<PAGE>
1933 Act Registration No. 033-17759
1940 Act Registration No. 911-05355
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
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Post-Effective Amendment No. 27
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AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. X
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(Check appropriate box or boxes)
FORTIS ADVANTAGE PORTFOLIOS, INC.
(Exact Name of Registrant as Specified in Charter)
500 Bielenberg Drive
Woodbury, Minnesota 55125
(Address of Principal Executive Offices, Zip Code)
(651) 738-4000
(Registrant's Telephone Number, including Area Code)
Scott R. Plummer, Esq.
500 Bielenberg Drive
Woodbury, Minnesota 55125
(Name and Address of Agent for Service)
COPY TO:
Kathleen L Prudhomme, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
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on (specify date) pursuant to paragraph (b) of Rule 485
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75 days after filing pursuant to paragraph (a) of Rule 485
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X on July 1, 1999 pursuant to paragraph (a) of Rule 485
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60 days after filing pursuant to paragraph (a) of Rule 485
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<PAGE>
[LOGO]
FORTIS STOCK FUNDS PROSPECTUS
As with all mutual funds, the Securities and Exchange Commission
has not approved or disapproved these securities or determined if
this prospectus is truthful or complete. Any statement to the contrary
is a criminal offense.
Dated July 1, 1999
- - Asset Allocation Portfolio
Class Z Shares
MAILING ADDRESS:
P.O. Box 64284
St. Paul, Minnesota 55164-0284
STREET ADDRESS:
500 Bielenberg Drive
Woodbury, Minnesota 55125-1400
TELEPHONE: (651) 738-4000
TOLL FREE: (800) 800-2000, extension 3012
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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PAGE
<S> <C>
The Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Principal Investment Strategies . . . . . . . . . . . . . . . . . . . . . . 1
Principal Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fund Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shareholder Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Purchasing Class Z Shares . . . . . . . . . . . . . . . . . . . . . . . . . 5
Determining Your Purchase Price . . . . . . . . . . . . . . . . . . . . . . 5
How to Buy Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
How to Sell Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Dividend and Capital Gains Distributions. . . . . . . . . . . . . . . . . . 9
Tax Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Shareholder Inquiries . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fund Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Portfolio Managers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
More Information on the Fund's Objective, Investment Strategies and Risks. . . . 12
Fund Objective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Principal Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
THE FUND
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This section describes the objective, principal investment strategies and
principal risks of Asset Allocation Portfolio (the "Fund"). It also provides
you with information on how the Fund has performed and on Fund expenses. For
more information, please read the section entitled "More Information on the
Fund's Objective, Investment Strategies and Risks."
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
OBJECTIVE
The Fund has an objective of maximizing total return on invested capital, mainly
from capital appreciation, dividends and interest.
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its objective by following a flexible asset allocation strategy
that contemplates shifts among a wide range of investments and markets. The
Fund invests in equity and debt securities of domestic and foreign issuers and
in money market instruments. Depending on prevailing economic and market
conditions, the Fund may at any given time be primarily comprised of equity
securities, debt securities, short-term money market securities or any
combination of these securities. In managing the equity portion of the Fund's
portfolio, the adviser uses a "bottom up" investment style in which stock
selection is driven primarily by the merits of the company itself. The Fund
will attempt to maintain an average effective duration of three to seven years
for the debt securities portion of its portfolio. The Fund may invest up to 20%
of its net assets in securities of foreign governments and companies. The
Fund's investments may include the following:
- - EQUITY SECURITIES. The Fund's equity security investments may include common
stocks, preferred stocks and securities convertible into common stocks. The
Fund generally invests in equity securities which, in the judgment of the Fund's
adviser, have above average growth potential.
- - U.S. GOVERNMENT SECURITIES. The Fund may invest in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
- - MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities, including pass-through certificates issued by the Government
National Mortgage Association ("GNMA") and the Federal National Mortgage
Association ("FNMA") and collateralized mortgage obligations ("CMOs"). CMOs are
debt instruments issued by special purpose entities which are secured by pools
of mortgage loans or other mortgage-backed securities.
- - ZERO COUPON OBLIGATIONS. The Fund may invest in zero coupon obligations
issued by the U.S. Government and its agencies and by corporate issuers.
Because these obligations do not pay interest currently, their prices can be
highly volatile as interest rates rise and fall.
- - MUNICIPAL OBLIGATIONS. The Fund may invest up to 20% of its total assets in
municipal securities during periods when these securities appear to offer more
attractive returns than taxable securities.
- - CORPORATE BONDS. The Fund may invest without limitation in corporate bonds
rated within the four highest grades at the time of purchase by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Rating Services
("Standard & Poor's"), or comparably rated by another nationally recognized
rating organization. These are commonly referred to as "investment grade"
securities. In addition, the Fund may invest up to 30% of its total assets in
securities rated lower than investment grade, commonly known as "junk bonds."
The Fund will not invest in bonds rated below Caa by Moody's or CCC by Standard
& Poor's, or comparably rated by another nationally recognized rating
organization.
1
<PAGE>
- - BANK OBLIGATIONS. The Fund may invest in obligations of United States banks,
and in U.S. dollar denominated obligations of Canadian chartered banks and
United States branches or agencies of foreign banks.
- - COMMERCIAL PAPER. The Fund may invest in commercial paper rated at the time
of purchase Prime-2 or higher by Moody's, A-2 or higher by Standard & Poor's,
comparably rated by another nationally recognized rating organization, or
unrated and issued by a corporation with an outstanding debt issue rated A or
better by Moody's or Standard & Poor's or comparably rated by another nationally
recognized rating organization.
PRINCIPAL RISKS
As with any non-money market mutual fund, the Fund's share price and yield will
change daily because of changes in stock prices, interest rates and other
factors. You may lose money if you invest in the Fund. The principal risks of
investing in the Fund include:
- - RISKS OF COMMON STOCKS. Prices of stocks in the Fund's portfolio may decline
over short or extended periods of time. Price changes may occur in the market
as a whole, or they may occur in only a particular company, industry or sector
of the market. As you consider an investment in the Fund, you should take into
account your personal tolerance for daily fluctuations of the stock market.
- - INTEREST RATE RISK. Debt securities in the Fund will fluctuate in value with
changes in interest rates. In general, debt securities will increase in value
when interest rates fall and decrease in value when interest rates rise.
- - CREDIT OR DEFAULT RISK. If a bond issuer's credit quality declines or its
agency ratings are downgraded, there may be a resulting decline in the bond's
price. If credit quality deteriorates to the point of possible or actual
default (inability to pay interest or repay principal on a timely basis), the
bond's market value could decline precipitously.
- - RISKS OF HIGH YIELD/HIGH RISK SECURITIES. A significant portion of the
Fund's portfolio may consist of non-investment grade debt securities, commonly
known as "high yield" securities or "junk bonds." These securities generally
have more volatile prices and carry more risk to principal than investment grade
securities.
- - CALL RISK. The Fund is subject to the possibility that, under certain
conditions, especially during periods of falling interest rates, a bond issuer
will "call" -- or repay -- its bonds before their maturity date. The Fund may
then be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline on the Fund's income.
- - RISKS OF MORTGAGE-RELATED SECURITIES. The Fund's investments in debt
securities include mortgage-related securities, which are subject to prepayment
and extension risk. Similar to call risk, prepayment risk is the risk that
falling interest rates could cause faster than expected prepayments of mortgages
underlying the Fund's mortgage-related securities. These prepayments are passed
through to the Fund, which must then reinvest them at a time when interest rates
on new mortgage investments are falling, reducing the Fund's income. Extension
risk is the risk that rising interest rates could cause mortgage prepayments to
slow, which would lengthen the duration of the Fund's mortgage-related
securities and cause their prices to decline. (Duration is a commonly used
measure of the potential volatility of a debt security. See "More Information
on the Fund's Objective, Investment Strategies and Risks.")
- - RISKS OF FOREIGN INVESTMENT. Investing in foreign securities involves risks
not typically associated with U.S. investing. These investments may involve
increased political and economic risk. In addition, the Fund may experience a
decline in net asset value resulting from changes in exchange rates between the
U.S. dollar and foreign currencies.
- - RISKS OF ACTIVE MANAGEMENT. Because the Fund may invest in a wide range of
investments and markets, the Fund's investment adviser has substantially more
investment discretion than the advisers of most mutual funds. The performance
of the Fund will reflect in part the adviser's ability to effectively allocate
the Fund's assets among these investments and markets.
2
<PAGE>
FUND PERFORMANCE
The bar chart and table below provide you with information on the Fund's
volatility and performance. Because Class Z shares have not been offered prior
to the date of this Prospectus, information in the chart is for the Fund's
Class A shares, which are offered through another prospectus. The classes will
have substantially similar returns, because they are invested in the same
portfolio of securities. However, Class Z shares will have higher returns
because their expenses are lower.
The bar chart shows you how performance of the Fund's Class A shares has
varied from year to year. The table compares the Fund's performance over
different time periods to that of a broad measure of market performance.
Remember, how the Fund has performed in the past is not necessarily an
indication of how it will perform in the future.
[CHART]
ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----- ------ ------ ------ ----- ------ ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3.21% 22.67% -1.05% 29.34% 6.29% 11.27% -0.82% 22.01% 12.03% 18.17%
</TABLE>
* The Fund's total return for the period from January 1, 1999 through March 31,
1999 was ____%
BEST QUARTER: 12.55% (Quarter ending June 30, 1997)
WORST QUARTER: -8.95% (Quarter ending September 30, 1990)
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS TEN YEARS
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<S> <C> <C> <C>
Asset Allocation Portfolio (Class A)* ___% ___% ___%
S&P 500 Index** ___% ___% ___0%
Lehman Brothers Aggregate Bond Index*** ___% ___% ___%
</TABLE>
___________________________
* Class A share returns do not reflect the 4.75% front-end sales charge
normally imposed on those shares. Class Z shares have no sales charge.
** An unmanaged index of 500 common stocks.
*** An unmanaged index of government, corporate and mortgage-backed securities
with an average maturity of approximately nine years.
3
<PAGE>
FEES AND EXPENSES
As an investor, you pay certain fees and expenses if you buy and hold shares of
the Fund. Shareholder fees are fees paid directly from your investment. Annual
fund operating expenses are deducted from Fund assets. The figures below are
based on Fund expenses during the fiscal year ended August 31, 1998.
<TABLE>
<S> <C>
SHAREHOLDER FEES
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price) . . . . . . . . . . . . . . None
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds,
whichever is less). . . . . . . . . . . . . . . . . . . . None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees . . . . . . . . . . . . . . . . . . . . . . 0.90%
Distribution and/or Service (12b-1) Fees. . . . . . . . . . None
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . 0.09%
Total Annual Fund Operating Expenses. . . . . . . . . . . . 0.99%
</TABLE>
EXAMPLE This example is intended to help you compare the cost of investing in
Class Z shares of the Fund with the cost of investing in other mutual funds. It
assumes that you invest $10,000 in the Fund for the time periods indicated, that
your investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<S> <C>
1 year . . . . . . . . . $____
3 years. . . . . . . . . ____
5 years. . . . . . . . . ____
10 years . . . . . . . . ____
</TABLE>
4
<PAGE>
SHAREHOLDER INFORMATION
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PURCHASING CLASS Z SHARES
Class Z shares are available only for investment by:
- Fortis, Inc. or its subsidiaries, and the following persons associated
with these companies: (a) officers, directors, employees or sales
representatives; (b) their children, grandchildren, parents,
grandparents or siblings; and (c) spouses/domestic partners of any
such persons;
- Fund directors and officers or their spouses/domestic partners; or
such persons' children, grandchildren, parents, grandparents, or
spouses/domestic partners of the preceding;
- Representatives of Fortis Investors (including agencies) or their
spouses; or such persons' children, grandchildren, parents,
grandparents, or spouses of any such persons; and
- Pension, profit sharing and other retirement plans created for the
benefit of any of the above persons.
You do not pay any sales charge either at the time of purchase or when you
redeem your shares and your shares are not subject to annual Rule 12b-1 fees.
DETERMINING YOUR PURCHASE PRICE
Your purchase price is equal to the Fund's net asset value per share. The net
asset value per share is determined as of the primary closing time for business
on the New York Stock Exchange (the "Exchange") on each day the Exchange is
open.
Your purchase price will be the next net asset value per share of the Fund
calculated after your purchase order is accepted by Fortis Investors
("Investors"), the Fund's underwriter. Orders generally must be received by
Investors prior to the close of the Exchange to receive that day's price. If
you purchase Fund shares through a broker-dealer other than Investors, your
order must be received by your broker-dealer prior to the close of the Exchange.
Investors will apply that day's price to the order if the broker-dealer places
the order with Investors by the end of Investors' business day.
The Fund's net asset value per share is determined by dividing the value of the
securities and other assets owned by the Fund, less all liabilities, by the
number of the Fund's shares outstanding. The securities owned by the Fund are
generally valued at market value. However, there are times when market values
are not readily available. In these cases, securities are valued at fair value
as determined in good faith by Advisers under supervision of the Fund's Board of
Directors.
HOW TO BUY SHARES
You may become a shareholder in the Fund with an initial investment of $500 or
more. If you invest under the Systematic Investment Plan, the minimum initial
investment is $25 for the Pre-Authorized Check Plan and $50 for any other
Systematic Investment Plan (except for telephone or wire orders).
The minimum subsequent investment is $50 for investments by mail ($25 for the
Pre-Authorized Check Plan), $100 for investments by telephone through the
automatic Fortis Information Line, and $500 for investments by telephone or
investments by wire.
The Fund may reject any purchase order or restrict purchases at any time.
5
<PAGE>
INVESTING BY TELEPHONE
Your registered representative may make your purchase ($500 minimum) by
telephoning the number on the cover page of this Prospectus. You must promptly
send your check and the Account Application which accompanies this Prospectus so
that Investors receives it within three business days. Please make your check
payable to Fortis Investors, Inc. and mail it with your Application to "CM-9651,
St. Paul, MN 55170-9651."
If you have a bank account authorization form on file, you may invest $100 -
$10,000 by telephone through the automated Fortis Information Line.
INVESTING BY WIRE
If you have an account with a commercial bank that is a member of the Federal
Reserve System, you may purchase shares ($500 minimum) by requesting your bank
to transmit immediately available funds (Federal Funds) by wire to:
U.S. Bank National Association
ABA #091000022, credit account no: 1-702-2514-1341
Fortis Funds Purchase Account
For further credit to: (your name)
Fortis Account NBR: (your account number)
Before making an initial investment by wire, your broker-dealer must telephone
Investors at the number on the cover page of this Prospectus to open your
account and obtain your account number. You must promptly send your Account
Application which accompanies this Prospectus to Investors at "CM-9614,
St. Paul, MN 55170-9614." You may make additional investments at any time even
if your initial investment was by mail. Your bank should transmit Federal Funds
using the instructions above.
INVESTING BY MAIL
You should complete and sign the Account Application which accompanies this
Prospectus. Please make your check or other negotiable bank draft payable to
Fortis Funds and mail it with your Application to "CM-9614, St. Paul, MN
55170-9614."
You may make additional purchases at any time by mailing a check or other
negotiable bank draft along with your confirmation stub. Be sure to identify
the account to which any such purchase is to be credited by specifying the
name(s) of the registered owner(s) and the account number.
SPECIAL PURCHASE PLANS
TAX SHELTERED RETIREMENT PLANS. Individual Retirement Accounts ("IRAs"),
Self-Employed, Pension, Profit Sharing and 403(b) accounts are available.
GIFTS OR TRANSFERS TO MINOR CHILDREN. Adults can make an irrevocable gift or
transfer of Fund shares in an account established for a minor.
SYSTEMATIC INVESTMENT PLAN. You may have $25 or more automatically withdrawn
each month from your checking account (see the Systematic Investment Plan
Authorization Agreement in the Account Application). A systematic investment
plan may lower your average cost per share through the principle of "dollar cost
averaging." Advisers may elect to send you confirmations for purchases made
under the Systematic Investment Plan quarterly, rather than following each
transaction.
6
<PAGE>
EXCHANGE PRIVILEGE
You may exchange your Class Z Fund shares for Class Z shares of Fortis Growth
Fund (the only other Fortis Fund offering Class Z shares) or for Class A shares
of any other Fortis Fund. You pay no exchange fee or additional sales charge
for exchanges.
You may initiate an exchange by writing to or telephoning your broker-dealer,
sales representative or the Fund. You may also use the automated Fortis
Information Line for exchanges of $100 - $100,000. You may make a telephone
exchange only if you have completed and returned the Telephone Exchange section
of the Account Application. During times of chaotic economic or market
circumstances, you may have difficulty reaching your broker-dealer, sales
representative or the Fund by telephone. A telephone exchange may be difficult
to implement at those times. (See "How to Sell Shares -- By Phone.")
An exchange of shares is a sale for federal income tax purposes and you may have
a taxable capital gain or loss.
Advisers has the right to change, terminate, impose charges on or restrict the
frequency of exchanges. You will receive at least 30 days' notice before any
such change is made.
HOW TO SELL SHARES
You may sell your shares on any day when the New York Stock Exchange is open.
Your redemption price will be the net asset value of your shares, less any
contingent deferred sales charge.
BY MAIL
If you redeem by mail, your redemption price will be the next net asset value of
your shares which is determined after the Fund receives your written redemption
request in proper form (and a properly endorsed stock certificate if one has
been issued).
To redeem by mail, send a written request to Fortis Funds, P.O. Box 64284, St.
Paul, MN 55164.
Your request should include the following information:
- Name of Fund
- Account number
- Dollar amount or number of shares to be redeemed
- Name on the account
- Signatures of all registered account owners
If you hold certificates for your shares, you must include them with your
request. You should send certificates by certified mail. These certificates
(and any stock powers included with your redemption request) must be endorsed
and executed exactly as the Fund shares are registered.
7
<PAGE>
No signature guarantee is required if you are the registered holder and the
redemption proceeds are sent to your address on the Fund's records. A written
redemption request requires a signature guarantee if:
- The Fund does not have the signature of the registered holder on file
and the redemption proceeds are greater than $25,000.
- The redemption proceeds are paid to someone other than the registered
holder.
- The redemption proceeds are sent to an address other than the address
on the Fund's records.
You may obtain a signature guarantee from a bank, broker-dealer, credit union,
national securities exchange, registered securities association, clearing agency
or savings association. A signature guarantee assures that a signature is
genuine and protects you from unauthorized account transfers.
BY PHONE
Your broker-dealer may place a redemption order by phone if it has a selling
agreement with Investors. The proceeds will be released after the Fund receives
appropriate written materials. If your broker-dealer receives your order prior
to the close of the Exchange and places the order with Investors by the end of
the business day, you will receive that day's price on the order. Some
broker-dealers may charge a fee to process redemptions.
You may also redeem up to $25,000 by calling the Fund at (800) 800-2000, ext.
3012, provided that:
- Your account is not a tax-qualified plan,
- The check is sent to the address on the Fund's records, and
- You have not changed your address on the Fund's records for at least
30 days.
In addition, you may use the automated Fortis Information Line for redemptions
of $500 - $25,000 on non-tax qualified accounts.
The telephone redemption procedure is automatically available. The Fund will
employ reasonable procedures to confirm that telephone instructions are genuine.
The Fund will not be responsible for any losses that may result from acting on
telephone instructions that it reasonably believes to be genuine. The Fund's
procedures will verify your address and social security number, tape record the
telephone call and provide written confirmation of the transaction. The
security measures for automated telephone redemptions using the Fortis
Information Line involve using a personal identification number and providing
written confirmation of the transaction.
You may have difficulty reaching your broker-dealer, sales representative or the
Fund by telephone during times of chaotic economic or market circumstances. If
you are unable to reach the Fund or its agents by telephone, written
instructions should be sent.
Advisers has the right to change, terminate or impose charges on the telephone
redemption privilege. You will receive at least 30 days' notice before any such
change is made.
PAYMENT OF REDEMPTION PROCEEDS
Your redemption proceeds generally will be paid as soon as possible, but not
later than three business days after receipt of a proper redemption request.
However, if your shares were recently purchased with non-guaranteed funds, such
as a personal check, the mailing of your redemption check may be delayed by up
to fifteen days. If you wish to avoid this delay, you should consider the wire
purchase method described under "How to Buy Shares."
8
<PAGE>
INVOLUNTARY REDEMPTIONS
The Fund has the right to redeem accounts that fall below $500 as a result of
selling or exchanging shares. If you actively participate in the Fund's
Systematic Investment Plan, your account will not be redeemed. Before redeeming
your account, the Fund will mail you a notice of its intention to redeem and
give you an opportunity to make an additional investment. If you do not make an
additional investment within 60 days from the date the notice was mailed, your
account will be redeemed.
SYSTEMATIC WITHDRAWAL PLAN
The Fund has a Systematic Withdrawal Plan, which provides for voluntary
automatic withdrawals of at least $50 monthly, quarterly, semiannually or
annually. Confirmations for redemptions made under the Systematic Withdrawal
Plan may be sent to you quarterly, rather than following each transaction. For
further information about the Systematic Withdrawal Plan, contact your
broker-dealer or sales representative.
DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
The Fund pays quarterly dividends from net investment income and makes
distributions of any realized capital gains annually.
Dividend and capital gains distributions will be reinvested in additional Fund
shares of the same class (at net asset value). However, you may request that
dividends and/or capital gain distributions be sent to you in cash or reinvested
(at net asset value) in shares of the same class of another Fortis Fund. If
dividends and capital gains distributions are reinvested in the same Fund, the
reinvestment takes place on the dividend record date. If they are reinvested
in another Fortis Fund, processing normally takes one business day. If you
elect cash payment, a check will be mailed within three business days after
the dividend record date.
Prior to purchasing shares of the Fund, you should consider the impact of
dividend or capital gains distributions which are expected to be announced or
which have been announced but not paid. If you purchase shares shortly before
the record date for such a distribution, you will pay the full price for the
shares and then receive a portion of that price back as a taxable distribution.
TAX CONSIDERATIONS
Some of the common tax consequences of investing in the Fund are discussed
below. However, because everyone's tax situation is unique, be sure to consult
your tax adviser.
TAXES ON DISTRIBUTIONS
The Fund will distribute substantially all of its net income and capital gains
to its shareholders. For most investors, these distributions will be taxable,
whether paid in cash or reinvested.
Distributions paid from the Fund's net investment income are taxable as ordinary
income. Distributions paid from the Fund's long-term capital gains are taxable
as long-term gains, regardless of how long you have held your shares.
TAXES ON TRANSACTIONS
If you sell or exchange your Fund shares, you will have a taxable event that may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.
Information about the tax status of each year's distributions will be mailed
annually.
9
<PAGE>
SHAREHOLDER INQUIRIES
You should direct your inquiries to your broker-dealer or sales representative
or to the Fund at the telephone number or mailing address listed on the cover of
this Prospectus. A $10 fee will be charged for copies of Annual Account
Summaries older than the preceding year.
10
<PAGE>
FUND MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Fortis Advisers, Inc. ("Advisers") is the investment adviser for the Fund.
Advisers also serves as the Fund's transfer agent and dividend agent. Advisers
has been managing investment company portfolios since 1949. In addition to
providing investment advice, Advisers is responsible for managing the Fund's
business affairs, subject to the overall authority of the Board of Directors.
Advisers' address is that of the Fund.
The Fund pays Advisers a monthly fee for providing investment advisory services.
During its most recent fiscal year, the Fund paid an investment advisory fee to
Advisers equal to 0.90% of the Fund's average daily net assets.
PORTFOLIO MANAGERS
Howard G. Hudson supervises the portfolio management of the fixed-income portion
of the Fund and Lucinda S. Mezey supervises the portfolio management of the
equity portion of the Fund. Charles L. Mehlhouse has been primarily responsible
for the day-to-day management of the equity portion of the Fund since May 1996.
Maroun M. Hayek, Robert C. Lindberg, Christopher J. Pagano, Ho Wang and
Christopher J. Woods are primarily responsible for the day-to-day management of
the fixed-income portion of the Fund. Mr. Hayek has managed the Fund since
1988, Mr. Lindberg since 1993, Mr. Pagano since 1996, Mr. Wang since 1998, and
Mr. Woods since 1993.
Additional information about the Fund's investment supervisors and portfolio
managers is set forth below.
- - Mr. Hudson, an Executive Vice President and Head of Fixed Income
Investments of Advisers since 1991, has been managing debt securities for
Fortis, Inc. since 1991.
- - Ms. Mezey, an Executive Vice President and Head of Equity Investments of
Advisers since October 1997, manages equity securities for Advisers. From
1995 to October 1997, she was Chief Investment Officer, Alex Brown Capital
Advisory and Trust Co., Baltimore, Maryland. From 1970 to 1995, she was
employed by PNC Bank, Philadelphia, Pennsylvania, with her last position
being Senior Vice President and Head of Equity Investments.
- - Mr. Lindberg, a Vice President of Advisers since 1993, has been managing
debt securities for Advisers since that time.
- - Mr. Hayek, a Vice President of Advisers, has been managing debt securities
for Fortis, Inc. since 1987.
- - Mr. Pagano, a Vice President of Advisers since 1996, has been involved in
management of debt securities for Advisers since March 1996. Prior to
that, Mr. Pagano was a Government Strategist for Merrill Lynch in New York,
New York.
- - Mr. Wang, a Vice President of Advisers since 1998, has been managing
non-investment grade fixed-income securities since July 1998. From October
1995 to June 1998, Mr. Wang was a Senior Securities Analyst for Lord,
Abbett & Co. in New York, New York. From 1992 to October 1995, he was a
portfolio manager for New York Life in New York, New York.
- - Mr. Woods, a Vice President of Advisers since 1995, has been managing debt
securities for Fortis, Inc. since 1993.
- - Mr. Mehlhouse, a Vice President of Advisers since 1996, manages equity
securities for Advisers. From 1993 to May 1996, Mr. Mehlhouse was a
portfolio manager for Marshall & Ilsley Bank Corporation in Milwaukee,
Wisconsin.
11
<PAGE>
MORE INFORMATION ON THE FUND'S OBJECTIVE, INVESTMENT STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
The Fund's objective, which is described above under "The Fund," may be changed
without shareholder approval.
INVESTMENT STRATEGIES
The principal investment strategies of the Fund are described above under "The
Fund," and in more detail below. These are the strategies that Advisers
believes are most likely to be important in trying to achieve the Fund's goal.
Of course, there is no guarantee that the Fund will achieve its goal. You
should be aware that the Fund may also use strategies and invest in securities
that are not described below, but are described in the Statement of Additional
Information.
In selecting equity securities for the Fund's portfolio, Advisers uses a "bottom
up" investment style in which stock selection is driven primarily by the merits
of the company itself. Advisers invests based on a concept of growth potential,
seeking to identify companies whose earnings and revenue growth potential exceed
industry averages. In addition to superior earnings growth potential, Advisers
seeks companies which it believes to be well managed with above average returns
on equity and invested capital, healthy balance sheets and the potential to gain
market share. Companies of this nature typically have above average growth
potential and a correspondingly higher than average valuation level as measured
by price to earnings, price to cash flow and price to book value ratios.
In an attempt to respond to adverse market, economic, political or other
conditions, the Fund may invest, for temporary defensive purposes, without limit
in high grade preferred stocks, bonds, other fixed-income securities, short-term
money market instruments, commercial paper, obligations of banks or the U.S.
Government, other high quality short-term debt instruments or cash. Being
invested in these securities may keep the Fund from participating in a market
upswing and prevent the Fund from achieving its investment objective.
DURATION
The Fund will attempt to maintain an average effective duration of three to
seven years for the debt securities portion of its portfolio. Effective
duration, one measure of interest rate risk, measures how much the value of a
security is expected to change with a given change in interest rates. The
longer a security's effective duration, the more sensitive its price to changes
in interest rates. For example, if interest rates were to increase by one
percentage point, the market value of a bond with an effective duration of five
years would decrease by 5%, with all other factors being constant. Effective
duration is based on assumptions and subject to a number of limitations. It is
most useful when interest rate changes are small, rapid and occur equally in
short-term and long-term securities. In addition, it is difficult to calculate
precisely for bonds with prepayment options, such as mortgage-related
securities, because the calculation requires assumptions about prepayment rates.
PORTFOLIO TURNOVER
Before investing in any mutual fund, you should review its portfolio turnover
rate for an indication of the potential effect of transaction costs on the
fund's future returns. In general, the greater the volume of buying and selling
by the fund, the greater the impact that brokerage commissions and other
transaction costs will have on its return. Also, funds with high portfolio
turnover rates may be more likely than low-turnover funds to generate capital
gains that must be distributed to shareholders as taxable income. While the
Fund generally does not invest or trade for short-term profits, it is actively
managed and the portfolio managers may trade securities frequently. As a
result, the Fund has historically had portfolio turnover rates near 100%. The
"Financial Highlights" section of this Prospectus shows the Fund's historical
portfolio turnover rate.
12
<PAGE>
PRINCIPAL RISKS
The principal risks of investing in the Fund are summarized above under "The
Fund." More information about Fund risks is presented below. Please remember,
you may lose money if you invest in the Fund.
- - MARKET RISK. All stocks are subject to price movements due to changes in
general economic conditions, changes in the level of prevailing interest rates,
changes in investor perceptions of the market, or the outlook for overall
corporate profitability.
- - COMPANY RISK. Individual stocks can perform differently than the overall
market. This may be a result of specific factors such as changes in corporate
profitability due to the success or failure of specific products or management
strategies, or it may be due to changes in investor perceptions regarding a
company.
- - SECTOR RISK. The stocks of companies within specific industries or sectors
of the economy can periodically perform differently than the overall stock
market. This can be due to changes in such things as the regulatory or
competitive environment or to changes in investor perceptions of a particular
industry or sector.
- - RISKS OF GROWTH STOCKS. The Fund focuses on stocks which Advisers believes
have earnings and revenue growth potential that exceed industry averages. These
"growth stocks" typically trade at higher multiples of current earnings than
other stocks. Therefore, their prices may be more sensitive to changes in
current or expected earnings than the prices of other stocks. If Advisers'
assessment of the prospects for the company's earning growth is wrong, or its
judgment about how other investors will value the company's earnings growth is
wrong, then the price of the company's stock may fall or not approach the value
that Advisers has placed on it.
- - INTEREST RATE RISK. Debt securities in the Fund will fluctuate in value with
changes in interest rates. In general, debt securities will increase in value
when interest rates fall and decrease in value when interest rates rise. Longer
term debt securities are generally more sensitive to interest rate changes. In
addition, the Fund's investments in zero coupon obligations may be highly
volatile in response to changing interest rates.
- - CREDIT OR DEFAULT RISK. The Fund is subject to the risk that the issuers of
debt securities it holds will not make payments on the securities or that the
other party to a contract (such as a securities lending agreement) will default
on its obligations. There is also the risk that an issuer could suffer adverse
changes in financial condition that could lower the credit quality of a
security. This could lead to greater volatility in the price of the security
and in shares of the Fund. Also, a change in the credit quality rating of a
bond can affect the bond's liquidity and make it more difficult for the Fund to
sell.
- - RISKS OF HIGH YIELD/HIGH RISK SECURITIES. The Fund's investments in
corporate bonds may include non-investment grade fixed-income obligations.
Non-investment grade obligations are commonly referred to as "high yield"
securities or "junk bonds." Although these securities usually offer higher
yields than investment grade securities, they also involve more risk. High
yield bonds may be more susceptible to real or perceived adverse economic
conditions than investment grade bonds. In addition, the secondary trading
market may be less liquid. High yield securities generally have more volatile
prices and carry more risk to principal than investment grade securities. The
Fund may invest up to 30% of its total assets in securities rated as low as Caa
by Moody's, CCC by Standard & Poor's or comparably rated by another rating
agency. Securities in the Caa/CCC rating category are considered to be of poor
standing and are predominantly speculative. These securities may be in default,
or there may be present elements of danger with respect to the payment of
principal or interest.
- - CALL RISK. Many corporate bonds may be redeemed ("called") at the option of
the issuer before their stated maturity date. In general, an issuer will call
its bonds if they can be refinanced by issuing new bonds which bear a lower
interest rate. The Fund is subject to the possibility that during periods of
falling interest rates, a bond issuer will call its bonds. The Fund would then
be forced to invest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income.
13
<PAGE>
- - PREPAYMENT RISK. Because the Fund may invest in mortgage-related securities,
it may be subject to prepayment risk. Prepayment risk is the risk that falling
interest rates could cause prepayments of mortgage-related securities to occur
more quickly than expected. This occurs because, as interest rates fall, more
homeowners refinance the mortgages underlying these securities. The Fund must
reinvest the prepayments at a time when rates on new mortgages are falling,
reducing the income of the Fund. In addition, when interest rates fall, prices
on mortgage-related securities may not rise as much as for other types of
comparable debt securities because investors may anticipate an increase in
mortgage prepayments.
- - EXTENSION RISK. Mortgage-related securities also are subject to extension
risk, which is the risk that rising interest rates could cause homeowners to
prepay their mortgages more slowly than expected, resulting in slower
prepayments of mortgage-related securities. This would, in effect, convert a
short- or medium-duration mortgage-related security into a longer-duration
security, increasing its sensitivity to interest rate changes and causing its
price to decline.
- - RISKS OF FOREIGN SECURITIES. The Fund may invest up to 20% of its assets in
foreign securities. Foreign investing involves risks not typically associated
with U.S. investing. The Fund may experience a decline in net asset value
resulting from changes in exchange rates between the U.S. dollar and foreign
currencies. Other risks of foreign investing include limited liquidity and
volatile prices of non-U.S. securities, limited availability of information
regarding non-U.S. companies, investment and repatriation restrictions, and
foreign taxation.
- - RISKS OF SECURITIES LENDING. The Fund may lend its portfolio securities.
When the Fund loans its portfolio securities, it will receive collateral equal
to at least 100% of the value of the loaned securities. Nevertheless, the Fund
risks a delay in the recovery of the loaned securities, or even the loss of
rights in the collateral deposited by the borrower, if the borrower should fail
financially.
- - YEAR 2000 ISSUES. Like other mutual funds and financial and business
organizations around the world, the Fund could be adversely affected if the
computer systems used by the Fund, Advisers and other service providers and
entities with computer systems that are linked to the Fund's records do not
properly process and calculate date-related information and data from and after
January 1, 2000. The Fund and Advisers and its affiliates are taking steps that
they believe are reasonably designed to address year 2000 issues with respect to
the computer systems they use and to obtain satisfactory assurances that
comparable steps are being taken by each of the Fund's other major service
providers. However, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Fund. In addition, the prices of
securities in which the Fund invests could be adversely affected by year 2000
problems experienced by the issuers of those securities.
- - MANAGEMENT RISK. The Fund is actively managed by professionals with
extensive money management experience and expertise. The performance of the
Fund will reflect in part the ability of Advisers to select securities which are
suited to achieving the Fund's investment objective. Due to its active
management, the Fund could underperform other mutual funds with similar
investment objectives or the market generally.
14
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table that follows presents performance information about the currently
outstanding classes of shares of the Fund. No Class Y shares were outstanding
as of the date of this Prospectus. This information is intended to help you
understand the Fund's financial performance for the past five years. Some of
this information reflects financial results for a single Fund share. The total
returns in the table represents the rate that you would have earned or lost on
an investment in the Fund, assuming you reinvested all of your dividends and
distributions.
This information has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the Fund's financial statements, is included
in the Fund's annual report, which is available upon request.
<TABLE>
<CAPTION>
Six
Months
Ended
February Year Ended
ASSET ALLOCATION PORTFOLIO - CLASS A 28, 1999 Year Ended August 31, October 31,
- ----------------------------------------------- -----------------------------------------------------------------------------
1998 1997 1996 1995++ 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period . . . . . . $ 18.98 $ 16.48 $ 16.52 $ 14.44 $ 15.43 $ 14.00
- ------------------------------------------------------------------------------------------------------------------------------
Operations:
Investment income - net . . . . . . . . . . . .39 .39 .47 .43 .37 .42
Net realized and unrealized gains on
investments . . . . . . . . . . . . . . . . . .13 3.47 .29 2.14 (.31) 1.52
- ------------------------------------------------------------------------------------------------------------------------------
Total from operations. . . . . . . . . . . . . . .52 3.86 .76 2.57 .06 1.94
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From investment income - net. . . . . . . . . (.41) (.41) (.47) (.40) (.33) (.51)
From net realized gains . . . . . . . . . . . (2.18) (.95) (.32) (.09) (.72) --
Excess distributions of net realized gains. . -- -- (.01) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders. . . . . . . (2.59) (1.36) (.80) (.49) (1.05) (.51)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period . . . . . . . . . $ 16.91 $ 18.98 $ 16.48 $ 16.52 $ 14.44 $ 15.43
- ------------------------------------------------------------------------------------------------------------------------------
Total return @ . . . . . . . . . . . . . . . . . 2.71% 24.62% 4.73% 18.25% .48% 14.20%
Net assets end of period (000s omitted). . . . . $151,920 $156,734 $136,656 $132,939 $119,395 $108,488
Ratio of expenses to average daily net assets. . 1.44% 1.48% 1.50% 1.57%* $1.55% 1.58%
Ratio of net investment income to average daily
net assets. . . . . . . . . . . . . . . . . . 2.07% 2.22% 2.85% 3.31%* 2.60% 2.90%
Portfolio turnover rate. . . . . . . . . . . . . 104% 109% 89% 94% 94% 103%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------
Six Months
Ended Year Ended August 31,
February 28, -----------------------------------------
Asset Allocation Portfolio 1999 1998 1997 1996 1995+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . . $18.87 $16.40 $16.46 $14.27
- ------------------------------------------------------------------------------------------------------------------
Operations:
Investment income - net . . . . . . . . . . . . . . . . .29 .27 .37 .39
Net realized and unrealized gains on investments. . . . .13 3.47 .29 2.26
- ------------------------------------------------------------------------------------------------------------------
Total from operations: . . . . . . . . . . . . . . . . . . .42 3.74 .66 2.65
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From investment income - net. . . . . . . . . . . . . . (.31) (.32) (.39) (.37)
From net realized gains . . . . . . . . . . . . . . . . (2.18) (.95) (.32) (.09)
Excess distributions of net realized gains. . . . . . . -- -- (.01) --
- ------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders. . . . . . . . . . . . (2.49) (1.27) (.72) (.46)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . . $16.80 $18.87 $16.40 $16.46
- ------------------------------------------------------------------------------------------------------------------
Total return@. . . . . . . . . . . . . . . . . . . . . . . 2.14% 23.92% 4.12% 19.00%
Net assets end of period (000s omitted). . . . . . . . . . $9,928 $7,462 $4,411 $ 692
Ratio of expenses to average daily net assets. . . . . . . 1.99% 2.03% 2.05% 2.12%*
Ratio of net investment income to
average daily net assets. . . . . . . . . . . . . . . . . 1.50% 1.67% 2.34% 2.51%*
Portfolio turnover rate. . . . . . . . . . . . . . . . . . 104% 109% 89% 94%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------
Six Months
Ended Year Ended August 31,
February 28, -----------------------------------------
Asset Allocation Portfolio 1999 1998 1997 1996 1995+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . . $18.81 $16.35 $16.41 $14.27
- ------------------------------------------------------------------------------------------------------------------
Operations:
Investment income - net . . . . . . . . . . . . . . . . .29 .26 .37 .39
Net realized and unrealized gains on investments. . . . .13 3.47 .29 2.21
- ------------------------------------------------------------------------------------------------------------------
Total from operations: . . . . . . . . . . . . . . . . . . .42 3.73 .66 2.60
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From investment income - net. . . . . . . . . . . . . . (.31) (.32) (.39) (.37)
From net realized gains . . . . . . . . . . . . . . . . (2.18) (.95) (.32) (.09)
Excess distributions of net realized gains. . . . . . . -- -- (.01) --
- ------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders. . . . . . . . . . . . (2.49) (1.27) (.72) (.46)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . . $16.74 $18.81 $16.35 $16.41
- ------------------------------------------------------------------------------------------------------------------
Total return@. . . . . . . . . . . . . . . . . . . . . . . 2.15% 23.93% 4.13% 18.64%
Net assets end of period (000s omitted). . . . . . . . . . $5,831 $4,789 $2,641 $ 777
Ratio of expenses to average daily net assets. . . . . . . 1.99% 2.03% 2.05% 2.12%*
Ratio of net investment income to average daily net assets 1.51% 1.67% 2.33% 2.52%*
Portfolio turnover rate. . . . . . . . . . . . . . . . . . 104% 109% 89% 94%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CLASS H
--------------------------------------------------------
Six Months
Ended Year Ended August 31,
February 28, -----------------------------------------
Asset Allocation Portfolio 1999 1998 1997 1996 1995+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . . $ 18.86 $ 16.39 $ 16.44 $14.27
- ------------------------------------------------------------------------------------------------------------------
Operations:
Investment income - net . . . . . . . . . . . . . . . . .29 .27 .38 .39
Net realized and unrealized gains on investments. . . . .13 3.47 .29 2.24
- ------------------------------------------------------------------------------------------------------------------
Total from operations: . . . . . . . . . . . . . . . . . . .42 3.74 .67 2.63
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From investment income - net. . . . . . . . . . . . . . (.31) (.32) (.39) (.37)
From net realized gains . . . . . . . . . . . . . . . . (2.18) (.95) (.32) (.09)
Excess distributions of net realized gains. . . . . . . -- -- (.01) --
- ------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders. . . . . . . . . . . . (2.49) (1.27) (.72) (.46)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . . $ 16.79 $ 18.86 $ 16.39 $16.44
- ------------------------------------------------------------------------------------------------------------------
Total return@. . . . . . . . . . . . . . . . . . . . . . . 2.15% 23.93% 4.19% 18.86%
Net assets end of period (000s omitted). . . . . . . . . . $22,979 $17,142 $10,904 $4,676
Ratio of expenses to average daily net assets. . . . . . . 1.99% 2.03% 2.05% 2.12%*
Ratio of net investment income to average daily net assets 1.50% 1.67% 2.32% 2.54%*
Portfolio turnover rate. . . . . . . . . . . . . . . . . . 104% 109% 89% 94%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
+ For the period from November 14, 1994 (initial offering of shares) to
August 31, 1995.
