obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by each Fund will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the FDIC.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Certain Corporate Obligations--Commercial paper in which the Funds may
invest consists of short-term, unsecured promissory notes issued by domestic or
foreign entities to finance short-term credit needs.
Variable and Floating Rate Instruments--Each Fund may invest in variable and
floating instruments, including without limitation, inverse floating rate debt
instruments ("inverse floaters") some of which may be leveraged. The interest
rate of an inverse floater resets in the opposite direction from the market rate
of interest to which it is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
degree of leverage inherent in inverse floaters is associated with greater
volatility in their market values.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Fund to
dispose of the instruments if the issuer defaulted on its payment obligation or
during periods that the Fund is not entitled to exercise demand rights, and the
Fund could, for these or other reasons, suffer a loss with respect to such
instruments. In the absence of an active secondary market, variable and floating
rate instruments (including inverse floaters) will be subject to a Fund's
limitation on illiquid investments. See "Illiquid Securities."
Repurchase and Reverse Repurchase Agreements--To increase its income, each
Fund may agree to purchase portfolio securities from financial institutions
subject to the seller's agreement to repurchase them at a mutually agreed-upon
date and price ("repurchase agreements"). No Fund will enter into repurchase
agreements with the Investment Advisers, the Distributor, or any of their
affiliates. The
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seller under a repurchase agreement will be required to maintain the value of
the securities subject to the agreement at not less than the repurchase price,
marked to market daily. Default by the seller would, however, expose a Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Each Fund may also obtain funds for temporary purposes by entering into
reverse repurchase agreements. Pursuant to such agreements, the Funds will sell
portfolio securities to financial institutions such as banks and broker-dealers
and agree to repurchase them at a particular date and price. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the price of the securities it is obligated to
repurchase.
Lending Portfolio Securities--To increase income or offset expenses, each
Fund may lend its portfolio securities to financial institutions such as banks
and broker dealers in accordance with the investment limitations described
below. Agreements would require that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned plus accrued interest. Collateral for such loans could include
cash or securities of the U.S. Government, its agencies or instrumentalities.
Such loans will not be made if, as a result, the aggregate of all outstanding
loans of a particular Fund exceeds one-third of the value of its total assets.
Loans of securities involve risk of delay in receiving additional collateral or
in recovering the securities loaned or possible loss of rights in the collateral
should the borrower of the securities become insolvent. Loans will be made only
to borrowers that provide the requisite collateral comprised of liquid assets
and when, in the Investment Advisers' judgment, the income to be earned from the
loan justifies the attendant risks.
Zero Coupon Obligations--Each Fund may invest in zero coupon obligations
which are discount debt obligations that do not make periodic interest payments
although income is generally imputed to the holder on a current basis. Such
obligations may have higher price volatility than those which require the
payment of interest periodically. The Investment Advisers will consider the
liquidity needs of the Funds when any investment in zero coupon obligations is
made.
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. To maintain its qualification as a
regulated investment company and avoid liability for Federal income taxes, each
Fund that invests in such securities may be required to distribute such income
accrued with respect to these securities and may have to dispose of portfolio
securities under disadvantageous circumstances in order to generate cash to
satisfy these distribution requirements. Such Fund will not be able to purchase
additional income producing securities with cash used to make such distributions
and its current income may be reduced as a result.
When Issued Purchases and Forward Commitments--The Funds may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by a
Fund to purchase or sell particular securities with payment and delivery taking
place at a future date (perhaps one or two months later), permit the Fund to
lock-in a price or yield on a security it owns or intends to purchase,
regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the
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yield obtained in a transaction may be less favorable than the yield available
in the market when the securities delivery takes place. Each Fund's forward
commitments and when-issued purchases are not expected to exceed 25% of the
value of its total assets absent unusual market conditions. The Funds do not
earn income with respect to these transactions until the subject securities are
delivered to the Funds. The Funds do not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of their investment objectives.
Foreign Securities--Investments by the Asset Allocation, Equity and Bond
Funds in foreign securities, with respect to certain foreign countries, exposes
a Fund to the possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets or diplomatic developments that could
affect investment within those countries. Because of these and other factors,
securities of foreign companies acquired by a Fund may be subject to greater
fluctuation in price than securities of domestic companies.
Since foreign securities often are purchased with and payable in currencies
of foreign countries, the value of these assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Some currency exchange costs may be incurred when a Fund
changes investments from one country to another.
Furthermore, some securities may be subject to brokerage taxes levied by
foreign governments, which have the effect of increasing the costs of such
investments and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by the Funds from sources
within foreign countries may be reduced by withholding or other taxes imposed by
such countries. Tax conventions between certain countries and the United States,
however, may reduce or eliminate such taxes. All such taxes paid by a Fund will
reduce its net income available for distribution to investors.
American Depository Receipts ("ADRs")--Each Asset Allocation and Equity Fund
may invest in securities of foreign issuers in the forms of ADRs or similar
securities representing securities of foreign issuers. These securities may not
be denominated in the same currency as the securities they represent. ADRs are
receipts typically issued by a United States bank or trust company evidencing
ownership of the underlying foreign securities and are denominated in U.S.
dollars. Certain such institutions issuing ADRs may not be sponsored by the
issuer. A non-sponsored depository may not provide the same shareholder
information that a sponsored depository is required to provide under its
contractual arrangements with the issuer.
European Depository Receipts ("EDRs")--Each Asset Allocation and Equity Fund
may invests in securities of foreign issuers in the form of EDRs or similar
securities representing securities of foreign issuers. These securities may not
be denominated in the same currency as the securities they represent. EDRs are
receipts issued by a European financial institution evidencing ownership of the
underlying foreign securities and are generally denominated in foreign
currencies. Generally, EDRs, in bearer form, are designed for use in the
European securities markets.
Supranational Bank Obligations--The Asset Allocation, Equity and Bond Funds
may invest in obligations of supranational banks. Supranational banks are
international banking institutions designed
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or supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the World Bank). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will be
undertaken or met in the future.
Convertible Securities--Each Fund may invest in convertible securities. A
convertible security is a security that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of common stock. By investing in convertible securities, a Fund seeks the
opportunity, through the conversion feature, to participate in the capital
appreciation of the common stock into which the securities are convertible,
while earning higher current income than is available from the common stock.
Warrants--Each Asset Allocation and Equity Fund may invest up to 5% of its
assets at the time of purchase in warrants and similar rights (other than those
that have been acquired in units or attached to other securities). Warrants
represent rights to purchase securities at a specified price valid for a
specified period of time. The prices of warrants do not necessarily correlate
with the prices of underlying securities.
Securities of Investment Companies--Each Fund may invest in securities
issued by open and closed-end investment companies which principally invest in
securities in which the Fund invests. Under the 1940 Act, a Fund's investment in
such securities, subject to certain exceptions, currently is limited to (i) 3%
of the total voting stock of any one investment company, (ii) 5% of the Fund's
net assets with respect to any one investment company and (iii) 10% of the Funds
net assets in the aggregate. Such purchases will be made in the open market
where no commission or profit to a sponsor or dealer results from the purchase
other than the customary brokers' commissions. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Fund bears directly in connection with its own operations.
Asset Backed Securities--Asset backed securities held by the Asset
Allocation and Bond Funds arise through the grouping by governmental,
government-related and private organizations of loans, receivables and other
assets originated by various lenders ("Asset Backed Securities"), as described
below.
The yield characteristics of Asset Backed Securities differ from traditional
debt securities. A major difference is that the principal amount of the
obligations may be prepaid at any time because the underlying assets (i.e.
loans) generally may be prepaid at any time. As a result, if an Asset Backed
Security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an Asset Backed Security is purchased at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease, yield to maturity. In calculating the average weighted maturity of the
Funds, the maturity of Asset Backed Securities will be based on estimates of
average life.
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Prepayments on Asset Backed Securities generally increase with falling
interest rates and decrease with rising interest rates. Prepayment rates are
also influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage backed securities is of shorter maturity than
mortgage loans and is less likely to experience substantial prepayments. Like
other fixed income securities, when interest rates rise the value of an Asset
Backed Security with prepayment features may not increase as much as that of
other fixed income securities, and, as noted above, changes in market rates of
interest may accelerate or retard prepayments and thus affect maturities.
These characteristics may result in higher level of price volatility for
these assets under certain market conditions. In addition, while the trading
market for short-term mortgages and Asset Backed Securities is ordinarily quite
liquid, in times of financial stress the trading market for these securities
sometimes becomes restricted.
Mortgage Backed Securities. Asset Backed Securities acquired by the Asset
Allocation and Bond Funds consist of both mortgage and non-mortgage backed
securities. Mortgage backed securities represent an ownership interest in a pool
of mortgages, the interest on which is in most cases issued and guaranteed by an
agency or instrumentality of the U.S. Government, although not necessarily by
the U.S. Government itself. Mortgage backed securities include collateralized
mortgage obligations and mortgage pass-through certificates.
Collateralized mortgage obligations ("CMOs") provide the holder with a
specified interest in the cash flow of a pool of underlying mortgages or other
mortgage backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways. The
multiple class securities may be issued or guaranteed by U.S. Government
agencies or instrumentalities, including the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC"), or issued by trusts formed by private
originators of, or investors in, mortgage loans. Classes in CMOs which the Funds
may hold are known as "regular" interests. CMOs also issue "residual" interests,
which in general are junior to and more volatile than regular interests. The
Funds do not intend to purchase residual interests.
Mortgage pass-through certificates provide the holder with a pro rata
interest in the underlying mortgages. One type of such certificate in which the
Funds may invest is a GNMA Certificate which is backed as to the timely payment
of principal and interest by the full faith and credit of the U.S. Government.
Another type is a FNMA Certificate, the principal and interest of which are
guaranteed only by FNMA itself, not by the full faith and credit of the U.S.
Government. Another type is a FHLMC Participation Certificate which is
guaranteed by FHLMC as to timely payment of principal and interest. However,
like a FNMA security, it is not guaranteed by the full faith and credit of the
U.S. Government. Privately issued mortgage backed securities will carry a rating
at the time of purchase of at least A by S&P or by Moody's or, if unrated, will
be in the Investment Advisers' opinion equivalent in credit quality to such
rating. Mortgage backed securities issued by private issuers, whether
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or not such obligations are subject to guarantees by the private issuer, may
entail greater risk than obligations directly or indirectly guaranteed by the
U.S. Government.
Non-Mortgage Backed Securities. The Asset Allocation and Bond Funds may also
invest in non-mortgage backed securities including interest in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities may also be debt instruments, which
are also known as collateralized obligations and are generally issued as the
debt of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Non-mortgage backed securities are not issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Non-mortgage backed securities involve certain risks that are not presented
by mortgage backed securities. Primarily, these securities do not have the
benefit of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws. Most issuers
of motor vehicle receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
motor vehicle receivables may not have an effective security interest in all of
the obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
Stripped Government Obligations--The Asset Allocation and Bond Funds and the
Intermediate Municipal Bond Fund may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government obligations. These
participations, which may be issued by the U.S. Government (or a U.S. Government
agency or instrumentality) or by private issuers such as banks and other
institutions, are issued at a discount to their "face value," and may include
stripped mortgage backed securities ("SMBS"), which are derivative multi-class
mortgage securities. Stripped securities, particularly SMBS, may exhibit greater
price volatility than ordinary debt securities because of the manner in which
their principal and interest are returned to investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of mortgage
backed obligations. A common type of SMBS will have one class receiving all of
the interest, while the other class will receive all of the principal. However,
in some instances, one class will receive some of the interest and most of the
principal while the other class will receive most of the interest and the
remainder of the principal. With respect to investments in interest only
securities, should the underlying obligations experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
entirely of principal payments may be more volatile in response to change in
interest rates. The yields on a class SMBS that receives all or most of the
interest are generally higher than prevailing market yields on other mortgage
backed obligations because their cash flow patterns are
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more volatile. For interest only securities, there is a greater risk that the
initial investment will not be fully recouped.