++ Ten-month period ended August 31, 1995.
@ These are the total returns during the period, including reinvestment of
all dividend and capital gains distributions without adjustments for sales
charge.
<PAGE>
[LOGO]
BULK RATE
U.S. POSTAGE
PAID
Permit No. 3794
Minneapolis, MN
FORTIS FINANCIAL GROUP
P.O. Box 64284
St. Paul, Minnesota 55164-0284
PROSPECTUS
Dated July 1, 1999
- - Asset Allocation Portfolio
Class Z shares
SEC file number: 811-05355
[LOGO]
FORTIS FINANCIAL GROUP
Fortis Advisers, Inc. (fund management since 1949)
Fortis Investors, Inc. (principal underwriter; member NASD, SIPC)
Fortis Benefits Insurance Company & Fortis Insurance Company (issuers of FFG's
insurance products)
P.O. Box 64284 - St. Paul, MN 55164-0284
- (800) 800-2000
http://www.ffg.us.fortis.com
98225-C- Fortis 1/99
More information about the Fund is available in the Fund's Statement of
Additional Information (SAI) and annual and semiannual reports.
- - STATEMENT OF ADDITIONAL INFORMATION. The SAI provides more details about the
Fund and its policies. A current SAI is on file with the Securities and
Exchange Commission (SEC) and is incorporated into this Prospectus by reference,
which means that it is legally considered part of this Prospectus.
- - ANNUAL AND SEMIANNUAL REPORTS. Additional information about Fund investments
is available in the Fund's annual and semiannual reports to shareholders. In
the Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.
You can obtain a free copy of the Fund's SAI and/or the Fund's most recent
annual or semiannual report by calling (800) 800-2000, extension 3012. The
material you request will be sent by first-class mail, or other means designed
to ensure equally prompt delivery, within three business days of receipt of
request.
You can also obtain copies by visiting the SEC's public reference room in
Washington, DC, or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
(800) SEC-0330.
Information about the Fund is available on the Internet. Text-only versions of
the Fund documents can be viewed online or downloaded from the SEC's Internet
site at http://www.sec.gov.
The Fortis logo and Fortis-SM- are service marks of Fortis AMEV and
Fortis AG.
<PAGE>
ASSET ALLOCATION PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
EACH A SERIES OF FORTIS ADVANTAGE PORTFOLIOS, INC.
FORTIS VALUE FUND
FORTIS GROWTH & INCOME FUND
FORTIS CAPITAL FUND
EACH A SERIES OF FORTIS EQUITY PORTFOLIOS, INC.
FORTIS GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
DATED JULY 1, 1999
Asset Allocation Portfolio ("Asset Allocation Fund"), Fortis Capital
Appreciation Portfolio ("Capital Appreciation Fund"), Fortis Value Fund ("Value
Fund"), Fortis Growth & Income Fund ("Growth & Income Fund"), Fortis Capital
Fund ("Capital Fund") and Fortis Growth Fund, Inc. ("Growth Fund") are
individually referred to as a "Fund" and collectively referred to as the
"Funds." This Statement of Additional Information is not a prospectus.
This Statement of Additional Information relates to the Prospectus dated
January 1, 1999 for all classes of each Fund other than the Class Z shares of
Asset Allocation Fund, and the Prospectus dated July 1, 1999 for the Class Z
shares of Asset Allocation Fund, and should be read in conjunction with the
appropriate Prospectus. The financial statements included as part of the
Funds' Annual Report to Shareholders for the fiscal year ended August 31, 1998
and the financial statements included as part of the Funds' Semi-Annual Report
to Shareholders for the six months ended February 28, 1999 are incorporated by
reference into this Statement of Additional Information. Copies of the Funds'
Prospectuses, Annual Report and/or Semi-Annual Report are available, without
charge, by writing or calling the Funds, P.O. Box 64284, St. Paul, Minnesota
55164 (telephone: (651) 738-4000 or (800) 800-2000).
<PAGE>
TABLE OF CONTENTS
Page
Fund History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of the Funds . . . . . . . . . . . . . . . . . . . . . . . .
Investment Policies and Restrictions . . . . . . . . . . . . . . . . . .
Investment Practices and Risk Considerations . . . . . . . . . . . . . .
Management of the Funds. . . . . . . . . . . . . . . . . . . . . . . . .
Principal Holders of Securities. . . . . . . . . . . . . . . . . . . . .
Investment Advisory and Other Services . . . . . . . . . . . . . . . . .
Brokerage Allocation and Other Practices . . . . . . . . . . . . . . . .
Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pricing of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriter and Distribution of Shares . . . . . . . . . . . . . . . . .
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Service Providers. . . . . . . . . . . . . . . . . . . . . . . . .
Limitation of Director Liability . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix A
Description of Futures, Options and Forward Contracts . . . . . . .
Appendix B
Corporate Bond, Preferred Stock and Commercial Paper Ratings. . . .
<PAGE>
FUND HISTORY
Asset Allocation Fund and Capital Appreciation Fund are portfolios of
Fortis Advantage Portfolios, Inc. ("Fortis Advantage") which was incorporated in
Minnesota in 1987. Asset Allocation Fund and Capital Appreciation Fund
commenced operations on January 4, 1988. Value Fund, Growth & Income Fund and
Capital Fund are the three portfolios of Fortis Equity Portfolios, Inc. ("Fortis
Equity") which was incorporated in Minnesota in 1949. Value Fund and Growth &
Income Fund commenced operations on January 2, 1996 and Capital Fund commenced
operations on June 8, 1949. Fortis Growth Fund, Inc. ("Fortis Growth") was
incorporated in Minnesota in 1958 and its single portfolio commenced operations
on March 31, 1963.
DESCRIPTION OF THE FUNDS
Fortis Advantage, Fortis Equity and Fortis Growth are registered with the
Securities and Exchange Commission under the Investment Company Act of 1940 (the
"1940 Act") as open-end diversified management investment companies. Fortis
Advantage currently has three investment portfolios (only two of which are
discussed in this Statement of Additional Information) and Fortis Equity has
three investment portfolios; Growth Fund has a single portfolio. As a
fundamental policy, each Fund operates as an open-end, diversified investment
company as defined under the 1940 Act. Open-end means that it generally must
redeem an investor's shares upon request. In order to be diversified, each
Fund must meet the following requirements:
At least 75% of the value of the Fund's total assets will be
represented by cash and cash items (including receivables), Government
securities, securities of other investment companies, and other securities
for the purposes of this calculation limited in respect of any one issuer
to an amount not greater in value than 5% of the value of the total
assets of the Fund and to not more than 10% of the outstanding voting
securities of such issuer.
Fortis Advantage, Fortis Equity and Fortis Growth may establish other
portfolios, each corresponding to a distinct investment portfolio and a distinct
series of their common stock.
INVESTMENT POLICIES AND RESTRICTIONS
Each Fund's investment objective and, except as otherwise noted, the
policies by which each Fund seeks to achieve its objective, may be changed
without the approval of shareholders. No changes are contemplated at this time,
but a change in investment objective or policies could result in a Fund no
longer being appropriate for an investor.
Any investment policy or restriction in the Prospectus or this Statement of
Additional Information which involves a maximum percentage of securities or
assets, except those dealing with borrowing and illiquid securities, shall not
be considered to be violated unless an excess over the percentage occurs
immediately after an acquisition of securities or utilization of assets
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and such excess results therefrom.
Some investment policies and restrictions are fundamental and may be
changed only by the approval of a majority of a Fund's shareholders. In this
situation, majority means the lesser of (i) 67% of the Fund's outstanding shares
present at a meeting of the holders if more than 50% of the outstanding shares
are present in person or by proxy or (ii) more than 50% of the Fund's
outstanding shares.
INVESTMENT POLICIES -- ASSET ALLOCATION FUND
The Fund will endeavor to achieve its investment objective by following a
flexible asset allocation strategy that contemplates shifts, which may be
frequent, among a wide range of investments and markets. Advisers has broad
latitude in selecting the class of investments and market sectors in which the
Fund will invest. Asset Allocation Fund is not required to maintain a portion
of its investments in each of its permitted investment types. A shareholder of
the Fund confers substantially more investment discretion on the investment
adviser, enabling the investment adviser to invest in a wide variety of
investment securities.
Depending upon prevailing economic and market conditions, Asset Allocation
Fund may at any given time be primarily comprised of equity securities
(including debt securities convertible into equity securities), short-term money
market securities, investment grade bonds and other debt securities, or any
combination thereof. For example, during periods when Advisers believes that
the overall return on equity securities will exceed the return on debt
securities, the Fund may be fully or substantially invested in equity
securities. The Fund normally would be invested primarily in debt securities
during periods when Advisers believes that the total return from investing in
debt securities will exceed the return on equity securities. Finally, during
periods when Advisers believes interest rates will rise, the Fund may be
primarily invested in short-term money market securities.
Equity securities in which the Fund may invest include common stocks,
preferred stocks and securities convertible into common stocks, all with growth
potential. In addition to its investments in equity securities and in
obligations of the U.S. Government, its agencies, and instrumentalities, Asset
Allocation Fund may invest in a variety of long, intermediate and short-term
debt securities. Such instruments may include corporate bonds, bank obligations
and commercial paper.
The Fund may invest up to 30% of its total assets in lower rated corporate
bonds commonly known as "junk bonds" and may also invest up to 10% of its total
assets in corporate bonds that are rated in one of the four highest rating
categories (such as BBB or above), and at the same time are rated below such
categories by another nationally recognized agency (or in the alternative, any
such bonds may be included with those subject to the 30% limitation on lower
rated bonds). The Fund may retain a security whose rating has changed if the
security otherwise meets the Fund's criteria. The Fund will not invest in bonds
rated below Caa by Moody's or CCC by S&P, or comparably rated by another
nationally recognized rating agency. Securities in
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the Caa/CCC rating categories are considered to be of poor standing and are
predominantly speculative. Lower ratings may reflect a greater possibility that
the financial condition of the issuer, or adverse changes in general economic
conditions, or both, may impair the ability of the issuer to make payments of
interest and principal. Additionally, investments in securities rated Caa or CCC
involve significant risk exposure to adverse conditions. Such securities may be
in default, or there may be present elements of danger with respect to the
payment of principal or interest. For a description of ratings assigned by both
Moody's and S&P, see the Appendix.
The bank obligations in which the Fund may invest are: (i) obligations
(including certificates of deposit and bankers acceptances) of U.S. banks,
savings and loan associations, and savings banks, which institutions have total
assets (as of the date of their most recent annual financial statements at the
time of investment) of not less than $1 billion; (ii) U.S. dollar denominated
obligations of Canadian chartered banks, London branches of U.S. banks, and U.S.
branches or agencies of foreign banks which meet the asset size referred to in
(i) above; and (iii) obligations of the institutions referred to in (i) above
which have total assets of less than $1 billion, provided that the amount of the
obligations purchased does not exceed $100,000 for any one such institution, and
the payment of the principal is insured by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation.
The Fund may invest without limitation in commercial paper issued by U.S.
corporations or affiliated foreign corporations and rated (or guaranteed by a
company whose commercial paper is rated) at the date of investment Prime-2 or
higher by Moody's or A-2 or higher by S&P, or comparably rated by another
nationally recognized rating agency, or, if not rated, issued by a corporation
having an outstanding debt issue rated A or better by Moody's or S&P, or
comparably rated by another nationally recognized rating agency, and, if issued
by an affiliated foreign corporation, such commercial paper (not to exceed in
the aggregate 20% of the Fund's net assets) is U.S. dollar denominated and not
subject at the time of purchase to foreign tax withholding.
INVESTMENT POLICIES -- CAPITAL APPRECIATION FUND
Capital Appreciation Fund's policy is to invest, under normal
circumstances, at least 65% of its total assets (exclusive of collateral in
connection with securities lending) in: (a) common stocks of small and
medium-sized companies that are early in their life cycles, but which have the
potential to become major enterprises ("emerging growth companies"); and
(b) equity securities of some more established companies whose rates of earnings
growth are expected to accelerate because of special factors such as new
products, changes in consumer demand, basic changes in the economic environment
or rejuvenated management.
The Fund may also write covered call and secured put options and purchase
call and put options on securities and stock indexes in an effort to increase
total return and for hedging purposes and may purchase and sell stock index
futures contracts and options thereon for hedging purposes.
INVESTMENT RESTRICTIONS -- ASSET ALLOCATION FUND AND CAPITAL APPRECIATION FUND
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The following investment restrictions are fundamental and may be changed
only by the approval of shareholders. Neither Fund will:
(1) Purchase securities on margin or otherwise borrow money or issue
senior securities, except that the Funds, in accordance with their
investment objectives and policies, may purchase securities on a
when-issued and delayed delivery basis, within the limitations set
forth in the Prospectus and Statement of Additional Information.
Fortis Advantage may also obtain such short-term credit as it needs
for the clearance of securities transactions, and may borrow from
banks, for the account of either Fund, as a temporary measure to
facilitate redemptions (but not for leveraging or investment) an
amount that does not exceed 10% of the value of a Fund's total assets.
No additional investment securities may be purchased by a Fund while
outstanding borrowings exceed 5% of the value of such Fund's total
assets.
(2) Mortgage, pledge or hypothecate its assets, except in an amount not
exceeding 10% of the value of its total assets to secure temporary or
emergency borrowing.
(3) Invest in commodities or commodity contracts, other than for hedging
purposes only.
(4) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities, Fortis Advantage may be deemed an underwriter under
applicable laws.
(5) Participate on a joint or a joint and several basis in any securities
trading account.
(6) Invest in real estate, except a Fund may invest in securities issued
by companies owning real estate or interests therein.
(7) Make loans to other persons. Repurchase agreements, the lending of
securities and the acquiring of debt securities in accordance with the
Prospectus and Statement of Additional Information are not considered
to be "loans" for this purpose.
(8) Concentrate its investments in any particular industry, except that
(i) it may invest up to 25% of the value of its total assets in any
particular industry, and (ii) there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S. Government
or its agencies and instrumentalities, or obligations of domestic
commercial banks. As to utility companies, gas, electric, water and
telephone companies will be considered as separate industries. As to
finance companies, the following categories will be considered as
separate industries: (a) captive automobile finance, such as General
Motors Acceptance Corp. and Ford Motor Credit Corp.; (b) captive
equipment finance companies, such as Honeywell Finance Corporation and
General Electric Credit Corp.; (c) captive retail finance companies,
such as Macy Credit Corp. and Sears Roebuck Acceptance Corp.;
(d) consumer loan companies, such as Beneficial Finance Corporation
and Household Finance Corporation; (e) diversified finance companies
such as CIT Financial Corp., Commercial Credit Corporation and Borg
Warner Acceptance Corp.; and (f) captive oil finance companies, such
as Shell Credit, Inc., Mobil Oil Credit Corp. and Texaco Financial
Services, Inc.
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(9) Purchase from or sell to any officer, director, or employee of Fortis
Advantage, or Advisers or Investors, or any of their officers or
directors, any securities other than shares of Fortis Advantage's
common stock.
(10) Make short sales, except for sales "against the box." While a short
sale is made by selling a security the Fund does not own, a short sale
is "against the box" to the extent that the Fund contemporaneously
owns or has the right to obtain securities identical to those sold
short at no added cost.
The following investment restrictions may be changed without shareholder
approval. Neither Fund will:
(1) Invest more than 5% of the value of its total assets in securities of
other investment companies, except in connection with a merger,
consolidation, acquisition or reorganization.
(2) Invest in a company for the purposes of exercising control or
management.
(3) Buy or sell foreign exchange, except as incidental to the purchase or
sale of permissible foreign investments.
(4) Invest more than 15% of its net assets in illiquid securities.
(5) Invest more than 20% of its net assets in when-issued, delayed
delivery or forward commitment transactions, and of such 20%, no more
than one-half (i.e., 10% of its net assets) may be invested in
when-issued, delayed delivery or forward commitment transactions
without the intention of actually acquiring securities (i.e., dollar
rolls).
INVESTMENT POLICIES -- VALUE FUND AND CAPITAL FUND
Value Fund and Capital Fund invest primarily in common stock and securities
convertible into common stocks. Value Fund intends to maintain a median market
capitalization of over $1 billion making it a mid to large cap value fund.
Capital Fund intends to maintain a median market capitalization of over $5
billion making it a large cap growth fund.
INVESTMENT RESTRICTIONS -- VALUE FUND AND CAPITAL FUND
The following investment restrictions are fundamental and may be changed
only by the approval of shareholders. Neither Fund will:
(1) Concentrate its investments, that is, invest more than 25% of the
value of its assets in any particular industry.
(2) Purchase or sell physical commodities (such as grains, livestock,
etc.) or futures or options contracts thereon; however, it may
purchase or sell any forms of financial instruments or contracts that
might be deemed commodities.
(3) Invest directly in real estate or interests in real estate; however,
the Fund may invest in interests in real estate investment trusts,
debt securities secured by real estate or interests therein, or debt
or equity securities issued by companies which invest in real estate
or interests therein.
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(4) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed an underwriter under applicable
laws.
(5) Purchase securities on margin or otherwise borrow money, except that
the Fund, in accordance with its investment objectives and policies,
may purchase securities on a when-issued, delayed delivery, or forward
commitment basis, and may make margin deposits in connection with
dealing in commodities or options thereon. The Fund may also obtain
such short-term credit as it needs for the clearance of securities
transactions, and may borrow from a bank as a temporary measure to
facilitate redemptions (but not for leveraging or investment) an
amount that does not exceed 10% of the value of the Fund's total
assets. Investment securities will not be purchased while outstanding
borrowings (including "roll" transactions) exceed 5% of the value of
the Fund's total assets.
(6) Issue senior securities (as defined in the 1940 Act) other than as set
forth in restriction #5 above concerning borrowing and except to the
extent that using options and futures contracts or purchasing or
selling securities on a when issued, delayed delivery, or forward
commitment basis (including the entering into of roll transactions)
may be deemed to constitute issuing a senior security.
(7) Make loans to other persons, except that it may lend its portfolio
securities in an amount not to exceed 33 1/3% of the value of the
Fund's total assets (including the amount lent) if such loans are
secured by collateral at least equal to the market value of the
securities lent, provided that such collateral shall be limited to
cash, securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, certificates of deposit or other
high-grade, short term obligations or interest-bearing cash
equivalents. Loans shall not be deemed to include repurchase
agreements or the purchase or acquisition of a portion of an issue of
notes, bonds, debentures, or other debt securities, whether or not
such purchase or acquisition is made upon the original issuance of the
securities. ("Total assets" of the Fund includes the amount lent as
well as the collateral securing such loans.)
The following investment restrictions may be changed without shareholder
approval. Neither Fund will:
(1) Invest more than 5% of the value of its total assets in securities of
other investment companies, except in connection with a merger,
consolidation, acquisition or reorganization; provided that the Fund
shall not purchase or otherwise acquire more than 3% of the total
outstanding voting stock of any other investment company.
(2) Invest in a company for the purposes of exercising control or
management.
(3) Buy or sell foreign exchange.
(4) Invest in securities which would expose the Fund to liabilities
exceeding the amount invested.
(5) Invest more than 15% of its net assets in illiquid securities.
(6) Make short sales, except for sales "against the box."
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(7) Mortgage, pledge, or hypothecate its assets except to the extent
necessary to secure permitted borrowings.
(8) Purchase the securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of any
issuer to be held by the Fund.
(9) Invest more than 10% of its total assets in real estate investment
trusts or invest in real estate investment trusts that are not
publicly distributed.
(10) Enter into any options, futures, or forward contract transactions if
immediately thereafter (a) the amount of premiums paid for all
options, initial margin deposits on all futures contracts and/or
options on futures contracts, and collateral deposited with respect to
forward contracts held by or entered into by the Fund would exceed 5%
of the value of the total assets of the Fund or (b) the Fund's assets
covering, subject to, or committed to all options, futures, and
forward contracts would exceed 20% of the value of the total assets of
the Fund. (This restriction does not apply to securities purchased on
a when-issued, delayed delivery, or forward commitment basis.)
(11) Write, purchase, or sell put or call options, except that it may write
covered call options.
(12) Invest more than 10% of its assets in foreign securities.
INVESTMENT POLICIES -- GROWTH FUND
Growth Fund invests primarily in common stock and securities convertible
into common stocks. The Fund intends to maintain a median market capitalization
of $1 - $5 billion making it a mid cap growth fund.
INVESTMENT RESTRICTIONS -- GROWTH FUND
The following investment restrictions are fundamental and may be changed
only by the approval of shareholders. Growth Fund will not:
(1) Concentrate its investments, that is, invest more than 25% of the
value of its assets, in any particular industry.
(2) Buy or sell commodities or commodity contracts.
(3) Purchase or sell real estate or other interests in real estate, or
interests in real estate investment trusts.
(4) Mortgage, pledge, hypothecate, or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund.
(5) Act as an underwriter of securities of other issuers, except that the
Fund may invest up to 5% of the value of its assets (at time of
investment) in portfolio securities which the Fund might not be free
to sell to the public without registration of such securities under
the Securities Act of 1933.
(6) Write, purchase, or sell puts, calls, or combinations thereof.
(7) Purchase or sell securities on margin or sell short.
(8) Make loans to other persons, except that it may purchase bonds,
debentures, or other debt securities, which are not publicly
distributed in an amount not to
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exceed 5% of the value of its total assets. The purchase of a portion
of an issue of publicly distributed bonds, debentures, or other debt
securities, does not constitute the making of a loan.
(9) Borrow money or issue debt securities.
(10) Invest more than 5% of its net assets in each of i) restricted
securities and ii) bonds, debentures or other debt securities which
are not publicly distributed.
The following investment restrictions may be changed without shareholder
approval. Growth Fund will not:
(1) Invest more than 5% of the value of its total assets in securities of
other investment companies, except in connection with a merger,
consolidation, acquisition or reorganization.
(2) Invest in a company for the purposes of exercising control or
management.
(3) Buy or sell foreign exchange.
(4) Invest in securities which would expose the Fund to liabilities
exceeding the amount invested.
(5) Invest more than 10% of its assets in foreign securities.
(6) Invest more than 15% of its net assets in illiquid securities.
(7) Issue senior securities (as defined in the 1940 Act), except as set
forth herein and in the prospectus.
INVESTMENT POLICIES -- GROWTH & INCOME FUND
Growth & Income Fund invests primarily in common stock and securities
convertible into common stocks. The Fund intends to maintain a median market
capitalization of over $5 billion making it a large cap fund.
INVESTMENT RESTRICTIONS -- GROWTH & INCOME FUND
The following investment restrictions are fundamental and may be changed
only by the approval of shareholders. Growth & Income Fund will not:
(1) Concentrate its investments in any particular industry, except that
(i) it may invest up to 25% of the value of its total assets in any
particular industry, and (ii) there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S. Government
or its agencies and instrumentalities, or obligations of domestic
commercial banks. As to utility companies, gas, electric, water and
telephone companies will be considered as separate industries. As to
finance companies, the following categories will be considered as
separate industries: (a) captive automobile finance, such as General
Motors Acceptance Corp. and Ford Motor Credit Corp.; (b) captive
equipment finance companies, such as Honeywell Finance Corporation and
General Electric Credit Corp.; (c) captive retail finance companies,
such as Macy Credit Corp. and Sears Roebuck Acceptance Corp.;
(d) consumer loan companies, such as Beneficial Finance
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Corporation and Household Finance Corporation; (e) diversified finance
companies such as CIT Financial Corp., Commercial Credit Corporation
and Borg Warner Acceptance Corp.; and (f) captive oil finance
companies, such as Shell Credit, Inc., Mobile Oil Credit Corp. and
Texaco Financial Services, Inc.
(2) Purchase or sell physical commodities (such as grains, livestock,
etc.) or futures or options contracts thereon. However, the Fund may
purchase or sell any forms of financial instruments or contracts that
might be deemed commodities.
(3) Invest directly in real estate or interests in real estate; however,
the Fund may invest in interests in real estate investment trusts,
debt securities secured by real estate or interests therein, or debt
or equity securities issued by companies which invest in real estate
or interests therein.
(4) Mortgage, pledge, hypothecate, or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund, provided
that this restriction shall not apply to the transfer of securities in
connection with any permissible borrowing or the collateral
arrangements in connection with permissible activities.
(5) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed an underwriter under applicable
laws.
(6) Purchase securities on margin, except that the Fund, in accordance
with its investment objectives and policies, may purchase securities
on a when-issued, delayed delivery or forward commitment basis. The
Fund may also obtain such short-term credit as it needs for the
clearance of securities transactions and may make margin deposits in
connection with futures contracts.
(7) Make short sales, except for sales "against the box." While a short
sale is made by selling a security the Fund does not own, a short sale
is "against the box" to the extent the Fund contemporaneously owns or
has the right to obtain securities identical to those sold without
payment of any additional consideration.
(8) Make loans to other persons, except (i) the Fund may lend its
portfolio securities in an amount not to exceed 33 1/3% of the value
of its total assets if such loans are secured by collateral equal to
at least the market value of the securities lent, provided that such
collateral shall be limited to cash, securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities,
certificates of deposit or other high-grade, short-term obligations or
interest-bearing cash equivalents; and (ii) it may purchase debt
securities through private placements (restricted securities) in
accordance with its investment objectives and policies.
(9) Issue senior securities (as defined in the 1940 Act) other than as set
forth in restriction #10 below and except to the extent that using
options and futures contracts or purchasing or selling securities on a
when issued, delayed delivery or forward commitment basis (including
the entering into of roll transactions) may be deemed to constitute
issuing a senior security.
(10) Borrow money except from banks for temporary or emergency purposes not
in excess of 33 1/3% of the value of the Fund's total assets. The Fund
will not
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purchase securities while borrowings (including "roll" transactions) in
excess of 5% of total assets are outstanding. In the event that the asset
coverage for the Fund's borrowings falls below 300%, the Fund will reduce,
within three days (excluding Sundays and holidays), the amount of its
borrowings in order to provide for 300% asset coverage.
The following investment restrictions may be changed without shareholder
approval. Growth & Income Fund will not:
(1) Invest more than 5% of the value of its total assets in securities of
other investment companies, except in connection with a merger,
consolidation, acquisition, or reorganization; provided that the Fund
shall not purchase or otherwise acquire more than 3% of the total
outstanding voting stock of any other investment company.
(2) Invest in a company for the purpose of exercising control or
management.
(3) Invest more than 15% of its net assets in illiquid securities.
(4) Enter into any options, futures, or forward contract transactions if
immediately thereafter (a) the amount of premiums paid for all
options, initial margin deposits on all futures contracts and/or
options on futures contracts, and collateral deposited with respect to
forward contracts held by or entered into by the Fund would exceed 5%
of the value of the total assets of the Fund or (b) the Fund's assets
covering, subject to, or committed to all options, futures, and
forward contracts would exceed 20% of the value of the total assets of
the Fund. (This restriction does not apply to securities purchased on
a when-issued, delayed delivery, or forward commitment basis.)
(5) Purchase the securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of any
issuer to be held by the Fund.
(6) Borrow money in excess of 10% of its total assets, except as a
temporary or emergency measure. ("Roll" transactions will not be
considered borrowing for purposes of this restriction).
INVESTMENT PRACTICES AND RISK CONSIDERATIONS
MEDIAN MARKET CAPITALIZATION
As discussed in the prospectus, each Fund, except Asset Allocation Fund,
intends to maintain its median market capitalization within a certain range or
above or below a specified amount. There is no assurance that the Funds' median
market capitalizations will always remain within the designated ranges (or above
or below the specified amount) in light of constantly fluctuating market
conditions and the performance of the stocks held in the Funds' portfolios.
Market capitalization is a measure of a company's relative size and is
calculated by multiplying the number of outstanding shares of a company by the
market price of those shares. Half of a portfolio's assets are invested in
securities of companies with market capitalizations larger than the median
market capitalization of the portfolio, and half are invested in the securities
of companies with market capitalizations smaller than the median. For example,
in a portfolio of nine securities with market capitalizations of $1 billion,
$1.5 billion, $2 billion, $3 billion, $5 billion, $8 billion, $8 billion,
$8.75 billion and $9 billion, the median market capitalization of this portfolio
would be $5 billion because half of the portfolio securities have market
capitalizations that are smaller than the median and half have market
capitalizations that are larger than the median. Median market capitalization
is used as a measure of the average market capitalization of a portfolio and is
sometimes used in the mutual fund industry to categorize a fund as "small cap,"
"mid cap" or "large cap." The Funds consider small cap portfolios to have
median market capitalizations of less than $1 billion, mid cap portfolios to
have median market capitalizations of $1 billion to $5 billion and large cap
portfolios to have median market capitalizations of more than $5 billion.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. government securities, which include the
following U.S. Treasury obligations: U.S. Treasury bills (initial maturities of
one year or less), U.S. Treasury notes (initial maturities of one to 10 years),
and U.S. Treasury bonds (generally initial maturities of greater than 10 years),
all of which are backed by the full faith and credit of the United States. The
Funds may also invest in obligations issued or guaranteed by U.S. government
agencies or instrumentalities, including government guaranteed mortgage-related
securities, some of which are backed by the full faith and credit of the U.S.
Treasury, e.g., direct pass-through certificates of the Government National
Mortgage Association; some of which are supported by the right of the issuer to
borrow from the U.S. government, e.g., obligations of Federal Home Loan Banks;
and some of which are backed only by the credit of the issuer itself, e.g.,
obligations of the Student Loan Marketing Association. U.S. government
securities are backed by the full faith and credit of the U.S. government or
guaranteed by the issuing agency or instrumentality and, therefore, there is
generally considered to be no risk as to the issuer's capacity to pay interest
and repay principal. Nevertheless, due to fluctuations in interest rates, there
is no guarantee as to the market value of U.S. government securities.
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MORTGAGE-RELATED SECURITIES
Asset Allocation Fund and Growth & Income Fund may invest in certain types
of mortgage-related securities. One type of mortgage-related security includes
certificates which represent pools of mortgage loans assembled for sale to
investors by various governmental and private organizations. These securities
provide a monthly payment, which consists of both an interest and a principal
payment, which is in effect a "pass-through" of the monthly payment made by each
individual borrower on his or her residential mortgage loan, net of any fees
paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
residential property, refinancing, or foreclosure, net of fees or costs which
may be incurred. Some certificates (such as those issued by the Government
National Mortgage Association) are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, regardless of whether the
mortgagor actually makes the payment.
A major governmental guarantor of pass-through certificates is the
Government National Mortgage Association ("GNMA"). GNMA guarantees, with the
full faith and credit of the U.S. government, the timely payments of principal
and interest on securities issued by institutions approved by GNMA (such as
savings and loan institutions, commercial banks, and mortgage bankers) and
backed by pools of FHA-insured or VA-guaranteed mortgages. Other governmental
guarantors (but not backed by the full faith and credit of the United States
Government) include the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA purchases residential
mortgages from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers.
(i) GNMA CERTIFICATES. Certificates of the GNMA ("GNMA Certificates")
evidence an undivided interest in a pool of mortgage loans. GNMA
Certificates differ from bonds in that principal is paid back monthly as
payments of principal, including prepayments, on the mortgages in the
underlying pool are passed through to holders of the GNMA Certificates
representing interests in the pool, rather than returned in a lump sum at
maturity. The GNMA Certificates that the Government Total Return Portfolio
purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid or owed to the mortgage pool, net of fees paid or
due to the "issuer" and GNMA, regardless of whether or not the mortgagor
actually makes the payment.
(ii) GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal and interest on securities backed by a pool
of mortgages insured by the Federal Housing Administration ("FHA") or the
Farmers' Home Administration ("FmHA"), or guaranteed by the Veterans
Administration ("VA"). GNMA is also empowered to borrow without limitation
from the U.S. Treasury, if necessary, to make any payments required under
its guarantee.
<PAGE>
(iii) LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is
likely to be substantially less than the stated maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures will usually result in the return of the greater part
of principal investment long before the maturity of the mortgages in the
pool. Foreclosures impose no risk of loss of the principal balance of a
Certificate, because of the GNMA guarantee, but foreclosure may impact the
yield to shareholders because of the need to reinvest proceeds of
foreclosure.
As prepayment rates of individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA indicate that
the average life of single family dwelling mortgages with 25 to 30-year
maturities, the type of mortgages backing the vast majority of GNMA
Certificates, is approximately 12 years. Prepayments are likely to
increase in periods of falling interest rates. It is customary to treat
GNMA Certificates as 30-year mortgage-backed securities which prepay fully
in the twelfth year.
(iv) YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of
interest of GNMA Certificates is lower than the interest rate paid on the
VA-guaranteed or FHA-insured mortgages underlying the certificates, by the
amount of the fees paid to GNMA and the issuer.
The coupon rate by itself, however, does not indicate the yield which will
be earned on GNMA Certificates. First, GNMA Certificates may be issued at
a premium or discount, rather than at par, and, after issuance, GNMA
Certificates may trade in the secondary market at a premium or discount.
Second, interest is earned monthly, rather than semi-annually as with
traditional bonds; monthly compounding raises the effective yield earned.
Finally, the actual yield of a GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying it. For example, if
interest rates decline, prepayments may occur faster than had been
originally projected and the yield to maturity and the investment income of
the Fund would be reduced.
(v) FHLMC SECURITIES. "FHLMC" is a federally chartered corporation created
in 1970 through enactment of Title III of the Emergency Home Finance Act of
1970. Its purpose is to promote development of a nationwide secondary
market in conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro
rata share of all interest and principal payments made or owed on the
underlying pool. The FHLMC guarantees timely payment of interest on PCs
and the ultimate payment of principal. Like GNMA Certificates, PCs are
assumed to be prepaid fully in their twelfth year.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a
year in guaranteed
<PAGE>
minimum payments. The expected average life of these securities is
approximately ten years.
(vi) FNMA SECURITIES. "FNMA" is a federally chartered and privately owned
corporation which was established in 1938 to create a secondary market in
mortgages insured by the FHA. It was originally established as a
government agency and was transformed into a private corporation in 1968.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
FNMA Certificate represents a pro rata share of all interest and principal
payments made or owed on the underlying pool. FNMA guarantees timely
payment of interest on FNMA certificates and the full return of principal.
Like GNMA Certificates, FNMA Certificates are assumed to be prepaid fully
in their twelfth year.
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. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the pass-through certificates. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
governmental pools because there are no direct or indirect governmental
guarantees of payments in the former pools. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool, and hazard insurance. The
insurance and guarantees are issued by government entities, private insurers,
and the mortgage poolers.
Advisers expects that governmental or private entities may create mortgage
loan pools offering pass-through investments in addition to those described
above. As new types of pass-through securities are developed and offered to
investors, Advisers may, consistent with the Funds' investment objectives,
policies, and restrictions, consider making investments in such new types of
securities.
Other types of mortgage-related securities include debt securities which
are secured, directly or indirectly, by mortgages on commercial real estate or
residential rental properties, or by first liens on residential manufactured
homes (as defined in section 603(6) of the National Manufactured Housing
Construction and Safety Standards Act of 1974), whether such manufactured homes
are considered real or personal property under the laws of the states in which
they are located.
Securities in this investment category include, among others, standard
mortgage-backed bonds and newer collateralized mortgage obligations (CMOs).
Mortgage-backed bonds are secured by pools of mortgages, but, unlike
pass-through securities, payments to bondholders are not determined by payments
on the mortgages. The bonds consist of a single class, with interest payable
periodically and principal payable on the stated date of maturity.
<PAGE>
Asset Allocation Fund and Growth & Income Fund may invest in CMOs which
have characteristics of both pass-through securities and mortgage-backed
bonds. CMOs are secured by pools of mortgages, typically in the form of
"guaranteed" pass-through certificates such as GNMA, FNMA, or FHLMC
securities. The payments on the collateral securities determine the payments
to the bondholders, but there is not a direct "pass-through" of payments.
CMOs are structured into multiple classes, each bearing a different date of
maturity. Monthly payments of principal received from the pool of underlying
mortgages, including prepayments, is first returned to investors holding the
shortest maturity class. Investors holding the longest maturity classes
receive principal only after the shorter maturity classes have been retired.
Multi-class pass-through securities are interests in a trust composed of
mortgage loans or other mortgage-backed securities. Payments of principal and
interest on underlying collateral provide the funds to pay debt service on the
CMO or make scheduled distributions on the multi-class pass-through security.
Multi-class pass-through securities, CMOs, and classes thereof (including those
discussed below) are examples of the types of financial instruments commonly
referred to as "derivatives".
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specified
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on the underlying mortgages may
be allocated among the several classes of a series of a CMO in many ways. In a
common structure, payments of principal, including any principal prepayments, on
the underlying mortgages are applied according to scheduled cash flow priorities
to classes of the series of a CMO.
There are many classes of CMOs in which Asset Allocation Fund may invest.
There are IOs, which entitle the holder to receive distributions consisting
solely or primarily of all or a portion of the interest in an underlying pool of
mortgage loans or mortgage-backed securities), ("Mortgage Assets"). There are
also "POs", which entitle the holder to receive distributions consisting solely
or primarily of all or a portion of the principal of the underlying pool of
<PAGE>
Mortgage Assets. In addition, there are "inverse floaters", which have a coupon
rate that moves in the reverse direction to an applicable index, and accrual (or
"Z") bonds, which are described below.
As to IOs, POs, inverse floaters, and accrual bonds, not more than 7.5% of
the Asset Allocation Portfolio's net assets will be invested in any one of these
items at any one time, and no more than 15% of the net assets of the Fund will
be invested in all such obligations at any one time.
Inverse floating CMOs are typically more volatile than fixed or adjustable
rate tranches of CMOs. Investments in inverse floating CMOs would be purchased
by a Fund to attempt to protect against a reduction in the income earned on the
Fund investments due to a decline in interest rates. The Fund would be
adversely affected by the purchase of such CMOs in the event of an increase in
interest rates since the coupon rate thereon will decrease as interest rates
increase, and, like other mortgage-backed securities, the value will decrease as
interest rates increase.
The cash flows and yields on IO and PO classes are extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
pool of mortgage loans or mortgage-backed securities ("Mortgage Assets"). For
example, a rapid or slow rate of principal payments may have a material adverse
effect on the yield to maturity of IOs or POs, respectively. If the underlying
Mortgage Assets experience greater than anticipated prepayments of principal,
the holder of an IO may incur substantial losses, even if the IO class is rated
AAA. Conversely, if the underlying Mortgage Assets experience slower than
anticipated prepayments of principal, the yield and market value for the holder
of a PO will be affected more severely than would be the case with a traditional
Mortgage Backed Security. However, if interest rates were expected to rise, the
value of an IO might increase and may partially offset other bond value
declines, and if rates were expected to fall, the inclusion of POs could balance
lower reinvestment rates.
An accrual or "Z" bond holder is not entitled to receive cash payments
until one or more other classes of the CMO have been paid in full from
payments on the mortgage loans underlying the CMO. During the period in
which cash payments are not being made on the Z tranche, interest accrues on
the Z tranche at a stated rate, and this accrued interest is added to the
amount of principal which is due to the holder of the Z tranche. After the
other classes have been paid in full, cash payments are made on the Z tranche
until its principal (including previously accrued interest which was added to
principal, as described above) and accrued interest at the stated rate have
been paid in full. Generally, the date upon which cash payments begin to be
made on a Z tranche depends on the rate at which the mortgage loans
underlying the CMO are prepaid, with a faster prepayment rate resulting in an
earlier commencement of cash payments on the Z tranche. Like a zero coupon
bond, during its accrual period the Z tranche of a CMO has the advantage of
eliminating the risk of reinvesting interest payments at lower rates during a
period of declining market interest rates. At the same time, however, and
also like a zero coupon bond, the market value of a Z tranche can be expected
to fluctuate more widely with changes in market interest rates than would the
market value of a tranche which pays interest currently. Changes in market
interest rates also can be expected to influence prepayment rates on the
mortgage loans
<PAGE>
underlying the CMO of which a Z tranche is a part. As noted above, such changes
in prepayment rates will affect the date at which cash payments begin to be made
on a Z tranche, and therefore also will influence its market value.
Investments in mortgage-related securities involve certain risks. In
periods of declining interest rates, prices of fixed income securities tend to
rise. However, during such periods, the rate of prepayment of mortgages
underlying mortgage-related securities tends to increase, with the result that
such prepayments must be reinvested by the issuer at lower rates. In addition,
the value of such securities may fluctuate in response to the market's
perception of the creditworthiness of the issuers of mortgage-related securities
owned by the Funds. Because investments in mortgage-related securities are
interest sensitive, the ability of the issuer to reinvest favorably in
underlying mortgages may be limited by government regulation or tax policy. For
example, action by the Board of Governors of the Federal Reserve System to limit
the growth of the nation's money supply may cause interest rates to rise and
thereby reduce the volume of new residential mortgages. Additionally, although
mortgages and mortgage-related securities are generally supported by some form
of government or private guarantees and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
ZERO COUPON OBLIGATIONS
Asset Allocation Fund may invest in zero coupon obligations of the U.S.
Government, U.S. Government agencies, and corporate issuers, including rights to
"stripped" coupon and principal payments. Certain U.S. Government obligations
(principally, Treasury notes and Treasury bonds) and corporate obligations are
"stripped" of their coupons, and the rights to receive each coupon payment and
the principal payment are sold as separate securities. Once separated, each
coupon as well as the principal amount represents a different single-payment
claim due from the issuer of the security. Each single-payment claim (coupon or
principal) is equivalent to a zero coupon bond. A zero coupon security pays no
interest to its holder during its life, and its value consists of the difference
between its face value at maturity (the coupon or principal amount), if held to
maturity, or its market price on the date of sale, if sold prior to maturity,
and its acquisition price (the discounted "present value" of the payment to be
received).