Municipal and Related Obligations--Municipal Obligations that may be
acquired by the Asset Allocation and Bond Funds and the Intermediate Municipal
Bond Fund may include general obligations, revenue obligations, notes and moral
obligations bonds. Each of these Funds, other than the Intermediate Municipal
Bond Fund, currently intends to invest no more than 25% of its respective total
assets in Municipal Obligations. General obligations are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue obligations are payable only from the revenues derived
from a particular facility, class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source such as the user
of the facility being financed. Private activity bonds (i.e. bonds issued by
industrial development authorities) are in most cases revenue securities and are
not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of a private activity bond is usually directly related to the
credit standing of the private user of the facility involved. Although interest
paid on private activity bonds is exempt from regular federal income tax, it may
be treated as a specific tax preference item under the federal alternative
minimum tax. From time to time, the Intermediate Municipal Bond Fund may invest
more than 25% of the value of its total assets in industrial development bonds
which, although issued by industrial development authorities, may be backed only
by the assets and revenues of the nongovernmental users. Where a regulated
investment company receives such interest, a proportionate share of any
exempt-interest dividend paid by the investment company may be treated as such a
preference item to the shareholder. The Intermediate Municipal Bond Fund may
invest without limitation in such Municipal Obligations if the Investment
Advisers determine that their purchase is consistent with such Fund's investment
objective. See "Description of the Funds--Risk Factors--Municipal Obligations."
(See also "Taxes").
Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Moral obligation bonds are
normally issued by a special purpose public authority. If the issuer of a moral
obligation bond is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer. Municipal Obligations also include municipal lease/purchase
agreements which are similar to installment purchase contracts for property or
equipment issued by municipalities. The Investment Advisers will only invest in
rated municipal lease/purchase agreements.
There are, of course, variations in the quality of Municipal Obligations
both within a particular classification and between classifications, and the
yields on Municipal Obligations depend upon a variety of factors, including
general money market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue.
The Intermediate Municipal Bond Fund may invest more than 25% of the value
of its total assets in Municipal Obligations which are related in such a way
that an economic, business or political development or change affecting one such
security also would affect the other securities; for example,
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securities the interest upon which is paid from revenues of similar types of
projects, or securities of issuers that are located in the same state. As a
result, the Intermediate Municipal Bond Fund may be subject to greater risk as
compared to a fund that does not follow this practice.
Certain municipal lease/purchase obligations in which the Intermediate
Municipal Bond Fund may invest may contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease payments in future
years unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease/purchase obligations are secured by the leased
property, disposition of the leased property in the event of foreclosure might
prove difficult. In evaluating the credit quality of a municipal lease/purchase
obligation that is unrated, the Investment Advisers will consider, on an ongoing
basis, a number of factors including the likelihood that the issuing
municipality will discontinue appropriating funding for the leased property.
Among other securities, the Intermediate Municipal Bond Fund may purchase
short-term Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation
Notes and other forms of short-term loans. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax or other funds, the
proceeds of bonds or other revenues.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issues at the time of issuance. Neither the Funds nor
the Investment Advisers will review the proceedings relating to the issuance of
Municipal Obligations or the bases for such opinions.
Certain provisions in the Code relating to the issuance of Municipal
Obligations may reduce the volume of Municipal Obligations qualifying for
Federal tax exemption. One effect of these provisions could be to increase the
cost of the Municipal Obligations available for purchase by the Intermediate
Municipal Bond Fund and thus reduce the available yield. Shareholders of the
Intermediate Municipal Bond Fund should consult their tax advisers concerning
the effect of these provisions on an investment in the Fund. Proposals that may
restrict or eliminate the income tax exemption for interest on Municipal
Obligations may be introduced in the future. If any such proposal were enacted
that would reduce the availability of Municipal Obligations for investment by
any of these Funds so as to adversely affect its shareholders, the Board would
reevaluate the affected Fund's investment objective and policies and submit
possible changes in the Fund's structure to shareholders for their
consideration. If legislation were enacted that would treat a type of Municipal
Obligation as taxable, the Intermediate Municipal Bond Fund would treat such
security as a permissible taxable investment within the applicable limits set
forth herein.
Custodial Receipts and Certificates of Participation--The Asset Allocation
and Bond Funds and the Intermediate Municipal Bond Fund may purchase
participations in trusts that hold U.S. Treasury securities (such as TIGRs and
CATs) where the trust participations evidence ownership in either the future
interest payments or the future principal payments on the U.S. Treasury
obligations. These participations are normally issued at a discount to their
"face value," and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
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Securities acquired by the Intermediate Municipal Bond Fund may be in the
forms of custodial receipts evidencing rights to receive a specific future
interest payment, principal payment or both on certain Municipal Obligations.
Such securities are held in custody by a bank on behalf of holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATs") and "Municipal Zero-Coupon Receipts." The Intermediate
Municipal Bond Fund may also purchase from time to time certificates of
participation that, in the opinion of counsel to the issuer, are exempt from
Federal income tax. A certificate of participation gives the Fund an undivided
interest in a pool of Municipal Obligations. Certificates of participation may
have fixed, floating or variable rates of interest. If a certificate of
participation is unrated, the Investment Advisers will have determined that the
instrument is of comparable quality to those instruments in which the Investment
Advisers may invest pursuant to guidelines approved by the Board of Trustees.
For certain certificates of participation, the Fund will have the right to
demand payment, on not more than 30 days' notice, for all or any part of such
Fund's participation interest, plus accrued interest. As to these instruments,
the Fund intends to exercise its right to demand payment as needed to provide
liquidity, to maintain or improve the quality of its investment portfolio or
upon a default (if permitted under the terms of the instrument).
Tender Option Bonds--The Intermediate Municipal Bond Fund may hold tender
option bonds, which are Municipal Obligations (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal Obligation's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax exempt rate. The
Investment Advisers, on behalf of a Fund, will consider on an ongoing basis the
creditworthiness of the issuer of the underlying Municipal Obligation, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. No Fund will invest more than 15%
of the value of its net assets in securities that are illiquid, which would
include tender option bonds as to which it cannot exercise the tender feature on
not more than seven days' notice if there is no secondary market available for
these obligations.
Stand-By Commitments--The Asset Allocation and Bond Funds and the
Intermediate Municipal Bond Fund may acquire "stand-by commitments" with respect
to Municipal Obligations held in its portfolio. Under a stand-by commitment, a
Fund obligates a broker, dealer or bank to repurchase, at the Fund's option,
specified securities at a specified price and, in this respect, stand-by
commitments are comparable to put options. The exercise of a stand-by commitment
therefore is subject to the ability of the seller to make payment on demand. A
Fund will acquire stand-by commitments solely to facilitate
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portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. A Fund may pay for stand-by commitments if such action is
deemed necessary, thus increasing to a degree the cost of the underlying
Municipal Obligation and similarly decreasing such securities yield to
investors.
Options Transactions--Each Fund is permitted to invest up to 5% of their
respective assets, represented by the premium paid, in the purchase of call and
put options. Options transactions are a form of derivative security.
Each Fund is permitted to purchase call and put options in respect of
specific securities (or groups or "baskets" of specific securities) in which the
Fund may invest. Each Fund may write (i.e., sell) covered call option contracts
on securities owned by the Fund not exceeding 25% of the market value of its net
assets at the time such option contracts are written. Each Fund also may
purchase call options to enter into closing purchase transactions. Each Fund
also may write covered put option contracts to the extent of 25% of the value of
its net assets at the time such option contracts are written. A call option
gives the purchaser of the option the right to buy, and obligates the writer to
sell, the underlying security at the exercise price at any time during the
option period. Conversely, a put option gives the purchaser of the option the
right to sell, and obligates the writer to buy, the underlying security at the
exercise price at any time during the option period. A covered put option sold
by a Fund exposes the Fund during the term of the option to a decline in price
of the underlying security or securities. A put option sold by a Fund is covered
when, among other things, cash or liquid securities are placed in a segregated
account with the Fund's custodian to fulfill the obligation undertaken.
Each Fund also may purchase and sell call and put options on foreign
currency for the purpose of hedging against changes in future currency exchange
rates. Call options convey the right to buy the underlying currency at a price
which is expected to be lower than the spot price of the currency at the time
the option expires. Put options convey the right to sell the underlying currency
at a price which is anticipated to be higher than the spot price of the currency
at the time the option expires.
Each Fund also may purchase cash-settled options on interest rate swaps,
interest rate swaps denominated in foreign currency and equity index swaps. See
"Interest Rate and Equity Index Swaps" below. A cash-settled option on a swap
gives the purchaser the right, but not the obligation, in return for the premium
paid, to receive an amount of cash equal to the value of the underlying swap as
of the exercise date. These options typically are purchased in privately
negotiated transactions from financial institutions, including securities
brokerage firms.
Each Fund may purchase and sell call and put options on stock indexes listed
on U.S. securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included in the
index. Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular stock, whether a Fund will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock.
Successful use by a Fund of options will be subject to the Investment
Advisers' ability to predict correctly movements in the direction of individual
stocks, the stock market generally, foreign currencies
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or interest rates. To the extent the Investment Advisers' predictions are
incorrect, the Fund may incur losses which could adversely affect the value of a
shareholder's investment.
Futures Contracts and Options on Futures Contracts--Each Fund may enter into
futures contracts and options on future contracts. The Asset Allocation and
Equity Funds may enter into stock index futures contracts and all Funds may
enter into interest rate futures contracts and currency futures contracts, and
options with respect thereto. See "Options Transactions" above. These
transactions will be entered into as a substitute for comparable market
positions in the underlying securities or for hedging purposes. Although none of
these Funds would be a commodity pool, each would be subject to rules of the
CFTC limiting the extent to which it could engage in these transactions. Futures
and options transactions are a form of derivative security.
Each of these Funds' commodities transactions must constitute bona fide
hedging or other permissible transactions pursuant to regulations promulgated by
the CFTC. In addition, a Fund may not engage in such transactions if the sum of
the amount of initial margin deposits and premiums paid for unexpired commodity
options, other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%. To the
extent a Fund engages in the use of futures and options on futures for other
than bona fide hedging purposes, the Fund may be subject to additional risk.