Certain zero coupon obligations represent direct obligations of the issuer
of the "stripped" coupon and principal payments. Other zero coupon obligations
are securities issued by financial institutions which constitute a proportionate
ownership of an underlying pool of stripped coupon or principal payments. Asset
Allocation Portfolio may invest in either type of zero coupon obligation. The
investment policies and restrictions applicable to corporate and government
securities in the Fund shall apply to the Fund's investments in zero coupon
securities (including, for example, minimum corporate bond ratings and
percentage limitations).
MUNICIPAL SECURITIES
Asset Allocation Fund may invest up to 20% of its total assets in municipal
securities such as municipal bonds and other debt obligations. These municipal
bonds and debt obligations
<PAGE>
are issued by the states and by their local special-purpose political
subdivisions. The term "municipal bonds" includes short-term municipal notes
and other commercial paper issued by the states and their political
subdivisions. The two general classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured by
the governmental issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds ordinarily are not backed by
the faith, credit or general taxing power of the issuing governmental entity.
The principal and interest on revenue bonds for private facilities are typically
paid out of rents or other specified payments made to the issuing governmental
entity by a private company which uses or operates the facilities.
HIGH YIELD/HIGH RISK SECURITIES
Asset Allocation Fund may invest up to 30% of its total assets in lower
rated bonds. Participation in high-yielding securities transactions generally
involves greater returns in the form of higher average yields. However,
participation in such transactions involves greater risks, often related to
sensitivity to interest rates, economic changes, solvency, and relative
liquidity in the secondary trading market. Yields on high yield securities will
fluctuate over time. The prices of high-yielding securities have been found to
be less sensitive to interest rate changes than higher-rated investments, but
more sensitive to adverse economic changes or individual corporate developments.
During an economic downturn or substantial period of rising interest rates
highly leveraged issuers may experience financial stress which would adversely
affect their ability to serve their principal and interest payment obligations,
to meet projected business goals, and to obtain additional financing. If the
issuer of a security held by Asset Allocation Fund defaulted, the Fund might
incur additional expenses to seek recovery. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high-yielding securities and the Fund's assets. Furthermore,
in the case of high-yielding securities structured as zero coupon or debentures
the interest on which may be paid in other securities rather than cash ("PIKs"),
their market prices are affected to a greater extent by interest rate changes
and thereby tend to be more volatile than securities which pay interest
periodically and in cash.
High-yielding securities present risks based on payment expectations. For
example, high-yielding securities may contain redemption or call provisions. If
an issuer exercises these provisions in a declining interest rate market, Asset
Allocation Fund would have to replace the security with a lower-yielding
security, resulting in a decreased return for investors. Conversely, a
high-yielding security's value will decrease in a rising interest rate market,
as will the value of such Fund's assets. If the Fund experiences unexpected net
redemptions, this may force it to sell its high-yielding securities, without
regard to their investment merits, thereby decreasing the asset base upon which
the Fund's expenses can be spread and possibly reducing the rate of return.
To the extent that there is no established secondary market, there may be
thin trading of high-yielding securities. This may adversely affect the ability
of the Fund's Board of Directors
<PAGE>
to accurately value high-yielding securities and the Fund's assets and the
Fund's ability to dispose of the securities. Securities valuation becomes more
difficult and judgment plays a greater role in valuation because there is less
reliable, objective data available. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high-yielding securities, especially in a thinly traded market.
Illiquid or restricted high-yielding securities purchased by Asset Allocation
Fund may involve special registration responsibilities, liabilities and costs,
and liquidity and valuation difficulties.
Certain risks are associated with applying credit ratings as a method of
evaluating high-yielding securities. For example, credit ratings evaluate the
safety of principal and interest payments, not market value risk of
high-yielding securities. Since credit rating agencies may fail to timely
change the credit ratings to reflect subsequent events, Advisers continuously
monitors the issuers of high-yielding securities held by Asset Allocation Fund
to determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to assure the securities'
liquidity so the Fund can meet redemption requests. Achieving the Fund's
investment objective may be more dependent upon Advisers' own credit analysis
than is the case for higher quality bonds. Also, the Fund may retain a
portfolio security whose rating has been changed if the security otherwise meets
the Fund's investment objective and investment criteria.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. A repurchase agreement is a
short-term instrument under which securities are purchased from a bank or
securities dealer with an agreement by the seller to repurchase the securities
at a mutually agreed upon date, interest rate, and price. Generally, repurchase
agreements are of short duration, usually less than a week, but on occasion for
longer periods of time.
In investing in repurchase agreements, a Fund's risk is limited to the
ability of such bank or securities dealer to pay the agreed upon amount at the
maturity of the repurchase agreement. In the opinion of management, such risk
is not material; if the other party defaults, the underlying security
constitutes collateral for the obligation to pay--although the Fund may incur
certain delays in obtaining direct ownership of the collateral, plus costs in
liquidating the collateral. In the event a bank or securities dealer defaults
on the repurchase agreement, management believes that, barring extraordinary
circumstances, the Fund will be entitled to sell the underlying securities or
otherwise receive adequate protection (as defined in the federal Bankruptcy
Code) for its interest in such securities. To the extent that proceeds from any
sale upon a default were less than the repurchase price, however, the Fund could
suffer a loss. If the Fund owns underlying securities following a default on
the repurchase agreement, the Fund will be subject to risk associated with
changes in the market value of such securities. The Fund's custodian will hold
the securities underlying any repurchase agreement or such securities may be
part of the Federal Reserve Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price of the repurchase agreement (including any accrued interest),
the Fund will promptly receive additional collateral (so the total collateral is
in an amount at least equal to the repurchase price plus accrued interest).
<PAGE>
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Fund may invest in variable amount master demand notes. Variable
amount master demand notes are short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. They allow the investment of
fluctuating amounts by a Fund at varying market rates of interest pursuant to
arrangements between the Fund and a financial institution which has lent money
to a borrower. Variable amount master demand notes permit a series of
short-term borrowings under a single note. Both the lender and the borrower
have the right to reduce the amount of outstanding indebtedness at any time.
Such notes provide that the interest rate on the amount outstanding varies on a
daily basis depending upon a stated short-term interest rate barometer.
Advisers will monitor the creditworthiness of the borrower throughout the term
of the variable master demand note. It is not generally contemplated that such
instruments will be traded and there is no secondary market for the notes.
Typically, agreements relating to such notes provide that the lender shall not
sell or otherwise transfer the note without the borrower's consent. Thus,
variable amount master demand notes may under certain circumstances be deemed
illiquid assets. However, such notes will not be considered illiquid where the
Fund has a same day withdrawal option, I.E., where it has the unconditional
right to demand and receive payment in full of the principal amount then
outstanding together with interest to the date of payment.
ILLIQUID SECURITIES
Each Fund may invest in illiquid securities, including "restricted"
securities. A restricted security is one which was originally sold in a private
placement and was not registered with the Commission under the Securities Act of
1933 (the "1933 Act") and which is not free to be resold unless it is registered
with the Commission or its sale is exempt from registration. For this purpose
illiquid securities include, among others, (i) securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale, (ii) options purchased over-the-counter and the cover
for options written over-the-counter, and (iii) repurchase agreements not
terminable within seven days. Each Fund has a nonfundamental investment
restriction that it will invest no more than 15% of the value of its net assets
in illiquid securities, as determined pursuant to applicable Commission rules
and interpretations. In addition, Growth Fund has a fundamental investment
restriction that it will not invest more than 5% of its net assets in each of i)
restricted securities and ii) bonds, debentures or other debt securities which
are not publicly distributed.
The staff of the Securities and Exchange Commission has taken the position
that the liquidity of securities in the portfolio of a fund offering redeemable
securities is a question of fact for a board of directors of such a fund to
determine, based upon a consideration by such board of the readily available
trading markets and a review of any contractual restrictions. The SEC staff
also acknowledges that, while such a board retains ultimate responsibility, it
may delegate this function to the fund's investment adviser.
The Funds' Boards of Directors have adopted procedures to determine the
liquidity of certain securities, including commercial paper issued pursuant to
the private placement
<PAGE>
exemption of Section 4(2) of the 1933 Act and securities that are eligible for
resale to qualified institutional buyers pursuant to Rule 144A under the 1933
Act. Under these procedures, factors taken into account in determining the
liquidity of a security include (a) the frequency of trades and quotes for the
security, (b) the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, (c) dealer undertakings to make a
market in the security, and (d) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Section 4(2) commercial
paper or a Rule 144A security that when purchased enjoyed a fair degree of
marketability may subsequently become illiquid, thereby adversely affecting the
liquidity of the applicable Fund.
Illiquid securities may offer a higher yield than securities that are more
readily marketable. The sale of illiquid securities, however, often requires
more time and results in higher brokerage charges or dealer discounts or other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. A Fund may
also be restricted in its ability to sell such securities at a time when it is
advisable to do so. Illiquid securities often sell at a price lower than
similar securities that are not subject to restrictions on resale.
FOREIGN SECURITIES
Each Fund may invest up to 10% of total assets (except that Asset
Allocation Fund may invest up to 20% of total assets) in securities of foreign
governments and companies. No more than 15% of Asset Allocation Fund's total
assets may be invested in foreign securities that are not traded on national
foreign securities exchanges or traded in the United States. Domestic branches
of foreign banks and foreign branches of domestic banks are deemed by Advisers
to be domestic, not foreign, companies. Investing in foreign securities may
result in greater risk than that incurred by investing in domestic securities.
The obligations of foreign issuers may be affected by political or economic
instabilities. Financial information published by foreign companies may be less
reliable or complete than information disclosed by domestic companies pursuant
to U.S. Government securities laws, and may not have been prepared in accordance
with generally accepted accounting principles. Fluctuations in exchange rates
may affect the value of foreign securities not denominated in United States
currency.
Investing in foreign companies involves certain considerations, including
those discussed below, which are not typically associated with investing in U.S.
issuers. Since the Funds may invest in securities denominated in currencies
other than U.S. dollars, and since they may temporarily hold funds in bank
deposits or other money market investments denominated in foreign currencies,
they may be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rate between such currencies and the dollar. A change
in the value of a foreign currency relative to the U.S. dollar will result in a
corresponding change in the dollar value of the Fund's assets denominated in
that foreign currency. Changes in foreign currency exchange rates may also
affect the value of dividends and interest earned, gains and losses realized in
the sale of securities, and net investment income and gains, if any, to be
distributed to shareholders by the Funds. The rate of exchange between the U.S.
dollar and other
<PAGE>
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balances of
payments and other economic and financial conditions, government intervention,
speculation, and other factors.
Foreign securities held by the Funds may not be registered with, nor the
issuers thereof be subject to, reporting requirements of the U.S. Securities and
Exchange Commission. Accordingly, there may be less publicly available
information about the securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally not subject to uniform financial reporting
standards, practices, and requirements comparable to those applicable to
domestic companies. In addition, with respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations of the
removal of funds or other assets of the Funds, political or social instability,
or domestic developments which could affect United States investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of Gross National
Product, rate of inflation, capital reinvestment, resource self-sufficiency, and
balance of payment positions.
Securities of some foreign companies are less liquid and their prices are
more volatile than securities of comparable domestic companies. Certain foreign
countries are known to experience long delays between the trade and settlement
dates of securities purchased or sold. Due to the increased exposure to the
Funds of market and foreign exchange fluctuations brought about by such delays,
and due to the corresponding negative impact on liquidity, the Funds will avoid
investing in countries which are known to experience settlement delays which may
expose the Funds to unreasonable risk of loss.
The Funds will calculate their net asset values to complete orders to
purchase, exchange, or redeem shares only on a Monday through Friday basis
(excluding holidays on which the New York Stock Exchange is closed). A portion
of a Fund's investment securities may be listed on foreign stock exchanges which
may trade on other days (such as a Saturday). As a result, the Fund's net asset
values may be affected by trading on days when a shareholder has no access to
the Funds.
DELAYED DELIVERY TRANSACTIONS
Each Fund, except Growth Fund, may purchase securities on a "when
issued" or delayed delivery basis and purchase or sell securities on a
"forward commitment" basis. When such transactions are negotiated, the price
is fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. As to each such Fund, no more than 20% of its net
assets may be invested in when-issued, delayed delivery or forward commitment
transactions, and of such 20%, no more than 10% of net assets may be invested
in such transactions without the intention of actually acquiring securities,
i.e., dollar rolls. At the time a Fund enters into a transaction on a
when-issued or forward commitment basis, a segregated account consisting of
cash, U.S. Government securities or any security that is not considered
restricted or illiquid at least equal to the value of the when-
<PAGE>
issued or forward commitment securities will be established and maintained
with the custodian and will be marked to the market daily. During the period
between a commitment and settlement, no payment is made for the securities
purchased by the purchaser and, thus, no interest accrues to the purchaser
from the transaction. If the Fund disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it can incur a gain or loss
due to market fluctuation.
The use of when-issued transactions and forward commitments enables the
Fund to hedge against anticipated changes in interest rates and prices. The
Fund may also enter into such transactions to generate incremental income. In
some instances, the third-party seller of when-issued or forward commitment
securities may determine prior to the settlement date that it will be unable or
unwilling to meet its existing transaction commitments without borrowing
securities. If advantageous from a yield perspective, the Funds may, in that
event, agree to resell its purchase commitment to the third-party seller at the
current market price on the date of sale and concurrently enter into another
purchase commitment for such securities at a later date. As an inducement for
the Fund to "roll over" its purchase commitment, the Fund may receive a
negotiated fee.
The purchase of securities on a when-issued, delayed delivery, or forward
commitment basis exposes the Fund to risk because the securities may decrease in
value prior to their delivery. Purchasing securities on a when-issued, delayed
delivery, or forward commitment basis involves the additional risk that the
return available in the market when the delivery takes place will be higher than
that obtained in the transaction itself. These risks could result in increased
volatility of the Fund's net asset value to the extent that the Fund purchases
securities on a when-issued, delayed delivery, or forward commitment basis while
remaining substantially fully invested. There is also a risk that the securities
may not be delivered or that a Fund may incur a loss or will have lost the
opportunity to invest the amount set aside for such transaction in the
segregated asset account.
DOLLAR ROLLS
In connection with their ability to purchase securities on a when-issued or
forward commitment basis, each Fund, except Growth Fund, may enter into "dollar
rolls" in which the Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund gives up the right to receive principal and interest paid on the
securities sold. However, the Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase plus any fee income received. Unless such
benefits exceed the income and capital appreciation that would have been
realized on the securities sold as part of the dollar roll, the use of this
technique will diminish the investment performance of the Fund compared with
what such performance would have been without the use of dollar rolls. The Fund
will hold and maintain in a segregated account until the settlement date cash,
government securities or liquid high-grade debt securities in an amount equal to
the value of the when-issued or forward commitment securities. The benefits
derived from the use of dollar rolls may depend, among other things,
<PAGE>
upon Advisers ability to predict interest rates correctly. There is no
assurance that dollar rolls can be successfully employed. In addition, the use
of dollar rolls by the Fund while remaining substantially fully invested
increases the amount of the Fund's assets that are subject to market risk to an
amount that is greater than the Fund's net asset value, which could result in
increased volatility of the price of the Fund's shares.
REAL ESTATE OR REAL ESTATE INVESTMENT TRUSTS
Each Fund, except Growth Fund, is authorized to invest in real estate
investment trusts ("REITs"), real estate development and real estate operating
companies and other real estate related businesses. The Funds presently intend
to invest the REIT portion of their portfolio primarily in equity REITs, which
are trusts that sell shares to investors and use the proceeds to invest in real
estate or interests in real estate. A REIT may focus on particular projects,
such as apartment complexes or shopping centers, or geographic regions, such as
the Southeastern United States, or both. Debt REITs invest in obligations
secured by mortgages on real property or interests in real property.
The Funds' investments in real estate securities may be subject to certain
of the same risks associated with the direct ownership of real estate. These
risks include: declines in the value of real estate; risks related to general
and local economic conditions, overbuilding and competition; increases in
property taxes and operating expenses; and variations in rental income. In
addition, REITs may not be diversified. REITs are subject to the possibility of
failing to qualify for tax-free pass-through of income under the Internal
Revenue Code and failing to maintain exemption from the 1940 Act. Also, REITs
may be dependent upon management skill and may be subject to the risks of
obtaining adequate financing for projects on favorable terms.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, each Fund, except
Growth Fund, may each lend its portfolio securities (principally to
broker-dealers) where such loans are callable at any time and are
continuously secured by collateral securities equal to no less than the
market value, determined daily, of the securities loaned. A Fund will
receive amounts equal to dividends or interest on the securities loaned. A
Fund will also earn income for having made the loan. Any cash collateral
pursuant to these loans will be invested in government securities,
certificates of deposit or other high-grade, short-term obligations or
interest-bearing cash equivalents. Each Fund will limit such lending to not
more than 33 1/3% of the value of its total assets (including the amount lent
as well as the collateral securing such loans). Where voting or consent
rights with respect to loaned securities pass to the borrower, management
will follow the policy of calling the loan, in whole or in part as may be
appropriate, to permit the exercise of such voting or consent rights if the
issues involved have a material effect on the Fund's investment in the
securities loaned.
The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or
<PAGE>
possible loss of rights in the collateral should the borrower fail financially.
Loans will only be made to firms deemed by Advisers to be of good standing and
will not be made unless, in the judgment of Advisers, the consideration to be
earned from such loans would justify the risk.
OPTIONS
Each Fund, except Growth Fund, may use in options in order to increase
return and to hedge its portfolio. In addition, Value Fund and Capital Fund
have a nonfundamental investment policy that they will only write covered
call options. It is the current intent of Advisers to limit the investment
in options by each Fund so that such investments do not expose more than 5%
of each Fund's total assets to risk of loss. The writing of covered call
options can have the effect of limiting a Fund's gains on the securities or
other instruments covered thereby; however, Advisers believes that this
technique is a relatively low-risk way to enhance a portfolio's return.
Additional information about options is contained in Appendix A.
A put option gives the purchaser (holder) of the option the right to
sell (put) a security or other instrument to a third party at a stated period
or on a stated date. A call option gives the purchaser (holder) of the
option the right to purchase (call) a security or other instrument from a
third party at a stated period or on a stated date. A person who sells
(writes) a put option gives a third party the right to require the writer to
purchase a security or other instrument at a stated price for a stated period
or on a stated date, while a person who sells (writes) a call option gives a
third party the right to require the writer to sell a security or other
instrument at a stated price for a stated period or on a stated date. A
person who writes a call option may do so either on a "covered" basis, in
which case the writer already owns or has the right to acquire the security
or other instrument which the writer agrees may be called away from such
writer, or on an "uncovered" basis, in which case the writer does not own or
have the right to acquire such security or instrument. In the case of an
uncovered call option, the writer bears the risk that the writer will have to
purchase the security or instrument subject to the option in the open market
at an increased price if the purchaser of the call option exercises it.
Put and call options may be used for a variety of purposes. For example,
if a portfolio manager wishes to hedge a security which the manager owns against
a decline in price, the manager may purchase a put option on the underlying
security, i.e., purchase the right to sell the security to a third party at a
stated price. If the underlying security then declines in price, the manager
can exercise the put option, thus limiting the amount of the manager's loss
resulting from the decline in price. Similarly, if the manager intends to
purchase a security at some date in the future, the manager may purchase a call
option on the security today in order to hedge against an increase in its price
before the intended purchase date. On the other hand, put and call options also
can be used for speculative purposes. For example, if a portfolio manager
believes that the price of stocks generally is going to rise, the manager may
purchase a call option on a stock index, the components of which are unrelated
to the stocks the manager holds in portfolio or intends to purchase. Finally, a
portfolio manager may write covered call options on securities the manager owns
in order to realize additional income with respect to his portfolio, or the
manager may write put options for similar income-producing purposes. If the
options expire unexercised, the manager has increased the portfolio's income by
the amount of the price (premium) received upon sale of the option. On the
other hand, if a covered call option is exercised and the underlying security is
"called" away, the manager has limited the amount of his gain to the exercise
price of the options plus the premium.
OPTIONS ON SECURITIES. Each Fund, except Growth Fund, may write (sell)
covered call options. In addition, Asset Allocation Fund, Growth & Income Fund
and Capital Appreciation Fund may write secured put options and purchase call
and put options on securities (provided that Capital Appreciation Fund will
write and purchase options only on equity securities). If a Fund writes an
option which expires unexercised or is closed out by the Fund at a profit, it
will retain all or a portion of the premium received for the option, which will
increase its gross income and will offset in part the reduced value of the Fund
security underlying the option, or the increased cost of portfolio securities to
be acquired. In contrast, however, if the price of the underlying security
moves adversely to the Fund's position, the option may be exercised and the Fund
will be required to purchase or sell the underlying security at a
disadvantageous price, which may only be partially offset by the amount of the
premium, if at all. The Funds may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
<PAGE>
Asset Allocation Fund, Growth & Income Fund and Capital Appreciation Fund
may also purchase put or call options in anticipation of market fluctuations
which may adversely affect the value of its portfolio or the prices of
securities that the Fund wants to purchase at a later date. In the event that
the expected market fluctuations occur, the Fund may be able to offset the
resulting adverse effect on its Fund, in whole or in part, through the options
purchased. The premium paid for a put or call option plus any transaction costs
will reduce the benefit, if any, realized by the Fund upon exercise or
liquidation of the option, and, unless the price of the underlying security
changes sufficiently, the option may expire without value to the Fund.