Successful use of futures by a Fund also is subject to the Investment
Advisers' ability to predict correctly movements in the direction of the market,
interest rates or foreign currencies and, to the extent the transaction is
entered into for hedging purposes, to ascertain the appropriate correlation
between the transaction being hedged and the price movements of the futures
contract. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting the value of securities held in its portfolio
and prices increase instead, the Fund will lose part or all of the benefit of
the increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, each of these Funds may be required to segregate cash or
high quality money market instruments in connection with its commodities
transactions in an amount generally equal to the value of the underlying
commodity. The segregation of such assets will have the effect of limiting the
Fund's ability otherwise to invest those assets.
Foreign Currency Transactions--The Asset Allocation Funds and the
International Bond Fund may engage in currency exchange transactions either on a
spot (i.e., cash) basis at the rate prevailing in the currency exchange market,
or through entering into forward contracts to purchase or sell currencies. A
forward currency exchange contract involves an obligation to purchase or sell a
specific currency at a
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<PAGE>
future date, which must be more than two days from the date of the contract, at
a price set at the time of the contract. These contracts are entered into in the
interbank market conducted directly between currency traders (typically
commercial banks or other financial institutions) and their customers. They may
be used to reduce the level of volatility caused by changes in foreign currency
exchange rates or when such transactions are economically appropriate for the
reduction of risks in the ongoing management of the Funds. Although forward
currency exchange contracts may be used to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to limit
any potential gain that might be realized should the value of such currency
increase. The Funds also may combine forward currency exchange contracts with
investments in securities denominated in other currencies.
Each of these Funds also may maintain short positions in forward currency
exchange transactions, which would involve it agreeing to exchange an amount of
a currency it did not currently own for another currency at a future date in
anticipation of a decline in the value of the currency sold relative to the
currency such Fund contracted to receive in the exchange.
Options on Foreign Currency--The Asset Allocation Funds and the
International Bond Fund may purchase and sell call and put options on foreign
currency for the purpose of hedging against changes in future currency exchange
rates. Call options convey the right to buy the underlying currency at a price
which is expected to be lower than the spot price of the currency at the time
the option expires. Put options convey the right to sell the underlying currency
at a price which is anticipated to be higher than the spot price of the currency
at the time the option expires. The Funds may use foreign currency options for
the same purposes as forward currency exchange and futures transactions, as
described herein. See also "Options" and "Currency Futures and Options on
Currency Futures" below.
Risks Associated with Futures, Options and Currency and Options--To the
extent a Fund is engaging in a futures transaction as a hedging device, due to
the risk of an imperfect correlation between securities in its portfolio that
are the subject of a hedging transaction and the futures contract used as a
hedging device, it is possible that the hedge will not be fully effective. For
example, losses on the portfolio securities may be in excess of gains on the
futures contract or losses on the futures contract may be in excess of gains on
the portfolio securities that were the subject of the hedge. In futures
contracts based on indices, the risk of imperfect correlation increases as the
composition of the Fund varies from the composition of the index. In an effort
to compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of contracts, the Fund may
buy or sell futures contracts in a greater or lesser dollar amount than the
dollar amount of the securities being hedged if the historical volatility of the
futures contract has been less or greater than that of the securities. Such
"over hedging" or "under hedging" may adversely affect the Fund's net investment
results if market movements are not as anticipated when the hedge is
established.
Successful use of futures by a Fund also is subject to the Investment
Advisers' ability to predict correctly movements in the direction of securities
prices, interest rates, currency exchange rates and other economic factors. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting the value of securities held in its portfolio and
prices increase instead, the Fund will lose part or all of the benefit of the
increased value of securities which it has hedged because it
A-13
<PAGE>
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the rising market. The
Fund may have to sell securities at a time when it may be disadvantageous to do
so.
Although a Fund intends to enter into futures contracts and options
transactions only if there is an active market for such contracts, no assurance
can be given that a liquid market will exist for any particular contract at any
particular time. See "Illiquid Securities" above. Many futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that limit
or trading may be suspended for specified periods during the trading day.
Futures contracts prices could move to the limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of futures
positions and potentially subjecting the Fund to substantial losses. If it is
not possible, or the Fund determines not, to close a futures position in
anticipation of adverse price movements, the Fund will be required to make daily
cash payments of variation margin. In such circumstances, an increase in the
value of the portion of the portfolio being hedged, if any, may offset partially
or completely losses on the futures contract.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or political
developments in the United States or abroad. The foreign currency market offers
less protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Since a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for purchase or resale, if any, at the current market
price.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges are principal
markets so that no common clearing facility exists and a trader may look only to
the broker for performance on the contract. In addition, unless the Fund hedges
against fluctuations in the exchange rate between the U.S. dollar and the
currencies in which trading is done on foreign exchanges, any profits that the
Fund might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Fund could incur losses as a result of those changes.
Transactions on foreign exchanges may include both commodities which are traded
on domestic exchanges and those which are not.
Future Developments--Each Fund may take advantage of opportunities in the
area of options and futures contracts, options on futures contracts and any
other derivative investments which are not presently contemplated for use by a
Fund or which are not currently available but which may be developed, to the
extent such opportunities are both consistent with a Fund's investment objective
and
A-14
<PAGE>
legally permissible for such Fund. Before entering into such transactions or
making any such investment, the Fund will provide appropriate disclosure in its
prospectus.
Interest Rate and Equity Index Swaps--Each Fund may enter into interest rate
swaps and equity index swaps, to the extent described under "Description of the
Funds--Management Policies," in pursuit of their respective investment
objectives. Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest (for example,
an exchange of floating-rate payments for fixed-rate payments). Equity index
swaps involve the exchange by a Fund with another party of cash flows based upon
the performance of an index or a portion of an index which usually includes
dividends. In each case, the exchange commitments can involve payments to be
made in the same currency or in different currencies. Swaps are a form of
derivative security.
Each Fund usually will enter into swaps on a net basis. In so doing, the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. If a Fund enters into a swap,
it would maintain a segregated account in the full amount accrued on a daily
basis of the Fund's obligations with respect to the swap. Each of these Funds
will enter into swap transactions with counterparties only if: (i) for
transactions with maturities under one year, such counterparty has outstanding
short-term paper rated at least A-1 by S&P, Prime-1 by Moody's, F-1 by Fitch or
Duff-1 by Duff, or (ii) for transactions with maturities greater than one year,
the counterparty has outstanding debt securities rated at least Aa by Moody's or
AA by S&P, Fitch or Duff.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
security transactions. There is no limit on the amount of swap transactions that
may be entered into by a Fund. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps is limited to the net amount of payments that a Fund
is contractually obligated to make. If the other party to a swap defaults, the
relevant Fund's risk of loss consists of the net amount of payments that such
Fund contractually is entitled to receive.
Illiquid Securities--Each Fund will not knowingly invest more than 15% of
the value of its respective total assets in securities that are illiquid.
Securities having legal or contractual restrictions on resale or no readily
available market, and instruments (including repurchase agreements, variable and
floating rate instruments and time deposits) that do not provide for payment to
the Funds within seven days after notice are subject to this limitation.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not deemed to be illiquid for purposes of this
limitation.
The Funds may purchase securities which are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), but which can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. Any such security will not be considered to be illiquid so long as it is
determined by the Board of Trustees or the Investment Advisers, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities. The ability
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<PAGE>
to sell to qualified institutional buyers under Rule 144A is a recent
development, and it is not possible to predict how this market will develop. The
Board of Trustees will carefully monitor any investments by a Fund in these
securities.
Portfolio Turnover--Generally, the Funds will purchase securities for
capital appreciation or investment income, or both, and not for short-term
trading profits. However, a Fund may sell a portfolio investment soon after its
acquisition if the Investment Advisers believe that such a disposition is
consistent with or in furtherance of the Fund's investment objective. Fund
investments may be sold for a variety of reasons, such as more favorable
investment opportunities or other circumstances. As a result, such Funds are
likely to have correspondingly greater brokerage commissions and other
transaction costs which are borne indirectly by shareholders. Fund turnover may
also result in the realization of substantial net capital gains. (See
"Taxes--Federal" in the Prospectus and "Additional Information Concerning Taxes"
in the Statement of Additional Information.) While it is not possible to
accurately predict portfolio turnover rates, the annual turnover rate for each
of the Managed Assets Conservative, Managed Assets Growth, Equity Income,
Small-Cap Opportunity, Income, International Bond and Intermediate Municipal
Bond Funds are not expected to exceed 100%.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
June 11, 1996
for
CLASS A, CLASS B AND CLASS I SHARES
OF THE
MANAGED ASSETS CONSERVATIVE FUND
MANAGED ASSETS GROWTH FUND
EQUITY INCOME FUND
SMALL-CAP OPPORTUNITY FUND
INCOME FUND
INTERNATIONAL BOND FUND
INTERMEDIATE MUNICIPAL BOND FUND
of
THE WOODWARD FUNDS
c/o NBD Bank
P.O. Box 7058
Troy, Michigan 48007-7058
This Statement of Additional Information ("Additional Statement") is
meant to be read in conjunction with The Woodward Funds' Prospectus dated June
11, 1996 pertaining to all classes of shares of the Funds listed above (the
"Prospectus") (each, a "Fund" and collectively, the "Funds"), as it may be
revised from time to time, and is incorporated by reference in its entirety into
that Prospectus. Because this Additional Statement is not itself a prospectus,
no investment in shares of the Funds should be made solely upon the information
contained herein. Copies of the Funds' Prospectus may be obtained from any
office of the Distributor by writing or calling the Distributor or the Trust at
the address or telephone number listed above. Capitalized terms used but not
defined herein have the same meanings as in the Prospectus.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Investment Objectives, Policies and Risk Factors . . . . .
Additional Purchase and Redemption Information . . . . . .
Description of Shares . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Taxes . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . .
Independent Public Accountants . . . . . . . . . . . . . .
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information on Performance . . . . . . . . . . .
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . B-1
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<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Funds' respective investment
objectives and policies as set forth in the Prospectus.
Additional Information on Fund Instruments
- ------------------------------------------
Attached to this Additional Statement is Appendix A which contains
descriptions of the rating symbols used by Rating Agencies for securities in
which the Funds may invest.
Portfolio Transactions
- ----------------------
Subject to the general supervision of the Trust's Board of Trustees,
the Investment Advisers are responsible for, make decisions with respect to, and
place orders for all purchases and sales of portfolio securities for each Fund.
The annualized portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
reporting period by the monthly average value of the portfolio securities owned
during the reporting period. The calculation excludes all securities, including
options, whose maturities or expiration dates at the time of acquisition are one
year or less. Portfolio turnover of the Funds may vary greatly from year to
year as well as within a particular year, and may be affected by cash
requirements for redemption of shares and by requirements which enable the Funds
to receive favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions, and the Funds may engage in short term
trading to achieve their respective investment objectives.
Purchases of money market instruments by the Funds are made from
dealers, underwriters and issuers. The Funds currently do not expect to incur
any brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis acting as principal for their
own accounts without a stated commission. The price of the security, however,
usually includes a profit to the dealer. Securities purchased in underwritten
offerings include a fixed amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. When securities are
purchased directly from or sold directly to an issuer, no commissions or
discounts are paid.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions in the
over-the-counter market are generally on a net basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument.
<PAGE>
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
A Fund will engage in this practice, however, only when the Investment Advisers,
in their sole discretion, believe such practice to be otherwise in the Fund's
interests.