OPTIONS ON STOCK INDEXES. Each Fund, except Growth Fund, may write (sell)
covered call options on stock indexes. In addition, Asset Allocation Fund,
Growth & Income Fund and Capital Appreciation Fund may write secured put options
on stock indexes and purchase call and put options on stock indexes. If a Fund
writes an option on a stock index and the value of the index moves adversely to
the holder's position, the option will not be exercised, and the Fund will
either close out the option at a profit or allow it to expire unexercised. The
Fund will retain the amount of the premium, which will increase its gross income
and offset part of the reduced value of portfolio securities or the increased
cost of securities to be acquired. Such transactions, however, will constitute
only partial hedges against adverse price fluctuations, since any such
fluctuations will be offset only to the extent of the premium received by the
Fund for the writing of the option. In addition, if the value of an underlying
index moves adversely to a Fund's option position, the option may be exercised,
and the Fund will experience a loss which may only be partially offset by the
amount of the premium received.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS. Each Fund, except Growth Fund, may enter into stock
index futures contracts for hedging purposes. Each Fund, except Capital
Appreciation Fund and Growth Fund, may enter into interest rate futures
contracts for hedging purposes. Asset Allocation Fund, Capital Appreciation
Fund and Growth & Income Fund may also enter into foreign currency futures
contracts. Interest rate futures contracts, stock index futures contracts and
foreign currency futures contracts are collectively referred to as "Futures
Contracts."
Purchases or sales of stock index futures contracts are used to attempt to
protect a Fund's current or intended stock investments from broad fluctuations
in stock prices, and interest rate and foreign currency futures contracts are
purchased or sold to attempt to hedge against the effects of interest or
exchange rate changes on a Fund's current or intended investments in fixed
income or foreign securities. In the event that an anticipated decrease in the
value of portfolio securities occurs as a result of a general stock market
decline, a general increase in interest rates, or a decline in the dollar value
of foreign currencies in which portfolio securities are denominated, the adverse
effects of such changes may be offset, in whole or in part, by gains on the sale
of Futures Contracts. Conversely, the increased cost of portfolio securities to
be acquired, caused by a general rise in the stock market, a general decline in
interest rates, or a rise in the dollar value of foreign currencies, may be
offset, in whole or in part, by gains on Futures Contracts purchased by a Fund.
A Fund will incur brokerage fees when it purchases and sells Futures Contracts,
and it will be required to make and maintain margin deposits.
<PAGE>
OPTIONS ON FUTURES CONTRACTS. Each Fund, except Capital Appreciation Fund
and Growth Fund, may purchase and write options on interest rate futures
contracts for hedging purposes. Each Fund, except Growth Fund, may purchase and
write options on stock index futures contracts and may purchase and write
options on foreign currency futures contracts for hedging purposes. Options on
interest rate futures contracts, options on stock index futures contracts, and
options on foreign currency futures contracts are collectively referred to as
"Options on Futures Contracts."
Put and call options on Futures Contracts may be traded by the Funds in
order to protect against declines in the values of portfolio securities or
against increases in the cost of securities to be acquired. Purchases of
Options on Futures Contracts may present less risk in hedging the portfolios of
the Funds than the purchase or sale of the underlying Futures Contracts since
the potential loss is limited to the amount of the premium plus related
transaction costs. The writing of such options, however, does not present less
risk than the trading of futures contracts and will constitute only a partial
hedge, up to the amount of the premium received, and, if an option is exercised,
a Fund may suffer a loss on the transaction.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund, except Growth Fund, may enter into contracts for the purchase or
sale of a specific currency at a future date at a price set at the time of the
contract (a "Currency Contract") for hedging purposes only. These transactions
will include forward purchases or sales of foreign currencies for the purpose of
protecting the dollar value of securities denominated in a foreign currency or
protecting the dollar equivalent of interest or dividends to be paid on such
securities. By entering into such transactions, however, a Fund may be required
to forego the benefits of advantageous changes in exchange rates. Currency
Contracts are traded over-the-counter, and not on organized commodities or
securities exchanges. As a result, such contracts operate in a manner distinct
from exchange-traded instruments, and their use involves certain risks beyond
those associated with transactions in the futures and option contracts described
above.
OPTIONS ON FOREIGN CURRENCIES. Each Fund, except Growth Fund, may purchase
and write put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As in the case of other types of options, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and a Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates, although, in the event of rate movements adverse
to a Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs. As in the case of Currency Contracts, certain
options on foreign currencies are traded over-the-counter and involve risks
which may not be present in the case of exchange-traded instruments.
ADDITIONAL RISKS OF OPTIONS, FUTURES AND CURRENCY CONTRACTS
<PAGE>
Options and futures involve certain risks and transaction costs. For
example, a lack of correlation between the index or instrument underlying an
option or futures contract and the assets being hedged, or unexpected adverse
price movements, could render a Fund's hedging strategy unsuccessful and could
result in losses. A Fund also may enter into transactions in options on
securities and indexes of securities for other than hedging purposes, which
involves greater risk. There can be no assurance that a liquid secondary market
will exist for any contract purchased or sold, and a Fund may be required to
maintain a position until exercise or expiration, which could result in losses.
Other risks include dependence on Advisers' ability to predict movements in the
prices of individual securities, fluctuations in the general securities markets,
and movements in interest rates; imperfect correlation between movements in the
price of options, futures contracts, or options thereon and movements in the
price of the security hedged or used for cover, the fact that skills and
techniques needed to trade options, futures contracts and options thereon are
different from those needed to select the securities in which the Fund invests,
lack of assurance that a liquid secondary market will exist for any particular
option, futures contract or option thereon at any particular time; and the
possible need to defer closing out certain options, futures contracts, and
options thereon in order to continue to qualify for the beneficial tax treatment
afforded regulated investment companies.
Transactions in options, futures and currency contracts may be entered into
on U. S. exchanges regulated by the SEC or the Commodity Futures Trading
Commission (the "CFTC"), as well as in the over-the-counter market and on
foreign exchanges. In addition, the securities underlying options and futures
contracts traded by the Funds may include domestic as well as foreign
securities. Investors should recognize that transactions involving foreign
securities or foreign currencies, and transactions entered into in foreign
countries, may involve considerations and risks not typically associated with
investing in U.S. markets.
REGULATORY RESTRICTIONS
To the extent required to comply with Securities and Exchange Commission
Release No. 10666, when purchasing a futures contract, writing a put option, or
entering into a delayed delivery purchase, the Funds will each maintain in a
segregated account cash or any security that is not considered restricted or
illiquid equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid "commodity pool operator" status, none of the
Funds will enter into a futures contract or purchase an option thereon if
immediately thereafter the initial margin deposits for futures contracts held by
the Fund, plus premiums paid by it for open options on futures (less the amount
by which the value of the underlying futures contract exceeds the exercise price
at the time of purchase), would exceed 5% of the Fund's total assets. The Funds
will not engage in transactions in financial futures contracts or options
thereon for speculation, but only to attempt to hedge against changes in market
conditions affecting the values of securities which the Funds hold or intend to
purchase. When futures contracts or options thereon are purchased to protect
against a price increase on securities intended to be purchased later, it is
anticipated that at least 75% of such intended purchases will be completed.
When other futures contracts or options thereon are purchased, the underlying
value of such contracts will at all
<PAGE>
times not exceed the sum of: (1) accrued profit on such contracts held by the
broker; (2) cash or high quality money market instruments set aside in an
identifiable manner; and (3) cash proceeds from investments due in 30 days.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES
Each Fund may invest in certificates of deposits. Certificates of deposit
are receipts issued by a bank in exchange for the deposit of funds. The issuer
agrees to pay the amount deposited plus interest to the bearer of the receipt on
the date specified on the certificate. The certificate usually can be traded in
the secondary market prior to maturity. Bankers' acceptances typically arise
from short-term credit arrangements designed to enable businesses to obtain
funds to finance commercial transactions. Generally, an acceptance is a time
draft drawn on a bank by an exporter or importer to obtain a stated amount of
funds to pay for specific merchandise. The draft is then "accepted" by a bank
that, in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by the
accepting bank as an earning asset or it may be sold in the secondary market at
the going rate of discount for a specific maturity. Although maturities for
acceptances can be as long as 270 days, most acceptances have maturities of six
months or less.
SHORT-TERM MONEY MARKET INSTRUMENTS
Each Fund may invest funds awaiting investment or held as reserves, or for
temporary defensive purposes, in commercial paper, obligations of banks or the
U.S. Government and other high quality, short-term debt instruments. Short-term
debt instruments in which the Funds may invest include (i) short-term U.S.
Government securities and short-term obligations of foreign sovereign
governments and their agencies and instrumentalities, (ii) interest bearing
savings deposits on, and certificates of deposit and bankers' acceptances of,
U.S. and foreign banks, (iii) commercial paper of U.S. or foreign issuers rated
A-1 or higher by S&P or Prime-1 by Moody's or comparably rated by another
nationally recognized rating agency, or, if not rated, determined by Advisers to
be of comparable quality and (iv) repurchase agreements relating to the
foregoing.
PAYMENT-IN-KIND DEBENTURES
Asset Allocation Fund may invest in debentures the interest on which may
be paid in other securities rather than cash ("PIKs"). Typically, during a
specified term prior to the debenture's maturity, the issuer of a PIK may
provide for the option or the obligation to make interest payments in
debentures, common stock, or other instruments (I.E., "in kind" rather than in
cash). The type of instrument in which interest may or will be paid would be
known by the Fund at the time of the investment. While PIKs generate income for
generally accepted accounting standards purposes, they do not generate cash flow
and thus could cause the Fund to be forced to liquidate securities at an
inopportune time in order to distribute cash, as required by the Internal
Revenue Code.
PORTFOLIO TURNOVER
<PAGE>
The portfolio turnover rate for a Fund is calculated by dividing the lesser
of purchases or sales by such Fund of investment securities for the particular
fiscal year by the monthly average value of investment securities owned by the
Fund during the same fiscal year. Investment securities for purposes of this
calculation do not include securities with a maturity date less than twelve
months from the date of investment. A 100% portfolio turnover rate would occur,
for example, if the lesser of the value of purchases or sales of investment
securities for a particular year were equal to the average monthly value of the
investment securities owned during such year. While a higher turnover rate
(100% or more) may result in the Funds incurring higher transaction costs and
result in additional tax or brokerage consequences, Advisers attempt to have
such costs outweighed by the benefits of such transactions, although this cannot
be assured. During the last fiscal year, Value Fund's portfolio turnover rate
increased from 93% to 260%. The primary reasons for this increase were market
conditions and the portfolio manager's repositioning of the Fund's holdings to
acquire more large capitalization value stocks.
MANAGEMENT OF THE FUNDS
Under Minnesota law, the Board of Directors of Fortis Advantage, Fortis
Equity and Fortis Growth has overall responsibility for managing them in good
faith, in a manner reasonably believed to be in the best interests of each
company and with the care an ordinarily prudent person would exercise in similar
circumstances. This management may not be delegated. The Articles of
Incorporation limit the liability of directors to the fullest extent permitted
by law.
The names, addresses, principal occupations and other affiliations of
directors and executive officers of Fortis Advantage, Fortis Equity and Fortis
Growth are listed below. Unless stated otherwise, all positions have been held
at least five years. Each director and officer also serves as a director or
officer of all investment companies managed by Advisers (the "Fund Complex"),
with the exception of Mr. Jaffray and Ms. Shadko who are not directors of Fortis
Series Fund, Inc. The Fund Complex currently consists of one closed-end and
eight open-end investment companies.
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS AGE THE FUND PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ---------------- --- -------- -----------------------------------------
<S> <C> <C> <C>
Richard W. Cutting 67 Director Certified public accountant and financial consultant.
137 Chapin Parkway
Buffalo, New York
Allen R. Freedman* 58 Director Chairman, Chief Executive Officer and President of Fortis, Inc.; a
One Chase Manhattan Plaza Managing Director of Fortis International, N. V.
New York, New York
Dr. Robert M. Gavin 58 Director President, Cranbrook Education Community, Prior to July 1996, President
380 Lone Pine Road Macalester College, St. Paul, MN.
Bloomfield Hills, Michigan
Benjamin S. Jaffray 68 Director Chairman of the Sheffield Group, Ltd., a financial consulting group,
4040 IDS Center Minneapolis, MN.
Minneapolis, Minnesota
Jean L. King 54 Director President, Communi-King, a communications consulting firm, St. Paul, MN.
12 Evergreen Lane
St. Paul, Minnesota
Dean C. Kopperud * 46 President and Chief Executive Officer and a Director of Advisors, President and a
500 Bielenberg Drive Director Director of Investors, President of Fortis Financial Group, a Director
Woodbury, Minnesota of Fortis Benefits Insurance Company and a Senior Vice President of Time
Insurance Company.
Edward M. Mahoney 68 Director Retired; prior to December, 1994, Chairman and Chief Executive Officer
2760 Pheasant Road and a Director of Advisers and Investors, Senior Vice President and a
Excelsior, Minnesota Director of Fortis Benefits Insurance Company, and Senior Vice President
of Time Insurance Company.
Robb L. Prince 57 Director Financial and Employee Benefit Consultant; prior to July, 1995, Vice
5108 Duggan Plaza President and Treasurer, Jostens, Inc., a producer of products and
Edina, Minnesota services for the youth, education, sports award, and recognition markets,
Minneapolis, MN.
Leonard J. Santow 62 Director Principal, Griggs & Santow, Incorporated, economic and financial
75 Wall Street consultants, New York, NY.
21st Floor
New York, New York
Noel S. Shadko 44 Director Marketing Consultant; prior to May 1996, Senior Vice President of
1908 W. 49th Street Marketing & Strategic Planning, Rollerblade, Inc., Minneapolis, MN.
Minneapolis, Minnesota
Joseph M. Wikler 57 Director Investment consultant and private investor.
12520 Davan Drive
Silver Spring, Maryland
Gary N. Yalen 56 Vice President President and Chief Investment Officer of Advisers (since 1995) New York,
One Chase Manhattan Plaza NY, and Senior Vice President, Investments, Fortis, Inc.; prior to 1996,
New York, New York President and Chief Investment Officer, Fortis Asset Management, a former
division of Fortis, Inc.
Howard G. Hudson 61 Vice President Executive Vice President and Head of Fixed Income Investments of Advisers
One Chase Manhattan Plaza since 1995; prior to 1996, Senior Vice President, Fixed Income, Fortis
New York, New York Asset Management.
Lucinda S. Mezey 51 Vice President Executive Vice President and Head of Equity Investments of Advisers since
One Chase Manhattan Plaza October 1997; from 1995 to October 1997, Chief Investment Officer, Alex
New York, New York Brown Capital Advisory and Trust Co., Baltimore, MD; and prior to 1995,
Senior Vice President and Head of Equity Investments, PNC Bank,
Philadelphia, PA.
James S. Byrd 47 Vice President Executive Vice President of Advisers since 1995; prior to 1995, Vice
5500 Wayzata Boulevard President of Advisers and Investors.
Golden Valley, Minnesota
<PAGE>
Nicholas L. M. de Peyster 32 Vice President Vice President of Advisers since 1995; prior to 1996, Vice President,
One Chase Manhattan Plaza Equities, Fortis Asset Management.
New York, New York
Diane M. Gotham 40 Vice President Vice President of Advisers since 1998; from 1994 to 1998, securities
500 Bielenberg Drive analyst for Advisers.
Woodbury, Minnesota
Laura E. Granger 37 Vice President Vice President of Advisers since 1998; from 1993 to 1998, portfolio
One Chase Manhattan Plaza manager, General Motors Investment Management, New York, NY.
New York, New York
Maroun M. Hayek 50 Vice President Vice President of Advisers; prior to August 1996, Vice President, Fixed
One Chase Manhattan Plaza Income, Fortis Asset Management.
New York, New York
Robert C. Lindberg 46 Vice President Vice President of Advisers since 1993.
One Chase Manhattan Plaza
New York, New York
Charles L. Mehlhouse 56 Vice President Vice President of Advisers since 1996; prior to March 1996, Portfolio
One Chase Manhattan Plaza Manager to Marshall & Ilsley Bank Corporation, Milwaukee, WI.
New York, New York
Kevin J. Michels 47 Vice President Vice President of Advisers since 1995. Prior to 1996, Vice President,
One Chase Manhattan Plaza Administration, Fortis Asset Management.
New York, New York
Christopher J. Pagano 35 Vice President Vice President of Advisers since 1996; prior to March 1996, Government
One Chase Manhattan Plaza Strategist for Merrill Lynch, New York, N.Y.
New York, New York
Stephen M. Rickert 55 Vice President Vice President of Advisers since 1995; from 1994 to 1996, Corporate Bond
One Chase Manhattan Plaza Analyst, Fortis Asset Management.
New York, New York
Michael J. Romanowski 47 Vice President Vice President of Advisers since 1998; from October 1995 to March 1998,
One Chase Manhattan Plaza Portfolio Manager, Value Line, New York, NY; prior to October 1995,
New York, New York securities analyst, Conning & Co., Hartford, CT.
Ho Wang 51 Vice President Vice President of Advisers since 1998; from 1995 to 1998, senior
One Chase Manhattan Plaza securities analyst, Lord, Abbett & Co., New York, NY; prior to 1995,
New York, New York portfolio manager, New York Life, New York, NY.
Christopher J. Woods 38 Vice President Vice President of Advisers since 1995; prior to 1996, Vice President,
One Chase Manhattan Plaza Fixed Income, Fortis Asset Management.
New York, New York
Robert W. Beltz, Jr. 49 Vice President Vice President - Securities Operations of Advisers and Investors.
500 Bielenberg Drive
Woodbury, Minnesota
Peggy E. Ettestad 41 Vice President Senior Vice President, Operations of Advisers; prior to March 1997, Vice
500 Bielenberg Drive President G.E. Capital Fleet Services, Minneapolis, MN.
Woodbury, Minnesota
Tamara L. Fagely 40 Vice President Vice President of Advisers and Investors since 1998; prior thereto,
500 Bielenberg Drive and Treasurer Second Vice President of Advisers and Investors.
Woodbury, Minnesota
Dickson Lewis 49 Vice President Senior Vice President, Marketing and Sales of Advisers; from 1993 to July
500 Bielenberg Drive 1997, President and Chief Executive Officer Hedstrom/Blessing, Inc., a
Woodbury, Minnesota marketing communications company, Minneapolis, MN.
David A. Peterson 56 Vice President Vice President and Assistant General Counsel, Fortis Benefits Insurance
500 Bielenberg Drive Company.
Woodbury, Minnesota
<PAGE>
Scott R. Plummer 39 Vice President Vice President since 1998, Associate General Counsel since 1998 and
500 Bielenberg Drive Assistant Secretary of Advisers; prior thereto, Second Vice President and
Woodbury, Minnesota Corporate Counsel of Advisers.
Rhonda J. Schwartz 40 Vice President Senior Vice President and General Counsel of Advisers; Senior Vice
500 Bielenberg Drive President and General Counsel, Life and Investment Products, Fortis
Woodbury, Minnesota Benefits Insurance Company and Vice President and General Counsel, Life
and Investment Products, Time Insurance Company; from 1993 to January
1996, Vice President, General Counsel, Fortis, Inc.
Melinda S. Urion 45 Vice President Since December 1997, Senior Vice President and Chief Financial Officer of
500 Bielenberg Drive Advisers. Prior to December 1997, Senior Vice President of Finance and
Woodbury, Minnesota Chief Financial Officer, American Express Financial Corporation; prior to
1995, Corporate Controller, American Express Financial Corporation.
Michael J. Radmer 53 Secretary Partner, Dorsey & Whitney LLP, the Fund's General Counsel.
220 South Sixth Street
Minneapolis, Minnesota
</TABLE>
- ------------------
* Mr. Kopperud is an "interested person" (as defined under the 1940 Act) of
Advisers, Fortis Income and Fortis Advantage because he holds certain positions
including serving as Chief Executive Officer and a director of Advisers. Mr.
Freedman is an "interested person" of Advisers, Fortis Advantage, Fortis Equity
and Fortis Growth because he holds certain positions including serving as
Chairman and Chief Executive Officer of Fortis, Inc., the parent company of
Advisers, and as a Managing Director of Fortis International, N.V., the parent
company of Fortis, Inc.