The Advisory Agreement for the Funds provides that, in executing
portfolio transactions and selecting brokers or dealers, the Investment Advisers
will seek to obtain the best overall terms available for each Fund. In
assessing the best overall terms available for any transaction, the Investment
Advisers shall consider factors they deem relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In addition, the Agreement authorizes the Investment Advisers to cause a Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that the Investment Advisers determine
in good faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either the particular transaction or the overall responsibilities of the
Investment Advisers to the Funds. Such brokerage and research services might
consist of reports and statistics relating to specific companies or industries,
general summaries of groups of stocks or bonds and their comparative earnings
and yields, or broad overviews of the stock, bond and government securities
markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Investment Advisers and
does not reduce the advisory fees payable by the Funds. The Trustees will
periodically review any commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain of
the supplementary research or other services received will primarily benefit one
or more other investment companies or other accounts for which investment
discretion is exercised by the Investment Advisers. Conversely, a Fund may be
the primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.
The Trust will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with the Investment Advisers, the
Distributor or an affiliated person of any of them (as such term is defined in
the 1940 Act) acting as principal, except to the extent permitted under the 1940
Act. In addition, a Fund will not purchase securities during the existence of
any underwriting or selling group relating thereto of which the Distributor or
the Investment Advisers, or an affiliated person of any of them, is a member,
except to the extent permitted under the 1940 Act. Under certain circumstances,
the Funds may be at a
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<PAGE>
disadvantage because of these limitations in comparison with other investment
companies which have similar investment objectives but are not subject to such
limitations.
Investment decisions for each Fund are made independently from those
for the other Funds and for any other investment companies and accounts advised
or managed by the Investment Advisers. Such other investment companies and
accounts may also invest in the same securities as the Funds. To the extent
permitted by law, the Investment Advisers may aggregate the securities to be
sold or purchased for the Funds with those to be sold or purchased for other
investment companies or accounts in executing transactions. When a purchase or
sale of the same security is made at substantially the same time on behalf of
one or more of the Funds and another investment company or account, the
transaction will be averaged as to price and available investments allocated as
to amount, in a manner which the Investment Advisers believe to be equitable to
each Fund and such other investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or sold by the Fund.
Stripped U.S. Government Obligations
- ------------------------------------
Within the past several years, the Treasury Department has facilitated
transfers of ownership of zero coupon securities by accounting separately for
the beneficial ownership of particular interest coupon and principal payments on
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department
is known as "STRIPS" or "Separate Trading of Registered Interest and Principal
of Securities." To the extent consistent with their respective investment
objectives, the Asset Allocation and Bond Funds and the Intermediate Municipal
Bond Fund may purchase securities registered in the STRIPS program. Under the
STRIPS program, the Funds will be able to have their beneficial ownership of
zero coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
In addition, the Asset Allocation and Bond Funds and the Intermediate
Municipal Bond Fund may acquire U.S. Government obligations and their unmatured
interest coupons that have been separated ("stripped") by their holder,
typically a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
obligations, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRs") and "Certificate of Accrual on Treasury Securities"
("CATS"). The stripped coupons are sold separately from the underlying
principal, which is usually sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does not
receive any rights to periodic interest (cash) payments. The underlying U.S.
Treasury bonds and notes themselves are held in book-entry form at the Federal
Reserve Bank or, in the case of bearer securities (i.e., unregistered securities
which are ostensibly owned by the bearer or holder), in trust on behalf of the
owners. Counsel to the underwriters of these certificates or other evidences of
ownership of U.S. Treasury
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<PAGE>
securities have stated that, in their opinion, purchasers of the stripped
securities most likely will be deemed the beneficial holders of the underlying
U.S. Government obligations for federal tax purposes. The Trust is not aware of
any binding legislative, judicial or administrative authority on this issue.
As described in the Prospectus, such Funds may also purchase stripped
mortgage-backed securities ("SMBS"). SMBS that are interest only or principal
only and not issued by the U.S. Government may be considered illiquid securities
if they can not be disposed of promptly in the ordinary course of business at a
value reasonably close to that used in the calculation of net asset value per
share.
Bank Obligations
- ----------------
In accordance with their respective investment objectives, each Fund
may purchase bank obligations, which include bankers' acceptances, negotiable
certificates of deposit and non-negotiable time deposits, including U.S. dollar-
denominated instruments issued or supported by the credit of U.S. or foreign
banks or savings institutions. Although the Funds invest in obligations of
foreign banks or foreign branches of U.S. banks only where the Investment
Advisers deem the instrument to present minimal credit risks, such investments
may nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1.0
billion in total assets at the time of purchase.
Commercial Paper
- ----------------
Commercial paper, including variable and floating rate notes and other
short term corporate obligations, must be rated in one of the two highest
categories by at least two Rating Agencies, or if not rated, have been issued by
a corporation having an outstanding bond issue rated A or higher by a Rating
Agency. Except as provided in the Prospectus for the International Bond Fund,
bonds and other short term obligations (if not rated as commercial paper)
purchased by the Funds must be rated BBB or Baa, or higher, by a Rating Agency,
respectively, or if unrated, be of comparable investment quality in the judgment
of the Investment Advisers.
Variable and Floating Rate Instruments
- --------------------------------------
With respect to variable and floating rate obligations that may be
acquired by each Fund, the Investment Advisers will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
notes and will continuously monitor their financial status to meet payment on
demand. The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Fund to
dispose of instruments if the issuer defaulted on its payment obligation or
during
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<PAGE>
periods that the Fund is not entitled to exercise its demand rights, and the
Fund could, for these or other reasons, suffer a loss with respect to such
instruments.
Lending Securities
- ------------------
When a Fund lends its securities, it continues to receive interest or
dividends on the securities loaned and may simultaneously earn interest on the
investment of the cash collateral. Although voting rights, or rights to
consent, attendant to securities on loan pass to the borrower, such loans will
be called so that the securities may be voted by a Fund if a material event
affecting the investment is to occur.
Repurchase Agreements and Reverse Repurchase Agreements
- -------------------------------------------------------
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement). Securities subject to
repurchase agreements are held by the Trust's Custodian, in the Federal
Reserve/Treasury book-entry system or by another authorized securities
depository. Repurchase agreements are considered to be loans under the 1940
Act.
Reverse repurchase agreements are considered to be borrowings by a
Fund under the 1940 Act. At the time a Fund enters into a reverse repurchase
agreement, it will place in a segregated custodial account liquid assets such as
U.S. Government securities or other liquid high-grade debt securities having a
value equal to or greater than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure that such value is
maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price of the
securities it is obligated to repurchase.
American Depository Receipts ("ADRs")
- -------------------------------------
The Asset Allocation and Equity Funds may invest in ADRs, which are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADRs may be listed on a
national securities exchange or may trade in the over-the-counter market.
Although ADR prices are denominated in U.S. dollars, the underlying security may
be denominated in a foreign currency. The underlying security may be subject to
foreign government taxes which would reduce the yield on such securities.
When-Issued Purchases and Forward Commitments
- ---------------------------------------------
A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the
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<PAGE>
transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the Fund on
the settlement date. In these cases the Fund may realize a capital gain or
loss.
When a Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Mortgage Backed Securities
- --------------------------
Mortgage Backed Securities Generally. Mortgage backed securities held
------------------------------------
by the Asset Allocation and Bond Funds represent an ownership interest in a pool
of residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his lending institution are "passed-through" to an investor such as
the Funds. Most issuers or poolers provide guarantees of payments, regardless
of whether or not the mortgagor actually makes the payment. The guarantees made
by issuers or poolers are supported by various forms of credit, collateral,
guarantees or insurance, including individual loan, title, pool and hazard
insurance purchased by the issuers or poolers so that they can meet their
obligations under the policies. Mortgage backed securities issued by private
issuers or poolers, whether or not such securities are subject to guarantees,
may entail greater risk than securities directly or indirectly guaranteed by the
U.S. Government.
Interests in pools of mortgage backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid. Additional payments are
caused by repayments resulting from the sale of the underlying residential
property, refinancing or foreclosure net of fees or costs which may be incurred.
Some mortgage backed securities are described as "modified pass-through". These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the
U.S. Government and was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("PCs"), which represent interests in
-6-
<PAGE>
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and ultimate collection of principal.
The Federal National Mortgage Association ("FNMA") is a U.S.
Government sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases residential mortgages from a list of approved seller/servicers
which include state and federally-chartered savings and loan credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA.
The principal guarantor of mortgage-backed securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S
Government, the timely payment of principal and interest on securities issued by
approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government guarantees of payments in the former pools.
However, timely payment of interest and principal of these pools is supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance purchased by the issuer. The insurance and guarantees are
issued by governmental entities, private insurers and the mortgage poolers.
There can be no assurance that the private insurers or mortgage poolers can meet
their obligations under the policies.
The Trust expects that governmental or private entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payment may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage backed securities are developed and offered
in the market, the Trust may consider making investments in such new types of
securities.
Underlying Mortgages. Pools consist of whole mortgage loans or
--------------------
participations in loans. The majority of these loans are made to purchasers of
one to four family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Asset Allocation
and Bond Funds may purchase pools of variable rate mortgages ("VRM"), growing
equity mortgages ("GEM"), graduated payment mortgages ("GPM") and other types
where the principal and interest payment procedures vary. VRMs
-7-
<PAGE>
are mortgages which reset their interest rate periodically with changes in open
market interest rates. To the extent that a Fund is actually invested in VRMs,
its interest income will vary with changes in the applicable interest rate on
pools of VRMs. GPM and GEM pools maintain constant interest rates, with varying
levels of principal repayment over the life of the mortgage.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
Average Life. The average life of pass-through pools varies with the
------------
maturities of the underlying mortgage instruments. In addition, a pool's term
may be shortened by unscheduled or early payments of principal and interest on
the underlying mortgages. The occurrence of mortgage prepayments is affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Returns on Mortgage Backed Securities. Yields on mortgage backed
-------------------------------------
pass-through securities are typically quoted based on the maturity of the
underlying instruments and the associated average life assumption.
Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, thus affecting the yields of a Fund. The
compounding effect from reinvestments of monthly payments received by a Fund
will increase its yield to shareholders, compared to bonds that pay interest
semi-annually.
Real Estate Investment Trusts
- -----------------------------
The Asset Allocation and Bond Funds may invest in equity real estate
investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in commercial real estate properties. Investments in REITs may
subject a Fund to certain risks. REITs may be affected by changes in the value
of the underlying property owned by the trust. REITs are dependent upon
specialized management skill, may not be diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation and the possibility of
failing to qualify for the beneficial tax treatment available to REITs under the
Code and to maintain exemption from the 1940 Act. As a shareholder in a REIT, a
Fund would bear, along with other shareholders, its pro rata portion of the
REIT's operating expenses. These expenses would be in addition to the advisory
and other expenses a Fund bears directly in connection with its own operations.
-8-
<PAGE>
Foreign Currency Transactions
- -----------------------------
When the Asset Allocation Funds and the International Bond Fund enters
into a currency transaction, it will deposit, if so required by applicable
regulations, with its custodian cash or readily marketable securities in a
segregated account of a Fund in an amount at least equal to the value of the
Fund's total assets committed to the consummation of the forward contract, the
value of the cash or securities will be placed in the account so that the value
of the account will equal the amount of the Fund's commitment with respect to
the contract.
At or before the maturity of a forward contract, a Fund either may
sell a security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency which it is obligated to deliver. If the Fund
retains the security and engages in an offsetting transaction, at the time of
execution of the offsetting transaction, the Fund will incur a gain or loss to
the extent movement has occurred in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a currency and the date it enters into an offsetting
contract for the purchase of the currency, it will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost of currency transactions varies with factors such as the
currency involved, the length of the contract period and the market conditions
then prevailing. Because transactions in currency exchange usually are
conducted on a principal basis, no fees or commissions are involved. The use of
forward currency exchange contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. If a devaluation generally is anticipated,
a Fund may not be able to contract to sell the currency at a price above the
devaluation level it anticipates. The requirements for qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), may cause the Fund to restrict the degree to which it engages in
currency transactions. See "Additional Information Concerning Taxes."
Futures Contracts and Related Options
- -------------------------------------
See Appendix B to this Additional Statement for a discussion of
futures contracts and related options.
-9-
<PAGE>
Options Trading
- ---------------
As stated in the Prospectus, each Fund may purchase and sell put and
call options listed on a national securities exchange and issued by the Options
Clearing Corporation. Such transactions may be effected on a principal basis
with primary reporting dealers in U.S. Government securities in an amount not
exceeding 5% of a Fund's net assets. This is a highly specialized activity
which entails greater than ordinary investment risks. Regardless of how much
the market price of the underlying security increases or decreases, the option
buyer's risk is limited to the amount of the original investment for the
purchase of the option. However, options may be more volatile than the
underlying securities, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities. A listed call option gives the purchaser of the option
the right to buy from a clearing corporation, and a writer has the obligation to
sell to the clearing corporation, the underlying security at the stated exercise
price at any time prior to the expiration of the option, regardless of the
market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. Put and call options purchased by a Fund will be valued at the
last sale price or, in the absence of such a price, at the mean between bid and
asked prices.
A Fund's obligation to sell a security subject to a covered call
option written by it, or to purchase a security subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
option containing different terms on such underlying security. The cost of such
a liquidation purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Fund will have incurred a
loss in the transaction. An option position may be closed out only on an
exchange which provides a secondary market for an option of the same series.
There is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered call option writer, unable to effect a
closing purchase transaction, will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise
with the result that the writer in such circumstances will be subject to the
risk of market decline in the underlying security during such period. A Fund
will write an option on a particular security only if the Investment Advisers
believe that a liquid secondary market will exist on an exchange for options of
the same series which will permit the Fund to make a closing purchase
transaction in order to close out its position.
-10-
<PAGE>
When a Fund writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked-
to-market to reflect the current value of the option written. The current value
of the traded option is the last sale price or, in the absence of a sale, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. Any gain on a
covered call option may be offset by a decline in the market price of the
underlying security during the option period. If a covered call option is
exercised, the Fund may deliver the underlying security held by it or purchase
the underlying security in the open market. In either event, the proceeds of
the sale will be increased by the net premium originally received and the Fund
will realize a gain or loss. If a secured put option is exercised, the amount
paid by the Fund involved for the underlying security will be partially offset
by the amount of the premium previously paid to the Fund. Premiums from expired
options written by a Fund and net gains from closing purchase transactions are
treated as short-term capital gains for federal income tax purposes, and losses
on closing purchase transactions are short-term capital losses.
Stock Index Options
- -------------------
The Asset Allocation and Equity Funds may purchase and write put and
call options on stock indices listed on U.S. securities exchanges or traded in
the over-the-counter market. A stock index fluctuates with changes in the
market values of the stocks included in the index.
Options on stock indices are similar to options on stock except that
(a) the expiration cycles of stock index options are generally monthly, while
those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make
delivery of a stock at a specified price, an option on a stock index gives the
holder the right to receive a cash "exercise settlement amount" equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." 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 equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount. The writer 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.
-11-
<PAGE>
Convertible Securities
- ----------------------
In general, the market value of a convertible security is the higher
of its "investment value" (i.e., its value as a fixed-income security) or its
----
"conversion value" (i.e., the value of the underlying shares of common stock if
----
the security is converted). As a fixed-income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines.
Municipal and Related Obligations
- ---------------------------------
To the extent consistent with its investment objective, the Asset
Allocation and Bond Funds and the Intermediate Municipal Bond Fund may invest in
Municipal Obligations. There are, of course, variations in the quality of
Municipal Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend in part on a
variety of factors, including general market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Municipal Obligations by Rating Agencies represent their opinions
as to the quality of Municipal Obligations. It should be emphasized, however,
that ratings are general and are not absolute standards of quality, and
Municipal Obligations with the same maturity, interest rate and rating may have
different yields while Municipal Obligations with the same maturity and interest
rate with different ratings may have the same yield. Subsequent to its purchase
by a Fund, a Municipal Obligation may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Fund. The
Investment Advisers may consider such an event in determining whether the Fund
should continue to hold the obligation.
The payment of principal and interest on most Municipal Obligations
purchased by a Fund will depend upon the ability of the issuers to meet their
obligations. For the purpose of diversification under the 1940 Act, the
identification of the issuer of Municipal Obligations depends on the terms and
conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, such subdivision would be deemed
to be the sole issuer. Similarly, in the case of an industrial development
bond, if that bond is backed only by the assets and revenues of the non-
governmental user, then such non-governmental user would be deemed to be the
sole issuer. If, however, in either case, the creating government or some other
entity guarantees a security, such a guaranty would be considered a separate
security and will be treated as an issue of such government or other entity.
-12-
<PAGE>
An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights or
remedies of creditors, such as the Federal Bankruptcy Code, and any laws that
may be enacted by federal or state legislatures extending the time for payment
of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest or principal of its Municipal Obligations may be materially
adversely affected by litigation or other conditions.
Certain Municipal Obligations are subject to redemption at a date
earlier than their stated maturity pursuant to call options, which may be
separated from the related Municipal Obligation and purchased and sold
separately.
Certain of the Municipal Obligations held by the Funds may be insured
at the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal
Obligations at the time of original issuance. There is, however, no guarantee
that the insurer will meet its obligations. In addition, such insurance will
not protect against market fluctuations caused by changes in interest rates and
other factors.
The Intermediate Municipal Bond Fund will purchase tender option bonds
only when the Investment Advisers are satisfied that the custodial and tender
option arrangements, including the fee payment arrangements, will not adversely
affect the tax exempt status of the underlying Municipal Obligations and that
payment of any tender fees will not have the effect of creating taxable income
for the Fund. Based on the tender option bond agreement, that Fund expects to
be able to value the tender option bond at par; however, the value of the
instrument will be monitored by the Investment Advisers to assure that is valued
at fair value.
From time to time proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. For example, pursuant to federal tax
legislation passed in 1986 interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. The Trust cannot predict what legislation,
if any, may be proposed in Congress in the future as regards the federal income
tax status of interest on Municipal Obligations in general, or which proposals,
if any, might be enacted. Such proposals, if enacted, might materially
adversely affect the availability of Municipal Obligations for investments by
the Funds and their liquidity and value. In such event, the Board of Trustees
would re-evaluate the Funds' investment objectives and policies and consider
changes in their structure or possible dissolution.
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<PAGE>
Stand-By Commitments
- --------------------
The Asset Allocation and Bond Funds and the Intermediate Municipal
Bond Fund may acquire "stand-by commitments" with respect to Municipal
Obligations it holds. Under a stand-by commitment, a dealer agrees to purchase
at the Fund's option specified Municipal Obligations at a specified price.
Stand-by commitments may be exercisable by the Funds at any time before the
maturity of the underlying Municipal Obligations and may be sold, transferred or
assigned only with the instruments involved.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Funds may pay for a stand-by commitment either
separately in cash or by paying a higher price for Municipal Obligations which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The Funds may acquire a stand-by
commitment unless immediately after the acquisition, with respect to 75% of its
assets not more than 5% of its total assets will be invested in instruments
subject to a demand feature, including stand-by commitments, with the same
institution.
The Funds intends to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the Investment Advisers opinion,
present minimal credit risks. A Fund's reliance upon the credit of these
dealers, banks and broker-dealers will be secured by the value of the underlying
Municipal Obligations that are subject to the commitment. Thus, the risk of
loss to the Funds in connection with a "stand-by commitment" will not be
qualitatively different from the risk of loss faced by a person that is holding
securities pending settlement after having agreed to sell the securities in the
ordinary course of business.
The Funds will 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 will not affect the
valuation or assumed maturity of the underlying Municipal Obligations which will
continue to be valued in accordance with the amortized cost method. The actual
stand-by commitment will be valued at zero in determining net asset value.
Where a Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as an unrealized loss for the period during which the
commitment is held by the Fund and will be reflected in realized gain or loss
when the commitment is exercised or expires.
Additional Investment Limitations
- ---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Funds are subject to the following investment limitations which may not be
changed without approval of the holders of the majority of the outstanding
shares of the affected Fund (as defined under "Description of Shares" below).
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<PAGE>
None of the Funds may:
1. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with a Fund's
investment objective and policies: each Fund may purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indices, and options on futures contracts or indices; and each Fund
may purchase publicly traded securities of companies engaging in whole or in
part in such activities.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Fund might be deemed to be an
underwriter upon the disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Fund's investment objective, policies and limitations may be deemed to be
underwriting.
In addition to the above fundamental limitations, the Funds are
subject to the following non-fundamental limitations, which may be changed
without a shareholder vote:
None of the Funds may:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
2. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except for transactions in options on securities or
indices of securities, futures contracts and options on futures contracts and in
similar investments.
3. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Fund's transactions in futures contracts and related options and in
options on securities or indices of securities and similar instruments, and (b)
each Fund may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of exercising
control.
5. Invest more than 15% of its total assets in illiquid securities.
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<PAGE>
In order to permit the sale of a Fund's shares in certain states, the
Trust may make commitments with respect to a Fund more restrictive than the
investment policies and limitations described above and in its Prospectus.
Should the Trust determine that any such commitment is no longer in the best
interests of a particular Fund, it will revoke the commitment by terminating
sales of the Fund's shares in the state involved and, in the case of investors
in Texas, give notice of such action.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are offered and sold on a continuous basis by the
Trust's distributor, BISYS Fund Services, Inc. ("BISYS"), acting as agent.