Each director who is not affiliated with Advisers or Investors receives a
monthly fee ($200 per month from each of Value Fund, Growth & Income Fund and
Capital Fund; $350 per month from Growth Fund and $200 per month from each of
Asset Allocation Fund and Capital Appreciation Fund), $100 per meeting attended
from each Fund, and $100 per committee meeting attended from each Fund (and
reimbursement of travel expenses to attend meetings). Each such director also
receives a monthly fee, a meeting fee and a committee meeting fee from each fund
in the Fund Complex for which they are a director. The following table sets
forth the aggregate compensation received by each director from Fortis
Advantage, Fortis Equity and Fortis Growth during the fiscal year ended August
31, 1998, as well as the total compensation received by each director from the
Fund Complex during the calendar year ended December 31, 1997. Mr. Freedman and
Mr. Kopperud, who are affiliated with Advisers and Investors, did not receive
any compensation. No executive officer receives any compensation from the
Funds.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION AGGREGATE AGGREGATE TOTAL
FROM COMPENSATION COMPENSATION COMPENSATION
FORTIS FROM FROM FROM
DIRECTOR ADVANTAGE FORTIS EQUITY FORTIS GROWTH FUND COMPLEX*
-------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Richard W. Cutting $3,000 $2,400 $4,800 $31,200
Dr. Robert M. Gavin $3,000 $2,400 $4,800 $31,200
Benjamin S. Jaffray $3,000 $2,400 $4,800 $24,300
Jean L. King $2,900 $2,300 $4,700 $32,200
Edward M. Mahoney $3,000 $2,400 $4,800 $31,200
Robb L. Prince $3,000 $2,400 $4,800 $33,200
Leonard J. Santow $2,900 $2,300 $4,700 $30,200
Noel S. Shadko $3,000 $2,400 $4,800 $22,200
Joseph M. Wikler $3,000 $2,400 $4,800 $31,200
</TABLE>
<PAGE>
- -------------
* The Fund Complex consists of one closed-end and eight open-end investment
companies managed by Advisers.
During the fiscal year ended August 31, 1998, the Funds paid legal fees and
expenses as set forth below to a law firm of which the Funds' Secretary is a
partner.
<TABLE>
<S> <C>
Asset Allocation Fund $ 6,084
Value Fund $ 1,273
Growth & Income Fund $ 800
Capital Fund $ 23,831
Growth Fund $ 23,400
Capital Appreciation Fund $ 4,741
</TABLE>
Directors Gavin, Jaffray, Kopperud, Mahoney, Prince and Shadko are members
of the Executive Committee of the Board of Directors. While the Executive
Committee is authorized to act in the intervals between regular board meetings
with full capacity and authority of the full Board of Directors, except as
limited by law, it is expected that the Committee will meet at least twice a
year.
Directors, officers and other persons affiliated with the Funds are
eligible to purchase shares of the Funds without a sales charge. For more
complete information about these arrangements, refer to "Purchase of Shares -
Exemptions from the Sales Charge."
PRINCIPAL HOLDERS OF SECURITIES
As of June 1, 1999 no person owned of record or, to a Fund's
knowledge, beneficially as much as 5% of the outstanding shares of any Class of
Fund shares, except as follows:
<TABLE>
Percent of
Number Outstanding
Fund Class Name/Address of Shareholder of Shares Class
- ----------------- --------- --------------------------------------- ------------ -----------
<S> <C> <C> <C> <C>
</TABLE>
As of June 1, 1999, the directors and executive officers as a group
beneficially owned less than 1% of the outstanding shares of each class of each
Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL
Fortis Advisers, Inc. ("Advisers") has been the investment adviser and
manager of each Fund since inception. Fortis Investors, Inc. ("Investors") acts
as the Funds underwriter. Each
<PAGE>
acts pursuant to written agreements periodically approved by the directors or
shareholders. The address of each is that of the Funds. As of October 30, 1998,
Advisers managed thirty-three investment company portfolios with combined net
assets of approximately $5.8 billion.
CONTROL AND MANAGEMENT OF ADVISERS AND INVESTORS
Fortis, Inc. ("Fortis") owns 100% of the outstanding voting securities of
Advisers, and Advisers owns all of the outstanding voting securities of
Investors.
Fortis, located in New York, New York, is a financial services company that
provides specialty insurance and investment products to individuals, businesses,
associations and other financial services organizations in the United States.
Fortis is a part of a worldwide group of companies active in the fields of
insurance, banking and investments. Fortis is jointly owned by Fortis (NL) N.V.
of The Netherlands and Fortis (B) of Belgium.
Fortis (NL) N.V. is a diversified financial services company headquartered
in Utrecht, The Netherlands, where its insurance operations began in 1847.
Fortis (B) is a diversified financial services company headquartered in
Brussels, Belgium, where it insurance operations began in 1824. Fortis (NL)
N.V. and Fortis (B) own a group of companies active in insurance, banking and
financial services, and real estate development in The Netherlands, Belgium, the
United States, Western Europe, and the Pacific Rim.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENTS
Advisers act as investment adviser and manager of each Fund under separate
Investment Advisory and Management Agreements. These agreements are
individually referred to as an "Agreement" and collectively referred to as the
"Agreements." Each Agreement will terminate automatically in the event of its
assignment. In addition, the Agreements are terminable at any time, without
penalty, by the Board of Directors or, with respect to any particular portfolio,
by vote of a majority of a Fund's outstanding voting securities, on not more
than 60 days' written notice to Advisers, and by Advisers on 60 days' notice to
the Funds. Unless sooner terminated, the Agreements continue in effect for more
than two years after their execution only so long as such continuance is
specifically approved at least annually by either the board of Directors or,
with respect to any Fund, by a vote of a majority of the outstanding voting
securities of the applicable Fund; provided that, in either event, such
continuance is also approved by the vote of the majority of the directors who
are not parties to such Agreements, or interested persons of such parties, cast
in person at a meeting called for the purpose of voting on such approval.
Each Agreement provides for an investment advisory and management fee to be
paid by each Fund calculated as set forth below:
<TABLE>
<CAPTION>
Average Net Assets Annual Investment Advisory
of Each Fund and Management Fee
------------ ------------------
<S> <C>
For the first $100,000,000 1.00%
For the next $150,000,000 0.80%
<PAGE>
For assets over $250,000,000 0.70%
</TABLE>
Each Agreement requires each Fund to pay all its expenses which are not
assumed by Advisers and/or Investors. These expenses include, by way of
example, but not by way of limitation, the fees and expenses of directors and
officers who are not "affiliated persons" of Advisers, interest expenses, taxes,
brokerage fees and commissions, fees and expenses of registering and qualifying
the Funds and their shares for distribution under Federal and state securities
laws, expenses of preparing prospectuses and of printing and distributing
prospectuses annually to existing shareholders, custodian charges, auditing and
legal expenses, insurance expenses, association membership dues, and the expense
of reports to shareholders, shareholders' meetings and proxy solicitations.
Although investment decisions for the Funds are made independently from
those of the other funds or private accounts managed by Advisers, sometimes the
same security is suitable for more than one fund or account. If and when two or
more funds or accounts simultaneously purchase or sell the same security, the
transactions will be allocated as to price and amount in accordance with
arrangements equitable to each fund or account. The simultaneous purchase or
sale of the same securities by a Fund and other funds or accounts may have a
detrimental effect on a Fund, as this may affect the price paid or received by a
Fund or the size of the position obtainable by a Fund.
During various fiscal periods, the Funds paid advisory and management fees
as follows:
<TABLE>
<CAPTION>
Advisory Fees Paid During:
----------------------------------------
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
August 31, August 31, August 31,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Asset Allocation Fund $ 1,396,000 $ 1,577,254 $ 1,811,123
Value Fund $ 56,988 $ 207,623 $ 366,680
Growth & Income Fund $ 19,129* $ 125,226 $ 318,842
Capital Fund $ 2,519,746 $ 2,735,421 $ 3,140,323
Growth Fund $ 5,563,562 $ 6,323,998 $ 6,792,000
Capital Appreciation Fund $ 1,086,889 $ 1,190,025 $ 1,261,410
</TABLE>
* Period from inception (January 2, 1996) to August 31, 1996.
EXPENSES
Advisers bears the costs of acting as each Fund's transfer agent, registrar
and dividend agent. Advisers also furnishes each Fund with all required
management services, facilities, equipment, and personnel. Advisers or
Investors also shall bear all promotional expenses in connection with the
distribution of Fund shares, including paying for prospectuses and shareholder
reports for new shareholders and the costs of sales literature.
Expenses that relate exclusively to a particular Fund, such as custodian
charges and registration fees for shares, are charged to that Fund. Other
expenses are allocated pro rata between the Funds in an equitable manner as
determined by officers of the Fund under the
<PAGE>
supervision of the Board of Directors, usually on the basis of net assets or
number of accounts.
Advisers reserves the right, but shall not be obligated, to institute
voluntary expense reimbursement programs which, if instituted, shall be in such
amounts and based on such terms and conditions as Advisers, in its sole and
absolute discretion, determines. Furthermore, Advisers reserves the absolute
right to discontinue any of such reimbursement programs at any time without
notice to the applicable Fund.
PLAN OF DISTRIBUTION
Fortis Advantage, Fortis Equity and Fortis Growth, on behalf of each Fund,
have each adopted a plan pursuant to Rule 12b-1 under the 1940 Act. Rule
12b-1(b) provides that any payments made by the Fund in connection with
financing the distribution of its shares may only be made pursuant to a written
plan describing all aspects of the proposed financing of distribution, and also
requires that all agreements with any person relating to the implementation of
the plan must be in writing. In addition, Rule 12b-1(b)(1) requires that such
plan be approved by a majority of the Fund's outstanding shares, and Rule
12b-1(b)(1) requires that such plan, together with any related agreements, be
approved by a vote of the board of Directors who are not interested persons of
the fund and have no direct or indirect interest in the operation of the plan or
in the agreements related to the plan, cast in person at a meeting called for
the purpose of voting on such plan or agreement. Rule 12b-1(b)(3) requires that
the plan or agreement provide in substance:
(i) That it shall continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually in the
manner described in a paragraph (b)(3) of Rule 12b-1;
(ii) That any person authorized to direct the disposition of monies paid
or payable by the fund pursuant to the plan or any related
agreement shall provide to the Board of Directors, and the
directors shall review, at least quarterly, a written report of the
amounts so expended and the purpose for which such expenditures
were made; and
(iii) In the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the Board of Directors who are
not interested persons of the Fund and have no direct or indirect
financial interest in the operation of the plan or in any
agreements related to the plan or by vote of a majority of the
outstanding voting securities of the Fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Fund may rely on Rule 12b-1(b) only if the
selection and nomination of the Fund's disinterested directors are committed to
discretion of such disinterested
<PAGE>
directors. Rule 12b-1(e) provides that the Fund may implement or continue a
plan pursuant to Rule 12b-1(b) only if the directors who vote to approve such
implementation or continuation conclude, in the exercise of reasonable business
judgment and in light of their fiduciary duties under state law, and under
Sections 36(a) and (b) of the 1940 Act, that there is a reasonable likelihood
that the plan will benefit the Fund and its shareholders.
Pursuant to the provisions of the Distribution Plan each Fund pays Advisers
an annual fee of .25% (.45% for Asset Allocation Fund and Capital Appreciation
Fund) of the average daily net assets attributable to that Fund's Class A shares
and 1.00% attributable to that Fund's Class B, Class C and Class H shares. Such
fees are paid in connection with servicing of the Fund's shareholder accounts
and in connection with distribution-related services provided with respect to
the Fund. Class Z shares of Growth Fund and Asset Allocation Fund do not pay
any distribution fees. Investors will be paid under the Distribution Plan
regardless of Investors' actual expenses.
A portion of each Fund's total fee is paid as a distribution fee and will
be used by Investors to cover expenses that are primarily intended to result in,
or that are primarily attributable to, the sale of shares of the Fund
("Distribution Fees"), and the remaining portion of the fee is paid as a
shareholder servicing fee and will be used by Investors to provide compensation
for ongoing servicing and/or maintenance of shareholder accounts ("Shareholder
Servicing Fees"). For the Class A shares, the entire fee is designated as a
Distribution Fee. For the Class B, Class C and Class H shares, Investors
receives a total fee of 1.00% of the average daily net assets of each such
class, of which .75% is designated as a Distribution Fee and .25% is designated
as a Shareholder Servicing Fee.
Distribution Fees under the Plan include, but are not limited to, initial
and ongoing sales compensation (in addition to sales charges) paid to registered
representatives of Investors and to other broker-dealers; expenses incurred in
the printing of prospectuses, statements of additional information and reports
used for sales purposes; expenses of preparation and distribution of sales
literature; expenses of advertising of any type; an allocation of Investors'
overhead; and payments to and expenses of persons who provide support services
in connection with the distribution of Fund shares. Shareholder Servicing Fees
include all expenses of Investors incurred in connection with providing
administrative or accounting services to shareholders, including, but not
limited to, an allocation of Investors' overhead and payments made to persons,
including employees of Investors, who respond to inquiries of shareholders of
the Fund regarding their ownership of shares or their accounts with the Fund, or
who provide other administrative or accounting services not otherwise required
to be provided by Advisers.
Listed below are the total distribution fees paid by the Funds and how
those fees were used by Investors for the fiscal period ended August 31, 1998.
<TABLE>
<CAPTION>
Asset Growth Capital
Allocation Value & Income Growth Appreciation
Fund Fund Fund Capital Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Advertising $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
<PAGE>
Printing and Mailing of 38,916 6,176 6,322 32,234 70,773 25,809
Prospectuses to Other than
Current Shareholders
Compensation to Underwriters 933,755 140,064 123,949 991,856 2,056,497 657,415
Compensation to Dealers 0 0 0
Compensation to Sales Personnel 0 0 0
Interest, Carrying or Other
Financing Charges 0 0 0
Other (distribution-related
compensation, sales literature,
supplies, postage, toll-free
phone) 132,529 42,145 44,121 147,121 265,631 50,593
TOTAL $1,105,200 $ 188,385 $ 174,392 $1,171,211 $2,392,901 $ 733,817
</TABLE>
BROKERAGE ALLOCATION AND OTHER PRACTICES
In a number of security transactions, it is possible for the Funds to deal
in the over-the-counter security markets (including the so-called "third market"
which is the "over-the-counter" market for securities listed on the New York
Stock Exchange) without the payment of brokerage commissions, but at net prices
including a spread or markup. The Funds will continue to trade in this manner
whenever the net price appears advantageous. Generally, the Funds must deal
through brokers.
Advisers selects and (where applicable) negotiates commissions with the
broker-dealers who execute the transactions for each Fund. The primary
criterion for the selection of a broker-dealer is the ability of the
broker-dealer, in the opinion of Advisers, to secure prompt execution of the
transactions on favorable terms, including the reasonableness of the commission
and considering the state of the market at the time. When consistent with these
objectives, business may be placed with broker-dealers who furnish investment
research services to Advisers. Such research services include advice, both
directly and in writing, as to the value of securities; the advisability of
investing in, purchasing, or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analysis and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts. This allows Advisers to
supplement its own investment research activities and enables Advisers to obtain
the views and information of individuals and research staffs of many different
securities research firms prior to making investment decisions for the Fund. To
the extent such commissions are directed to these other broker-dealers who
furnish research services to Advisers, Advisers receives a benefit, not capable
of evaluation in dollar amounts, without providing any direct monetary benefit
to the Fund from these commissions. Advisers believes that most research
services obtained by it generally benefit several or all of the investment
companies and private accounts which it manages, as opposed to solely
benefitting one specific managed fund or account. Research services obtained
through commissions paid by the Fund may be used by Advisers in servicing all of
its accounts, and not all such services would necessarily be used by Advisers in
connection with the Fund.
Advisers has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of
<PAGE>
Fund portfolio transactions in exchange for research services provided Advisers,
except as noted below. However, Advisers does maintain an informal list of
broker-dealers, which is used from time to time as a general guide in the
placement of Fund business, in order to encourage certain broker-dealers to
provide Advisers with research services which Advisers anticipates will be
useful to it. Because the list is merely a general guide, which is to be used
only after the primary criterion for the selection of broker-dealers (discussed
above) has been met, substantial deviations from the list are permissible and
may be expected to occur. Advisers will authorize each Fund to pay an amount of
commission for effecting a securities transaction in excess of the amount of
commission another broker-dealer would have charged only if Advisers determines
in good faith that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either that particular transaction or Advisers' overall
responsibilities with respect to the accounts as to which Advisers exercises
investment discretion. Generally, the Funds pay higher commissions than the
lowest rates available.
The Funds paid the following brokerage commissions for the periods
indicated:
<TABLE>
<CAPTION>
Fiscal Period Ended Fiscal Year Ended Fiscal August Ended
August 31, 1996 August 31, 1997 August 31, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Asset Allocation Fund $ 74,894 $ 131,066 $ 207,470
Value Fund 19,061 67,046 188,814
Growth & Income Fund 5,040 17,192 24,624
Capital Fund 190,273 360,210 684,684
Growth Fund 359,800 421,163 1,120,063
Capital Appreciation Fund 45,448 36,593 90,781
</TABLE>
No Fund will effect any brokerage transactions in its portfolio securities
with any broker-dealer affiliated directly or indirectly with Advisers, unless
such transactions, including the frequency thereof, the receipt of commissions
payable in connection therewith, and the selection of the affiliated
broker-dealer effecting such transactions are not unfair or unreasonable to the
shareholders of the Fund. No commissions were paid to any affiliate of Advisers
by any of the Funds during the fiscal years ended August 31, 1996, 1997, and
1998.
From time to time, the Funds may acquire the securities of their regular
brokers or dealers or parent companies of such brokers or dealers. The Funds
acquired the following securities of their regular brokers or dealers or parent
companies of such brokers or dealers during the fiscal period ended August 31,
1998:
<TABLE>
<CAPTION>
Value of Securities
Owned at End of Period
----------------------
<S> <C>
ASSET ALLOCATION FUND
Bear Stearns Capital Trust $ 514,682
J.P. Morgan Commercial Mortgage 1,572,960
Lehman Brothers Holding 2,132,488
Merrill Lynch Mortgage 842,537
<PAGE>
Norwest Investment Services 7,518,287
U.S. Bank N.A. 7,234
VALUE FUND
J.P. Morgan Commercial Mortgage 623,100
Norwest Investment Services 2,903,420
U.S. Bank N.A. 465,258
GROWTH & INCOME FUND
Norwest Investment Services 3,285,642
U.S. Bank N.A. 78,321
CAPITAL FUND
Norwest Investment Services 23,696,397
U.S. Bank N.A. 13,445
GROWTH FUND
Norwest Investment Services 44,679,853
U.S. Bank N.A. 37,000
CAPITAL APPRECIATION FUND
Norwest Investment Services 6,882,313
U.S. Bank N.A. 4,876
</TABLE>
Advisers has developed written trade allocation procedures for its
management of the securities trading activities of its clients. Advisers manages
multiple portfolios, both public (mutual funds) and private. The purpose of the
trade allocation procedures is to treat the portfolios fairly and reasonably in
situations where the amount of a security that is available is insufficient to
satisfy the volume or price requirements of each portfolio that is interested in
purchasing that security. Generally, when the amount of securities available in
a public offering or the secondary market is insufficient to satisfy the
requirements for the interested portfolios, the procedures require a pro rata
allocation based upon the amounts initially requested by each portfolio manager.
In allocating trades made on combined basis, Advisers seeks to achieve the
average price of the securities for each participating portfolio. Because a pro
rata allocation may not always adequately accommodate all facts and
circumstances, the procedures provide for exceptions to allocate trades on a
basis other than pro rata. Examples of where adjustments may be made include:
(i) the cash position of the portfolios involved in the transaction; and (ii)
the relative importance of the security to a portfolio in seeking to achieve its
investment objective.
CAPITAL STOCK
Each Fund's shares have a par value of $.01 per share and equal rights to
share in dividends and assets. The shares possess no preemptive or conversion
rights.
Each Fund currently offers it shares in multiple classes, each with
different sales
<PAGE>
arrangements and bearing different expenses. Under the Funds' Articles of
Incorporation, the Board of Directors is authorized to create new portfolios or
classes without the approval of the shareholders of a Fund. Each share will
have a pro rata interest in the assets of the portfolio to which the shares of
that series relate, and will have no interest in the assets of any other
portfolio. In the event of liquidation, each share of a portfolio would have the
same rights to dividends and assets as every other share of that portfolio,
except that, in the case of a series with more than one class of shares, such
distributions will be adjusted to appropriately reflect any charges and expenses
borne by each individual class.
None of the Funds are required under Minnesota law to hold annual or
periodically scheduled regular meetings of shareholders. Minnesota corporation
law provides for the Board of Directors to convene shareholder meetings when it
deems appropriate. In addition, if a regular meeting of shareholders has not
been held during the immediately preceding fifteen months, a shareholder or
shareholders holding three percent or more of the voting shares may demand a
regular meeting of shareholders by written notice of demand given to the chief
executive officer or the chief financial officer. Within ninety days after
receipt of the demand, a regular meeting of shareholders must be held at the
Fund's expense. Additionally, the 1940 Act requires shareholder votes for all
amendments to fundamental investment policies and restrictions and for all
investment advisory contracts and amendments thereto.
Cumulative voting is not authorized. This means that the holders of more
than 50% of the shares voting for the election of directors can elect 100% of
the directors if they choose to do so, and in such event the holders of the
remaining shares will be unable to elect any directors.