A hypothetical illustration of the computation of the public offering
price per Class A share of the Funds, based on the value of each Fund's total
net assets equal to $1,000 and total number of shares outstanding for each
Fund equal to 100 is as follows:
TABLE
-----
Managed Managed
Assets Assets Equity Small-Cap
Conservative Growth Income Opportunity
Fund Fund Fund Fund
------- -------- ---- ----
Net Assets . . . . . . . $1,000 $1,000 $1,000 $1,000
Number of Shares Outstanding 100 100 100 100
Net Asset Value Per Share $ 10 $ 10 $ 10 $ 10
Sales Charge, 5.00 percent
of offering price (5.26
percent of net asset value
per share) . . . . . . . $ 0.53 $ 0.53 $ 0.53 $ 0.53
------ ------ ------ ------
Offering Price to Public $10.53 $10.53 $10.53 $10.53
====== ====== ====== ======
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<PAGE>
International
Bond
Fund
----
Net Assets . . . . . . . . . $1,000
Number of Shares Outstanding 100
Net Asset Value Per Share . . $ 10
Sales Charge, 4.50 percent
of offering price (4.71
percent of net asset value
per share) . . . . . . . . . $ 0.47
------
Offering Price to Public . . $10.47
======
Intermediate
Municipal
Income Bond
Fund Fund
------ ----
Net Assets . . . . . . . . . $1,000 $1,000
Number of Shares Outstanding 100 100
Net Asset Value Per Share . . $ 10 $ 10
Sales Charge, 3.00 percent
of offering price (3.09
percent of net asset value
per share) . . . . . . . . . $ 0.31 $ 0.31
------ ------
Offering Price to Public . . $10.31 $10.31
====== =======
Under the 1940 Act, the Trust may suspend the right of redemption or
postpone the date of payment for shares during any period when: (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. (The Trust may also suspend or
postpone the recordation of the transfer of shares upon the occurrence of any of
the foregoing conditions).
In addition to the situations described in the Prospectus under
"Redemption of Shares," the Trust may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to a transaction effected for the benefit of a shareholder which
is applicable to Fund shares as provided in the Prospectus from time to time.
The Trust normally redeems shares for cash. However, the Trustees can
determine that conditions exist making cash payments undesirable. If they
should so determine, redemption payments could be made in securities valued at
the value used in
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<PAGE>
determining net asset value. There may be brokerage and other costs incurred by
the redeeming shareholder in selling such securities. The Trust has elected to
be covered by Rule 18f-1 under the 1940 Act, pursuant to which the Trust is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
net asset value during any 90-day period for any one shareholder.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under
Massachusetts law on April 21, 1987. The Trust's Declaration of Trust
authorizes the Board of Trustees to divide shares into two or more series, each
series relating to a separate portfolio of investments, and divide the shares of
any series into two or more classes. The number of shares of each series and/or
of a class within each series shall be unlimited. The Trust does not intend to
issue share certificates.
In the event of a liquidation or dissolution of the Trust or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund. If there are any
assets, income, earnings, proceeds, funds or payments, which are not readily
identifiable as belonging to any particular Fund, the Trustees shall allocate
them among any one or more of the Funds as they, in their sole discretion, deem
fair and equitable.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each Fund affected by the matter. A Fund is affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter does not affect any interest of the Fund. Under the Rule,
the approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a Fund only if
approved by the holders of a majority of the outstanding shares of such Fund.
However, the Rule also provides that the ratification of the appointment of
independent accountants, the approval of principal underwriting contracts and
the election of Trustees may be effectively acted upon by shareholders of the
Trust voting together in the aggregate without regard to particular Funds.
When used in the Prospectus or in this Additional Statement, a
"majority" of shareholders means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the vote of the lesser of (1) 67% of the shares of the Trust, or the
applicable Fund, present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (2) more than 50% of
the outstanding shares of the Trust or the applicable Fund.
-18-
<PAGE>
When issued for payment as described in the Funds' Prospectus and this
Additional Statement, shares of the Funds will be fully paid and non-assessable
by the Trust.
The Declaration of Trust provides that the Trustees, officers,
employees and agents of the Trust will not be liable to the Trust or to a
shareholder, nor will any such person be liable to any third party in connection
with the affairs of the Trust, except as such liability may arise from his or
its own bad faith, willful misfeasance, gross negligence, or reckless disregard
of duties. It also provides that all third parties shall look solely to the
Trust property for satisfaction of claims arising in connection with the affairs
of the Trust. With the exceptions stated, the Declaration of Trust provides
that a Trustee, officer, employee or agent is entitled to be indemnified against
all liability in connection with the affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
Taxes In General
- ----------------
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning and is based
on tax laws and regulations which are in effect on the date hereof; such laws
and regulations may be changed by legislative or administrative action.
Investors are advised to consult their tax advisers with specific reference to
their own tax situations.
Each Fund is treated as a separate corporate entity under the Code and
intends to qualify as a regulated investment company. In order to so qualify,
each Fund must satisfy, in addition to the distribution requirement described in
the Prospectus, certain requirements with respect to the source of its income
for a taxable year. At least 90% of the gross income of each Fund must be
derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to the Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or trust is treated as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Fund's gross income for a
taxable year must be derived
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<PAGE>
from gains realized on the sale or other disposition of the following
investments held for less than three months: (1) stock and securities (as
defined in Section 2(a)(36) of the 1940 Act); (2) options, futures and forward
contracts other than those on foreign currencies; and (3) foreign currencies
(and options, futures and forward contracts on foreign currencies) that are not
directly related to a Fund's principal business of investing in stock and
securities (and options and futures with respect to stocks and securities).
Interest (including original issue discount and accrued market discount)
received by a Fund upon maturity or disposition of a security held for less than
three months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of this requirement. However,
any other income which is attributable to realized market appreciation will be
treated as gross income from the sale or other disposition of securities for
this purpose.
Each Fund will designate any distribution of long term capital gains
as a capital gain dividend in a written notice mailed to shareholders within 60
days after the close of the Fund's taxable year. Upon the sale or exchange of
Fund shares, if a shareholder has not held such shares for at least six months,
any loss on the sale or exchange of those shares will be treated as long term
capital loss to the extent of the capital gain dividends received with respect
to the shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%; however, because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's long
term capital gains are taxable at a maximum nominal rate of 28%. For
corporations, long term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35% (or at a maximum effective marginal rate of 39% in
the case of corporations having taxable income between $100,000 and $335,000).
A 4% nondeductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
If for any taxable year a Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions (whether or not derived from interest on Municipal
Obligations) would be taxable as ordinary income to shareholders to the extent
of the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders
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<PAGE>
who have failed to provide a correct tax identification number in the manner
required, who are subject to withholding by the Internal Revenue Service for
failure properly to include on their return payments of taxable interest or
dividends, or who have failed to certify to the Fund that they are not subject
to backup withholding when required to do so or that they are "exempt
recipients."
Depending upon the extent of the Funds' activities in states and
localities in which their offices are maintained, in which their agents or
independent contractors are located or in which they are otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Funds and their shareholders under such laws may
differ from their treatment under federal income tax laws.
As described above and in the Prospectus, the Intermediate Municipal
Bond Fund is designed to provide investors with current tax-exempt interest
income. The Fund is not intended to constitute a balanced investment program
and is not designed for investors seeking capital appreciation or maximum tax-
exempt income irrespective of fluctuations in principal. Shares of the Fund
would not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and IRAs
since such plans and accounts are generally tax-exempt and, therefore, would not
only fail to gain any additional benefit from the Fund's dividends being tax-
exempt, but such dividends would be ultimately taxable to the beneficiaries when
distributed to them. In addition, the Fund may not be appropriate investments
for entities which are "substantial users" of facilities financed by private
activity bonds or "related persons" thereof. "Substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses a part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, or
who occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S Corporation and its
shareholders.
The Intermediate Municipal Bond Fund's policy is to pay each year as
federal exempt-interest dividends substantially all of its Municipal Obligations
interest income net of certain deductions. In order for the Fund to pay exempt-
interest dividends with respect to any taxable year, at the close of each
quarter of its taxable year at least 50% of the aggregate value of the Fund's
assets must consist of exempt-interest obligations. After the close of its
taxable year, the Fund will notify its shareholders of the portion of the
dividends paid by it which constitutes an exempt-interest dividend with respect
to such taxable year. However, the aggregate amount of dividends so designated
by the Fund cannot exceed the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the taxable year over
any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the
Code. The percentage of total dividends paid by the Fund with respect to
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any taxable year which qualify as federal exempt-interest dividends will be the
same for all shareholders receiving dividends for such year.
A percentage of the interest on indebtedness incurred by a shareholder
to purchase or carry the Intermediate Municipal Bond Fund's shares, equal to the
percentage of the total non-capital gain dividends distributed during the
shareholder's taxable year that are exempt-interest dividends, is not deductible
for federal income tax purposes.
MANAGEMENT
Trustees and Officers of the Trust
- ----------------------------------
The Trustees and executive officers of the Trust, their ages and their
principal occupations for the last five years are set forth in the Prospectus.
Each Trustee has an address at The Woodward Funds, c/o NBD Bank, 611 Woodward
Avenue, Detroit, Michigan 48226. Each Trustee also serves as a trustee of The
Woodward Variable Annuity Fund, a registered investment Company advised by the
Investment Advisers.
For so long as the plan described in the section captioned
"Distribution and Shareholder Services Plans" remains in effect, the Trustees of
the Trust who are not "interested persons" of the Trust, as defined in the 1940
Act, will be selected and nominated by the Trustees who are not "interested
persons" of the Trust.
Each Trustee receives from the Trust and The Woodward Variable Annuity
Fund a total annual fee of $17,000 and a fee of $2,000 for each Board of
Trustees meeting attended. The Chairman is entitled to additional compensation
of $4,250 per year for his services to the Trusts in that capacity. These fees
are allocated among the investment portfolios of the Trust and The Woodward
Variable Annuity Fund based on their relative net assets. All Trustees are
reimbursed for out of pocket expenses incurred in connection with attendance at
meetings. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to the Trust.
The following table summarizes the compensation for each of the Trustees
for the Trust's fiscal year ending December 31, 1995 are as follows:
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<TABLE><CAPTION>
Total
Compensation
From Trust and
Aggregate Fund Complex**
Compensation Paid to Board
Name of Board Member Trust* Member
-------------------- ------ ------
<S> <C> <C>
Will M. Caldwell, Trustee $21,250 $21,250(2)+
Nicholas J. DeGrazia, Trustee P. $21,250 $21,250(2)+
John Gould, Trustee *** $30,000(4)+
Earl I. Heenan, Jr.,
Chairman and President++ $24,437.50**** $24,437.50(2)+
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee++ $21,250**** $21,250(2)+
Donald G. Sutherland, Trustee++ $21,250**** $21,250(2)+
Donald L. Tuttle, Trustee++ $21,250**** $21,250(2)+
Eugene C. Yehle, Trustee
and Treasurer $21,250 $21,250(2)+
</TABLE>
______________________
* Amount does not include reimbursed expenses for attending Board meetings,
which are estimated to be approximately $350 for all Trustees as a group.
** The Fund Complex consists of the Trust and the Woodward Variable Annuity
Fund, Prairie Funds, Prairie Institutional Funds, Prairie Intermediate Bond
Fund and Prairie Municipal Bond Fund, Inc.
*** Mr. Gould and Ms. McCoy were not trustees of the Trust during the fiscal
year ended December 31, 1995.
**** Entire amount of compensation deferred pursuant to a deferred compensation
plan.
+ Total number of investment companies in the Fund Complex from which the
Trustee receives compensation for serving as a trustee.
++ Deferred compensation in the amounts of $24, 437.50, $21,500, $21,500, and
$21,500 accrued during The Woodward Funds' fiscal year ended December 31, 1995
for Messrs. Heenan, Pallone, Sutherland and Tuttle, respectively.
Board members and officers of the Trust, as a group, owned less than
1% of any Fund's shares outstanding on April 10, 1996.
Investment Advisers
- -------------------
Information about the Investment Advisers and their duties and
compensation as investment adviser is contained in the Prospectus.
The Investment Advisers own investment portfolios may include bank
certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by
the Trust. Joint purchase of investments for the Trust and for NBD's own
investment portfolio will not be made. NBD and FCIMCO's respective commercial
banking departments may have deposit, loan and other commercial banking
relationships with issuers of securities purchased by the Trust, including
outstanding loans to such issuers which may be repaid in whole or in part with
the proceeds of securities purchased by the Trust.
Investment decisions for the Trust and other fiduciary accounts are
made by NBD and FCIMCO's respective trust investment divisions solely from the
standpoint of the independent interest of the Trust and such other fiduciary
accounts. NBD and FCIMCO's
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<PAGE>
respective trust investment divisions perform independent analyses of publicly
available information, the results of which are not made publicly available. In
making investment decisions for the Trust, personnel of NBD and FCIMCO's
respective trust investment divisions do not obtain information from any other
division or department of the Investment Advisers or otherwise, which is not
publicly available. NBD and FCIMCO's respective trust investment divisions
executes transactions for the Trust only with unaffiliated dealers but such
dealers may be customers of other divisions of the Investment Advisers. The
Investment Advisers may make bulk purchases of securities for the Trust and for
other customer accounts (but not for its own investment portfolio), in which
case the Trust will be charged a pro rata share of the transaction costs
incurred in making the bulk purchase. See "Investment Objectives, Policies and
Risk Factors - Portfolio Transactions" above.
NBD and FCIMCO have agreed as Investment Advisers that they will
reimburse the Trust such portions of its fees as may be required to satisfy any
expense limitations imposed by state securities laws or other applicable laws.
Restrictive limitations may be imposed on the Trust as a result of changes in
current state laws and regulations in those states where the Trust has qualified
its shares, or by a decision of the Trustees to qualify the shares in other
states having restrictive expense limitations. To the Trust's knowledge, of the
expense limitations in effect on the date of this Additional Statement none is
more restrictive than two and one-half percent (2-1/2%) of the first $30 million
of a Fund's average annual net assets, two percent (2%) of the next $70 million
of the average annual net assets and one and one-half percent (1-1/2%) of the
remaining average annual net assets.
Under the terms of the Advisory Agreement, the Investment Advisers are
obligated to manage the investment of each Fund's assets in accordance with
applicable laws and regulations, including, to the extent applicable, the
regulations and rulings of the various regulatory governmental bank agencies.
The Investment Advisers will not accept Trust shares as collateral for
a loan which is for the purpose of purchasing Trust shares, and will not make
loans to the Trust. Inadvertent overdrafts of the Trust's account with the
Custodian occasioned by clerical error or by failure of a shareholder to provide
available funds in connection with the purchase of shares will not be deemed to
be the making of a loan to the Trust by the Investment Advisers.
Under the Advisory Agreement, the Investment Advisers are not liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of such Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Investment Advisers in the
performance of their duties or from its reckless disregard of its duties and
obligations under the Agreement.
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<PAGE>
Administrators
- --------------
Pursuant to an Administration Agreement dated as of April 12, 1996
with the Trust, FCIMCO, NBD and BISYS assist in all aspects of the Trust's
operations, other than providing investment advice, subject to the overall
authority of the Trust's Board in accordance with Massachusetts law. Under the
terms of the Administration Agreement, FCIMCO, NBD and BISYS are entitled
jointly to a monthly administration fee at the annual rate of .15% of each
Fund's average daily net assets.
The Trust has agreed that neither FCIMCO, NBD nor BISYS will be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which the agreement with FCIMCO, NBD or BISYS
relates, except for a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of FCIMCO, NBD or BISYS in the performance of their
obligations or from reckless disregard by any of them of their obligations and
duties under the Administration Agreement.
In addition, the Administration Agreement provides that if, in any fiscal
year, the aggregate expenses of a Fund exceed the expense limitation of any
state having jurisdiction over the Fund, FCIMCO, NBD and BISYS will bear such
excess expense to the extent required by state law.
The aggregate of the fees payable to FCIMCO, NBD and BISYS is not subject
to reduction as the value of the Fund's net assets increases.
Distribution and Shareholder Servicing Plans
- --------------------------------------------
As stated in the Prospectus, the Trust may enter into Servicing
Agreements with Service Agents which may include the Investment Advisers and
their affiliates. The Servicing Agreements provide that the Service Agents will
render shareholder administrative support services to their customers who are
the beneficial owners of Fund shares in consideration for the Funds' payment of
up to .25% (on an annualized basis) of the average daily net asset value of the
shares beneficially owned by such customers and held by the Service Agents and,
at the Trust's option, it may reimburse the Service Agents' out-of-pocket
expenses. Such services may include: (i) processing dividend and distribution
payments from a Fund; (ii) providing information periodically to customers
showing their share positions; (iii) arranging for bank wires; (iv) responding
to customer inquiries; (v) providing subaccounting with respect to shares
beneficially owned by customers or the information necessary for such
subaccounting; (vi) forwarding shareholder communications; (vii) processing
share exchange and redemption requests from customers; (viii) assisting
customers in changing dividend options, account designations and addresses; and
(ix) other similar services requested by the Trust. Banks acting as Service
Agents are prohibited from engaging in any activity primarily intended to result
in the sale of Fund shares. However, Service Agents other than banks may be
requested to provide marketing assistance (e.g.,
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<PAGE>
forwarding sales literature and advertising to their customers) in connection
with the distribution of Fund shares.
Rule 12b-1 (the "Rule") adopted by the Securities and Exchange
Commission under the 1940 Act provides, among other things, that an investment
company may bear expenses of distributing its shares only pursuant to a plan
adopted in accordance with the Rule. The Trust's Board of Trustees has adopted
such a plan (the "Plan") with respect to each Fund's Class B Shares, pursuant to
which each Fund pays the Distributor a fee of up to 0.75% of the average daily
net asset value attributable to such Shares for advertising, marketing and
distributing such Shares and for the provision of certain services to the
holders of such Shares. Under the Plan, the Distributor may make payments to
certain financial institutions, securities dealers and other financial industry
professionals (collectively, "Service Agents") in respect of these services.
The Board of Trustees believes that there is a reasonable likelihood that the
Plan will benefit each Fund and the holders of such Shares.
The Board of Trustees reviews, at least quarterly, a written report of
the amounts expended under the Plan and in connection with the Trust's
arrangements with Service Agents and the purposes for which the expenditures
were made. In addition, such arrangements are approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Trustees").
Any material amendment to the Plan and the Trust's arrangements with
Service Agents under the Shareholder Servicing Agreements must be approved by a
majority of the Board of Trustees (including a majority of the Disinterested
Trustees).
As stated in the Prospectus for the Funds, the Trust has implemented
the Servicing Plan described above with respect to Class A and Class B shares of
the Funds only and the Plan with respect to Class B shares of the Funds only.
The Trust will enter into shareholder servicing agreements with Service Agents
pursuant to which services to their customers who beneficially own Class A and
Class B shares of the Funds in consideration for the payment of up to .25% (on
an annualized basis) of the average daily net asset value of such shares. The
Trust has allocated the Servicing Fees which are attributable to the Class A and
Class B shares exclusively to such shares and the Distribution Fees which are
attributable to the Class B shares exclusively to such shares.
Custodian
- ---------
As Custodian for the Trust, NBD (i) maintains a separate account or
accounts in the name of each Fund, (ii) collects and makes disbursements of
money on behalf of each Fund, (iii) collects and receives all income and other
payments and distributions on
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<PAGE>
account of the portfolio securities of each Fund, and (iv) makes periodic
reports to the Trust's Board of Trustees concerning the Trust's operations.
For its services as Custodian, NBD is entitled to receive from the Funds at
the following annual rates based on the aggregate market value of such Funds'
portfolio securities, held as Custodian: .03% of the first $20 million; .025%
of the next $20 million; .02% of the next $20 million; .015% of the next $40
million; .0125% of the next $200 million; and .01% of the balance over
$300,000,000. NBD will receive an annual account fee of $1,000 and $1.54 per
month per asset held in each of these Funds. In addition, NBD, as Custodian, is
entitled to receive $50 for each cash statement and inventory statement and $13
for each pass-through certificate payment, $35 for each option transaction
requiring escrow receipts and $20 for all other security transactions.
Distributor
- -----------
The Trust's shares are offered on a continuous basis through BISYS,
which acts under the Distribution Agreement as Distributor for the Trust. As
stated in the Prospectus, the Trust will allocate distribution fees which are
attributable to the Class B shares in a Fund exclusively to such shares.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500 Woodward
Avenue, Detroit, Michigan 48226-3424, serves as auditors for the Trust.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the Trust,
is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496, is
counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each class of shares of each
Fund and the yield of the Asset Allocation and Bond Funds and the Intermediate
Municipal Bond Fund for various periods may be quoted in advertisements,
shareholder reports or other communications to shareholders. Performance
information is generally available by calling (800) 688-3350.
Yield Calculations. A Fund's yield is calculated by dividing the
------------------
Fund's net investment income per share (as described below) earned during a 30-
day period by the maximum offering price per share on the last day of the period
and annualizing the result
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<PAGE>
on a semi-annual basis by adding one to the quotient, raising the sum to the
power of six, subtracting one from the result and then doubling the difference.
A Fund's net investment income per share earned during the period is based on
the average daily number of shares outstanding during the period entitled to
receive dividends and includes dividends and interest earned during the period
minus expenses accrued for the period, net of reimbursements. This calculation
can be expressed as follows:
a-b
Yield = 2 [(----- + 1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Portfolio is recognized by accruing 1/360 of the stated dividend rate of
the security each day that the security is in the portfolio. Each Fund
calculates interest earned on any debt obligations held in its portfolio by
computing the yield to maturity of each obligation held by it based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest), and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is in the portfolio. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Undeclared earned income may be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
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<PAGE>
In addition, the Intermediate Municipal Bond Fund may advertise their
standardized "tax-equivalent yield," which is computed by: (a) dividing the
portion of the yield (as calculated above) that is exempt from income tax by one
minus a stated income tax rate; and (b) adding the figure resulting from (a)
above to that portion, if any, of the yield that is not tax-exempt.
Total Return Calculations. Each Fund computes its "average annual
-------------------------
total return" for a class by determining the average annual compounded rates of
return during specified periods that equate the initial amount invested to the
ending redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Funds compute their aggregate total returns for each class by
determining the aggregate rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
ERV
T = (------) - 1
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period, and include all recurring fees
charged to all shareholder accounts, assuming an account size equal to a Fund's
mean (or median) account size for any fees that vary with the size of the
account. The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical investment and
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<PAGE>
the deduction of all nonrecurring charges at the end of the period covered by
the computation. Each Fund's average annual total return may reflect the
deduction of the maximum sales load imposed on purchases.
The Funds may also from time to time include in advertisements, sales
literature, communications to shareholders and other materials ("Literature")
total return figures that are not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing the Funds' total
returns with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Funds may calculate their returns for the period of
time specified in the advertisement or communication by assuming the investment
of $10,000 in shares and assuming the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. The Funds do
not, for these purposes, deduct from the initial value invested any amount
representing sales charges. The Funds will, however, disclose the maximum sales
charge and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
The Funds may also include discussions or illustrations of the
potential investment goals of a prospective investor, investment management
strategies, techniques, policies or investment suitability of a Fund (such as
value investing, market timing, dollar cost averaging, asset allocation,
constant ratio transfer, automatic accounting rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable instruments), economic
conditions, the relationship between sectors of the economy and the economy as a
whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Fund), as well as the view of
the Trust as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which compare the
investment objective, return potential, relative stability and/or growth
possibilities of the Fund and/or other mutual funds, or illustrate the potential
risks and rewards of investment in various
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<PAGE>
investment vehicles, including but not limited to, stocks, bonds, treasury bills
and shares of a Fund. In addition, advertisements or shareholder communications
may include a discussion of certain attributes or benefits to be derived by an
investment in a Fund and/or other mutual funds, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and investment alternatives to certificates of deposit
and other financial instruments. Such advertisements or communicators may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
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APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a 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 alternative
liquidity is maintained.
A-1
<PAGE>
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
A-2
<PAGE>
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
A-3
<PAGE>
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
A-4
<PAGE>
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit 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" and "C" - Debt 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.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace
A-5
<PAGE>
period. "D" rating is also used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds 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 are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
A-6
<PAGE>
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
A-7
<PAGE>
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A-8
<PAGE>
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
A-9
<PAGE>
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
A-10
<PAGE>
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-11
<PAGE>
APPENDIX B
----------
As stated in their Prospectus, each of the Funds may enter into
futures contracts and related options for hedging purposes.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures as
a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to hedge against expected increases in interest rates and futures contract
purchases to offset the impact of interest rate declines.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges - principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. The Fund
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance
B-1
<PAGE>
under contract provisions through a clearing corporation, a nonprofit
organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. A Fund may trade in any futures contract for which there exists a public
market, including, without limitation, the foregoing instruments.
Examples of Futures Contract Sale. A Fund would engage in an interest
---------------------------------
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in a Fund tends to
move in concert with the futures market prices of long-term United States
Treasury bonds ("Treasury bonds"). The Investment Advisers wish to hedge the
current market value of this portfolio security until some point in the future.
Assume the portfolio security has a market value of 100, and the Investment
Advisers believe that, because of an anticipated rise in interest rates, the
value will decline to 95. The Fund might enter into futures contract sales of
Treasury bonds for an equivalent of 98. If the market value of the portfolio
security does indeed decline from 100 to 95, the equivalent futures market price
for the Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Investment Advisers could be wrong in their forecast of interest
rates and the equivalent futures market price could rise above 98. In this
case, the market value of the portfolio securities, including the portfolio
security being hedged, would increase. The benefit of this increase would be
reduced by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. A Fund might engage in an
-------------------------------------
interest rate futures contract purchase when it is not fully invested in long-
term bonds but wishes to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter-
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
B-2
<PAGE>
endeavoring at the same time to hedge the effect of all or part of an expected
increase in market price of the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Investment Advisers wish to hedge the
current market price (and thus 10% yield) of the long-term bond until the time
(four months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the Investment Advisers believe
that, because of an anticipated fall in interest rates, the price will have
risen to 105 (and the yield will have dropped to about 9 1/2%) in four months.
A Fund might enter into futures contracts purchases of Treasury bonds for an
equivalent price of 98. At the same time, the Fund could, for example, assign a
pool of investments in short-term securities that are either maturing in four
months or earmarked for sale in four months, for purchase of the long-term bond
at an assumed market price of 100. Assume these short-term securities are
yielding 15%. If the market price of the long-term bond does indeed rise from
100 to 105, the equivalent futures market price for Treasury bonds might also
rise from 98 to 103. In that case, the 5-point increase in the price that the
Fund pays for the long-term bond would be offset by the 5-point gain realized by
closing out the futures contract purchase.
The Investment Advisers could be wrong in their forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98. If short-term rates at the same time
fall to 10% or below, it is possible that a Fund would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that a Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts
-----------------------
A stock or bond index assigns relative values to the stocks or bonds
included in the index and the index fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based
on broad market indices, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100 or
indices based on an industry or market segment, such as oil and
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gas stocks. Futures contracts are traded on organized exchanges regulated by
the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
The Asset Allocation and Equity Funds may sell index futures contracts
in order to hedge against a decrease in market value of its portfolio securities
that might otherwise result from a market decline. A Fund may do so either to
hedge the value of its portfolio as a whole, or to hedge against declines,
occurring prior to sales of securities, in the value of the securities to be
sold. Conversely, the Funds may purchase index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Funds may purchase such securities upon termination of the
long futures position, but a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Funds may utilize index futures contracts in
anticipation of changes in the composition of their portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. The
Fund may also sell futures contracts in connection with this strategy, in order
to hedge against the possibility that the value of the securities to be sold as
part of the restructuring of the portfolio will decline prior to the time of
sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Equity Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
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HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is,
market value decreased and the Fund had entered into an anticipatory purchase
hedge, or market value increased and the Fund had hedged its stock portfolio,
the results of the Fund's transactions in stock index futures would be as set
forth below.
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
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Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
III. Margin Payments
---------------
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Fund's Custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. 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 assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying security or index fluctuates making
the long and short positions in the futures contract more or less valuable, a
process known as marking to the market. For example, when a Fund has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where a Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Investment Advisers
may elect to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. 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 gain.
IV. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the secu-
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rities being hedged. If the price of the future moves less than the price of
the securities which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund involved will experience either a loss or gain on the
future which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, a Fund may buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
volatility over a particular time period of the prices of such securities has
been greater than the volatility over such time period of the future, or if
otherwise deemed to be appropriate by the Investment Advisers. Conversely, a
Fund may buy or sell fewer futures contracts if the volatility over a particular
time period of the prices of the securities being hedged is less than the
volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by the Investment Advisers. It is also
possible that, where a Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the value of securities held
by the Fund may decline. If this occurred, the Fund would lose money on the
future and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts (or options), will be deposited in a segregated account with the
Fund's Custodian and/or in a margin account with a broker to collateralize the
position and thereby ensure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. With respect to financial
futures contracts, the liquidity of the futures market depends on participants
entering into off-setting transactions rather than making or taking delivery.
To the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced thus producing distortions. From the point of
view of speculators, the deposit requirements in the futures
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market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may also
cause temporary price distortions. Due to the possibility of price distortion
in the futures market, and because of the imperfect correlation between the
movements in the cash market and movements in the price of futures, a correct
forecast of general market trends or interest rate movements by the Investment
Advisers may still not result in a successful hedging transaction over a short
time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although a Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Fund is also subject to the Investment
Advisers' ability to predict correctly movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held in its portfolio and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts
----------------------------
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time
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<PAGE>
during the period of the option. Upon exercise, the writer of the option is
obligated to pay the difference between the cash value of the futures contract
and the exercise price. Like the buyer or seller of a futures contract, the
holder, or writer, of an option has the right to terminate its position prior to
the scheduled expiration of the option by selling, or purchasing, an option of
the same series, at which time the person entering into the closing transaction
will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts, how-
ever, the purchase of call or put options on futures contracts may frequently
involve less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). Although permitted by
their investment policies, the Funds do not currently intend to write futures
options, and will not do so in the future absent any necessary regulatory
approvals.
VI. Accounting and Tax Treatment
----------------------------
Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.
Generally, futures contracts held by a Fund at the close of the Fund's
taxable year will be treated for federal income tax purposes as sold for their
fair market value on the last business day of such year, a process known as
"marking-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the length of time the Fund holds the futures contract ("the 40%-60%
rule"). The amount of any capital gain or loss actually realized by a Fund in a
subsequent sale or other disposition of those futures contracts will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale of the contracts. With respect to
futures contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by the Fund, losses as to such contracts to sell will be subject to certain
loss deferral rules which limit the amount of loss currently deductible on
either part of the straddle to the amount thereof which exceeds the unrecognized
gain (if any) with respect to the other part of the straddle, and to certain
wash sales regulations. Under short sales rules, which will also be applicable,
the holding period of the securities forming part of the straddle will (if they
have not been held for the long-term holding period) be deemed not to begin
prior to termination of the straddle. With respect to certain futures
contracts,
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<PAGE>
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, a Fund would be allowed (in lieu
of the foregoing) to elect either (1) to offset gains or losses from portions
which are part of a mixed straddle by separately identifying each mixed straddle
to which such treatment applies, or (2) to establish a mixed straddle account
for which gains and losses would be recognized and offset on a periodic basis
during the taxable year. Under either election, the 40%-60% rule will apply to
the net gain or loss attributable to the futures contracts, but in the case of a
mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term. Options on futures generally receive federal tax treatment similar
to that described above.
Certain foreign currency contracts entered into by a Fund may be
subject to the "marking-to-market" process and the 40%-60% rule in a manner
similar to that described in the preceding paragraph for futures contracts. To
receive such federal income tax treatment, a foreign currency contract must meet
the following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon which
the settlement value of the contract depends; (2) the contract must be entered
into at arm's length at a price determined by reference to the price in the
interbank market; and (3) the contract must be traded in the interbank market.
The Treasury Department has broad authority to issue regulations under the
provisions respecting foreign currency contracts. As of the date of this
Additional Statement, the Treasury Department has not issued any such
regulations. Other foreign currency contracts entered into by a Fund may result
in the creation of one or more straddles for federal income tax purposes, in
which case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
Some of the Funds' investments may be subject to special rules which
govern the federal income tax treatment of certain transactions denominated in
terms of a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option or similar
financial instrument. The disposition of a currency other than the U.S. dollar
by a U.S. taxpayer is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules, unless an election is made to have such
currency rules apply. With respect to transactions covered by the special
rules,
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foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not a
part of a straddle. In accordance with Treasury regulations, certain
transactions that are part of a "section 988 hedging transaction" (as defined in
the Code and the Treasury regulations) may be integrated and treated as a single
transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" are not subject to the mark-to-market or loss
deferral rules under the Code. Gain or loss attributable to the foreign
currency component of transactions engaged in by a Fund which are not subject to
the special currency rules (such as foreign equity investments other than
certain preferred stocks) will be treated as capital gain or loss and will not
be segregated from the gain or loss on the underlying transaction.
As described more fully in "Additional Information Concerning Taxes",
a regulated investment company must derive less than 30% of its gross income
from gains realized on the sale or other disposition of securities and certain
other investments held for less than three months. With respect to futures
contracts and other financial instruments subject to the marking-to-market
rules, the Internal Revenue Service has ruled in private letter rulings that a
gain realized from such a futures contract or financial instrument will be
treated as being derived from a security held for three months or more
(regardless of the actual period for which the contract or instrument is held)
if the gain arises as a result of a constructive sale under the marking-to-
market rules, and will be treated as being derived from a security held for less
than three months only if the contract or instrument is terminated (or
transferred) during the taxable year (other than by reason of marking-to-market)
and less than three months have elapsed between the date the contract or
instrument is acquired and the termination date. In determining whether the 30%
test is met for a taxable year, increases and decreases in the value of each
Fund's futures contracts and other investments that qualify as part of a
"designated hedge," as defined in the Code, may be netted.
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