PRICING OF SHARES
ASSET ALLOCATION FUND
On August 31, 1998, the Fund's net asset values per share were calculated
as follows (no Class Z shares were outstanding as of this date):
CLASS A
Net Assets ($151,919,819) = Net Asset Value per Share ($16.91)
-----------------------------
Shares Outstanding (8,983,702 )
To obtain the public offering price per share, the 4.75% sales charge must be
added to the net asset value obtained above:
$16.91 = Public Offering Price per Share ($17.75)
------
0.9525
CLASS B
Net Assets ($9,928,052) = Net Asset Value per Share ($16.80)
-----------------------------
Shares Outstanding (590,940)
CLASS C
Net Assets ($5,830,993) = Net Asset Value per Share ($16.74)
-----------------------------
Shares Outstanding (348,401)
CLASS H
<PAGE>
Net Assets ($22,979,434) = Net Asset Value per Share ($16.79)
-----------------------------
Shares Outstanding (1,368,337)
VALUE FUND
On August 31, 1998, the Fund's net asset values per share were calculated as
follows:
CLASS A
Net Assets ($22,448,820) = Net Asset Value per Share ($11.85)
-----------------------------
Shares Outstanding (1,894,249)
To obtain the public offering price per share, the 4.75% sales charge must be
added to the net asset value obtained above:
$11.85 = Public Offering Price per Share ($12.44)
------
0.9525
CLASS B
Net Assets ($4,793,957) = Net Asset Value per Share ($11.71)
-----------------------------
Shares Outstanding (409,260)
CLASS C
Net Assets ($1,990,524) = Net Asset Value per Share ($11.72)
-----------------------------
Shares Outstanding (169,861)
CLASS H
Net Assets ($7,016,498) = Net Asset Value per Share ($11.72)
-----------------------------
Shares Outstanding (598,717)
GROWTH & INCOME FUND
On August 31, 1998, the Fund's net asset values per share were calculated as
follows:
CLASS A
Net Assets ($20,994,307) = Net Asset Value per Share ($13.20)
-----------------------------
Shares Outstanding (1,591,074)
To obtain the public offering price per share, the 4.75% sales charge must be
added to the net asset value obtained above:
$13.20 = Public Offering Price per Share ($13.86)
------
0.9525
CLASS B
Net Assets ($5,158,623) = Net Asset Value per Share ($13.16)
-----------------------------
Shares Outstanding (391,957)
CLASS C
Net Assets ($2,452,708) = Net Asset Value per Share ($13.16)
-----------------------------
Shares Outstanding (168,471)
CLASS H
Net Assets ($6,305,699) = Net Asset Value per Share ($13.16)
-----------------------------
<PAGE>
Shares Outstanding (479,134)
CAPITAL FUND
On August 31, 1998, the Fund's net asset values per share were calculated as
follows:
CLASS A
Net Assets ($312,582,197) = Net Asset Value per Share ($22.37)
-----------------------------
Shares Outstanding (13,973,341)
To obtain the public offering price per share, the 4.75% sales charge must be
added to the net asset value obtained above:
$22.37 = Public Offering Price per Share ($23.49)
------
0.9525
CLASS B
Net Assets ($9,338,795) = Net Asset Value per Share ($21.73)
-----------------------------
Shares Outstanding (429,750)
CLASS C
Net Assets ($2,452,708) = Net Asset Value per Share ($21.73)
-----------------------------
Shares Outstanding (112,878)
CLASS H
Net Assets ($16,986,594) = Net Asset Value per Share ($21.74)
-----------------------------
Shares Outstanding (781,254)
GROWTH FUND
On August 31, 1998, the Fund's net asset values per share were calculated as
follows:
CLASS A
Net Assets ($581,818,754) = Net Asset Value per Share ($29.78)
------------------------------
Shares Outstanding (19,538,392)
To obtain the public offering price per share, the 4.75% sales charge must be
added to the net asset value obtained above:
$29.78 = Public Offering Price per Share ($31.27)
------
0.9525
CLASS B
Net Assets ($12,416,546) = Net Asset Value per Share ($28.85)
-----------------------------
Shares Outstanding (430,379)
CLASS C
Net Assets ($2,737,896) = Net Asset Value per Share ($28.85)
-----------------------------
Shares Outstanding (94,905)
CLASS H
Net Assets ($34,452,800) = Net Asset Value per Share ($28.86)
-----------------------------
<PAGE>
Shares Outstanding (1,193,677)
CLASS Z
Net Assets ($95,369,978) = Net Asset Value per Share ($30.00)
-----------------------------
Shares Outstanding (3,179,327)
CAPITAL APPRECIATION FUND
On August 31, 1998, the Fund's net asset values per share were calculated as
follows:
CLASS A
Net Assets ($79,813,218) = Net Asset Value per Share ($26.42)
-----------------------------
Shares Outstanding (3,020,824)
To obtain the public offering price per share, the 4.75% sales charge must be
added to the net asset value obtained above:
$26.42 = Public Offering Price per Share ($27.74)
------
0.9525
CLASS B
Net Assets ($5,848,934) = Net Asset Value per Share ($25.90)
-----------------------------
Shares Outstanding (225,785)
CLASS C
Net Assets ($1,793,777) = Net Asset Value per Share ($25.92)
-----------------------------
Shares Outstanding (69,204)
CLASS H
Net Assets ($11,932,860) = Net Asset Value per Share ($25.92)
-----------------------------
Shares Outstanding (460,343)
The primary close of trading of the New York Stock Exchange (the
"Exchange") currently is 3:00 P.M. (Central Time), but this time may be changed.
The offering price for purchase orders received in the office of the Funds after
the beginning of each day the Exchange is open for trading is based on net asset
value determined as of the primary closing time for business on the Exchange
that day; the price in effect for orders received after such close is based on
the net asset value as of such close of the Exchange on the next day the
Exchange is open for trading. Net asset value is the value of the securities
owned by the Fund, plus cash or other assets, less liabilities, divided by the
number of Fund shares outstanding.
Generally, the net asset value of the Funds' shares is determined on each
day on which the Exchange is open for business. The Exchange is not open for
business on the following holidays (or on the nearest Monday or Friday if the
holiday falls on a weekend): New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, net asset value need not be
determined (i) on days on which changes in the value of the Funds' portfolio
securities will not materially affect the current net asset value of the Funds'
shares; or (ii) on days during which no Fund shares are tendered for redemption
and no orders to purchase or sell Fund shares are received by the Funds.
<PAGE>
PURCHASE OF SHARES
EXEMPTIONS FROM SALES CHARGE
Purchases of Class A shares made by the following are exempt from the sales
charge:
- Fortis, Inc. or its subsidiaries and the following persons associated
with such companies, if all account owners fit this description:
(1) officers and directors; (2) employees or sales representatives
(including agencies and their employees); (3) spouses/domestic
partners of any such persons; or (4) any of such persons' children,
grandchildren, parents, grandparents, or siblings or spouses/domestic
partners of any of these persons. (All such persons may continue to
add to their account even after their company relationships have
ended);
- Fund directors, officers, or their spouses/domestic partners (or such
persons' children, grandchildren, parents, or grandparents--or
spouses/domestic partners of any such persons), if all account owners
fit this description;
- Representatives of Investors (including agencies) or of other
broker-dealers (or spouses of such representatives) having a sales
agreement with Investors (or such persons' children, grandchildren,
parents, or grandparents - or spouses of any such persons), if all
account owners fit this description;
- Pension, profit-sharing, and other retirement plans of directors,
officers, employees, representatives, and other relatives and
affiliates (as set forth in the preceding three paragraphs) of the
Fund, Fortis, Inc., and broker-dealers (and certain affiliated
companies) having a sales agreement with Investors and purchases with
the proceeds from such plans upon the retirement or employment
termination of such persons;
- Registered investment companies;
- Shareholders of unrelated mutual funds with front-end and/or deferred
sales loads, to the extent that the purchase price of such Fund shares
is funded by the proceeds from the redemption of shares of any such
unrelated mutual fund (within 60 days of the purchase of Fund shares),
provided that the shareholder's application so specifies and is
accompanied either by the redemption check of such unrelated mutual
fund (or a copy of the check) or a copy of the confirmation statement
showing the redemption. Similarly, anyone who is or has been the owner
of a fixed annuity contract not deemed a security under the securities
laws who wishes to surrender such contract and invest the proceeds in
a Fund, to the extent that the purchase price of such Fund shares is
funded by the proceeds from the surrender of the contract (within
60 days of the purchase of Fund shares), provided that such owner's
application so specifies and is accompanied either by the insurance
company's check (or a copy of the check) or a copy of the insurance
company surrender form. From time to time, Investors may pay
commissions to broker-dealers and registered representatives on
transfers from mutual funds or annuities as described above;
- Purchases by employees (including their spouses and dependent
children) of
<PAGE>
banks and other financial institutions that provide referral and
administrative services related to order placement and payment to
facilitate transactions in shares of the Fund for their clients
pursuant to a sales or servicing agreement with Investors; provided,
however, that only those employees of such banks and other firms who
as a part of their usual duties provide such services related to such
transactions in Fund shares shall qualify;
- Commercial banks offering self directed 401(k) programs containing
both pooled and individual investment options may purchase Fund shares
for such programs at a reduced sales charge of 2.5% on sales of less
than $500,000. For sales of $500,000 or more, normal sales charges
apply;
- Registered investment advisers, trust companies, and bank trust
departments exercising discretionary investment authority or using a
money management/mutual fund "wrap" program with respect to the money
to be invested in the Fund, provided that the investment adviser,
trust company or trust department provides Advisers with evidence of
such authority or the existence of such a wrap program with respect to
the money invested;
- Purchasers of Medical Savings Accounts ("MSAs") from Fortis Insurance
Company who maintain certain minimum balances in their MSA accounts
may invest a portion of their MSA account balances in Asset Allocation
Fund, Value Fund, Growth & Income Fund and Capital Fund.
In addition, purchases of Class Z shares of Growth Fund and Asset
Allocation Fund made by the following are exempt from the sales charge:
- Fortis, Inc. or its subsidiaries and the following persons associated
with such companies, if all account owners fit this description:
(1) officers and directors; (2) employees or sales representatives
(including agencies and their employees); (3) spouses/domestic
partners of any such persons; or (4) any of such persons' children,
grandchildren, parents, grandparents, or siblings or spouses/domestic
partners of any of these persons. (All such persons may continue to
add to their account even after their company relationships have
ended);
- Fund directors, officers, or their spouses/domestic partners (or such
persons' children, grandchildren, parents, or grandparents--or
spouses/domestic partners of any such persons), if all account owners
fit this description;
- Representatives of Investors (including agencies) or their spouses; or
such persons' children, grandchildren, parents or grandparents, or
spouses of any such persons), if all account owners fit this
description;
- Pension, profit-sharing and other retirement plans created for the
benefit of any of the above persons;
- Accounts which were exchanged from Special Portfolios, Inc., Stock
Portfolio.
SPECIAL PURCHASE PLANS
STATEMENT OF INTENTION. Your sales charge may be reduced or eliminated by
signing a non-binding Statement of Intention to purchase at least $100,000 of
shares which are sold with a
<PAGE>
sales charge over a 13-month period. The 13-month period is measured from the
date the letter of intent is approved by Investors, or at the purchaser's option
it may be made retroactive 90 days, in which case Investors will make
appropriate adjustments on purchases during the 90-day period.
In computing the total amount purchased for purposes of determining the
applicable sales commission, the public offering price (at the time they were
purchased) of shares currently held in the Fortis Funds having a sales charge
and purchased within the past 90 days may be used as a credit toward Fund shares
to be purchased under the Statement of Intention. Any such fund shares
purchased during the remainder of the 13-month period also may be included as
purchases made under the Statement of Intention.
The Statement of Intention includes a provision for payment of additional
applicable sales charges at the end of the period in the event the investor
fails to purchase the amount indicated. This is accomplished by holding in
escrow the number of shares represented by the sales charge discount. If the
investor's purchases equal those specified in the Statement of Intention, the
escrow is released. If the purchases do not equal those specified in the
Statement of Intention, the shareholder may remit to Investors an amount equal
to the difference between the dollar amount of sales charges actually paid and
the amount of sales charges that would have been paid on the aggregate purchases
if the total of such purchases had been made at a single time. If the purchaser
does not remit this sum to Investors on a timely basis, Investors will redeem
the escrowed shares.
RETIREMENT PLANS. Individual taxpayers can defer taxes on current income
by investing in tax qualified retirement plans established by their employer,
such as a pension plan, profit-sharing plan and Section 403(b)plans, or in
Individual Retirement Accounts (IRAs), including a traditional IRA, Roth IRA and
Education IRA. If you are interested in a retirement plan account, you should
contact Investors. Investing in a retirement plan involves a long-term
commitment of assets and is subject to legal and tax requirements and
restrictions. You should consult with your attorney or tax adviser prior to
establishing such a plan.
SYSTEMATIC INVESTMENT PLAN. The Systematic Investment Plan enables you to
make regular purchases in amounts less than normally required and employs the
principle of dollar cost averaging, described below.
By acquiring Fund shares on a regular or systematic basis, you take
advantage of the principle of dollar cost averaging. Under dollar cost
averaging, if a constant amount is invested at regular intervals at varying
price levels, the average cost of all the shares will be lower than the average
of the price levels. This is because the same fixed number of dollars buys more
shares when price levels are low and fewer shares when price levels are high.
The principle of dollar cost averaging will not protect against loss in a
declining market and a loss will result if the plan is discontinued when the
market value is less than cost.
You have no obligation to invest regularly or to continue the Plan, which
you may terminate at any time without penalty. Under the Plan, any
distributions of income and realized
<PAGE>
capital gains will be reinvested in additional shares at net asset value unless
you instruct Investors in writing to pay distributions in cash. Investors
reserves the right to increase or decrease the amount required to open and
continue a Plan, and to terminate any Plan after one year if the value of the
amount invested is less than the amount indicated.
EXCHANGE PRIVILEGE. You may exchange your shares for the same class of
shares in another Fortis Fund without payment of an exchange fee or additional
sales charge. The amount exchanged must meet the minimum purchase amount of the
Fund being purchased. You should consider the investment objectives and
policies of the other fund prior to making such exchange.
For Federal tax purposes, except where the transferring shareholder is a
tax qualified plan, an exchange between funds is a taxable event that will
result in a capital gain or loss. If you exchange your shares within 90 days of
purchase, the sales charge on that purchase cannot be taken into account for
determining your gain or loss on the sale of those shares to the extent that the
sales charge that would have been applicable to the purchase of the
later-acquired shares in the other fund is reduced because of the exchange
privilege. However, the amount of the sales charge that may not be taken into
account in determining your gain or loss on the sale of the first-acquired
shares may be taken into account in determining gain or loss on the eventual
sale or exchange of the later-acquired shares.
GIFTS OR TRANSFERS TO MINOR CHILDREN. You may purchase Fund shares in an
account established for a minor. This gift or transfer is registered in the
name of the custodian for a minor under the Uniform Transfers to Minors Act (in
some states the Uniform Gifts to Minors Act). Control of the Fund shares passes
to the child upon reaching a specified age (either 18 or 21 years in most
states).
REDEMPTION OF SHARES
GENERAL
If you request a redemption, the Fund is required to redeem your shares,
with certain exceptions. The Fund will pay all redemption requests in cash,
limited in amount during any 90-day period to the lesser of $250,000 or 1% of
the net asset value of the Fund at the beginning of such period. If your
redemption request exceeds such amount, the Fund reserves the right to make part
or all of the payment in the form of readily marketable securities or other
assets of the Fund. An example of when this might be done is in case of an
emergency, such as in those situations listed in the following paragraph, or at
any time a cash distribution would impair the liquidity of the Fund to the
detriment of the remaining shareholders. Any securities being so distributed
would be valued in the same manner as the portfolio of the Fund is valued. If
you received securities which you later sold, you probably would incur brokerage
charges.
Redemption of shares or payment may be suspended at time (a) when the
Exchange is closed for other than customary weekend or holiday closings, (b)
when trading on said Exchange is restricted, (c) when an emergency exists, as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable, or it is not reasonably practicable for the Fund fairly to
<PAGE>
determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits; provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist.
There is no charge for redeeming shares. In the event a charge is
established, it would apply only to persons who became shareholders after the
charge was implemented, and it would not, in any event, exceed 1% of the net
asset value of the shares redeemed. Should further public sales ever be
discontinued, the Funds may deduct a proportionate share of the cost of
liquidating assets from the asset value of the shares being redeemed, in order
to protect the equity of the other shareholders.
SYSTEMATIC WITHDRAWAL PLAN
You may open a "Systematic Withdrawal Plan" providing for withdrawals of
$50 or more monthly, quarterly, semiannually or annually if the value of your
shares is at least $4,000 ($10,000 if you elect monthly withdrawals).
These withdrawals may constitute return of capital. The redemption of Fund
shares pursuant to the Systematic Withdrawal Plan is a taxable event to you.
The withdrawals do not represent a yield or a return on your investment and
they may deplete or eliminate your investment. You have no assurance of
receiving payment for any specific period because payments will terminate when
all shares have been redeemed. The number of such payments will depend on the
amount and frequency of each payment and the increase (or decrease) in value of
the remaining shares.
Distributions of income and realized capital gains will continue to be
reinvested at net asset value. If you purchase additional shares of the Fund
(other than by reinvestment of distributions), when you have elected a
Systematic Withdrawal Plan, you will pay a sales charge on your purchases at the
same time that withdrawals are made at net asset value. Purchases of additional
shares concurrent with withdrawals are ordinarily disadvantageous to you because
of sales charges and tax liabilities. Additions to your account in which an
election has been made to receive systematic withdrawals will be accepted only
if each additional purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. You may not have a "Systematic
Withdrawal Plan" and a "Systematic Investment Plan" in effect at the same time.
The Systematic Withdrawal Plan is voluntary, flexible and under your
control and direction at all times, and does not limit or alter your right to
redeem shares. You or the Fund may terminate the Plan at any time by written
notification. Advisers bears the cost of operating the Plan.
REINVESTMENT PRIVILEGE
If you redeem Fund shares, you have a one-time privilege to reinvest in the
Fund or in any other fund underwritten by Investors and available to the public,
without a sales charge. The
<PAGE>
reinvestment privilege must be exercised within 60 days of the redemption and
for an amount which does not exceed the redemption proceeds.
The purchase price for Fund shares will be based upon net asset value at
the time of reinvestment, and may be more or less than the redemption value.
Should you utilize the reinvestment privilege within 30 days following a
redemption which resulted in a loss, all or a portion of that loss may not be
currently deductible for Federal income tax purposes. Exercising the
reinvestment privilege would not defer any capital gains taxes payable on a
realized gain. Furthermore, if you redeem within 90 days of purchasing your
shares, the sales charge incurred on that purchase cannot be taken into account
for determining your gain or loss on the sale of those shares. The primary
close of trading of the New York Stock Exchange (the "Exchange") currently is
3:00 P.M. (Central Time), but this time may be changed. The offering price for
purchase orders received in the office of the Funds after the beginning of each
day the Exchange is open for trading is based on net asset value determined as
of the primary closing time for business on the Exchange that day; the price in
effect for orders received after such close is based on the net asset value as
of such close of the Exchange on the next day the Exchange is open for trading.
TAXATION
Each Fund has qualified, and intends to continue to qualify, as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). If a Fund so qualifies, it is not taxed on the income it distributes
to its shareholders.
Gain or loss realized upon the sale of shares in a Fund will be treated as
capital gain or loss, provided that the shares represented a capital asset in
the hands of the shareholder. For individuals, estates, and trusts, long-term
capital gains, which are realized on the sale or exchange of capital assets held
for more than one year, are subject to a maximum federal income tax rate of 20%,
while ordinary income is subject to a maximum rate of 39.6%. Short-term capital
gains, which are realized on the sale or exchange of capital assets held one
year or less, are taxed at the same rates as ordinary income.
Pursuant to a special provision in the Code, if Fund shares with respect to
which a long-term capital gain distribution has been made are held for six
months or less, any loss on the sale or other disposition of such shares will be
a long-term capital loss to the extent of such long-term capital gain
distribution, unless such sale or other disposition is pursuant to a Systematic
Withdrawal Plan.
Under the Code, each Fund is subject to a nondeductible excise tax for each
calendar year equal to 4 percent of the excess, if any, of the amount required
to be distributed over the amount distributed. However, the excise tax does not
apply to any income on which a Fund pays income tax. In order to avoid the
imposition of the excise tax, each Fund generally must declare dividends by the
end of a calendar year representing at least 98 percent of the Fund's ordinary
income for the calendar year and 98 percent of its capital gain net income (both
long-term and short-term capital gains) for the 12-month period ending
October 31 of the calendar year.
<PAGE>
Asset Allocation Portfolio may invest in zero coupon obligations. If it
invests in such obligations upon their issuance, the obligations will have
original issue discount in the hands of the Fund. Generally, the original issue
discount equals the difference between the "stated redemption price at maturity"
of the obligation and its "issue price" as those terms are defined in the Code.
If the Fund acquires an already issued zero coupon bond from another holder, the
bond will have original issue discount in the Fund's hands, equal to the
difference between the "adjusted issue price" of the bond at the time the Fund
acquires it (that is, the original issue price of the bond plus the amount of
original issue discount accrued to date) and its stated redemption price at
maturity. In each case, the Fund is required to accrue as ordinary interest
income a portion of such original issue discount even though it receives no cash
currently as interest payment on the obligation. Similarly, if Asset Allocation
Portfolio invests in PIKs, it is required to recognize interest income in the
amount of the fair market value of the securities received as interest payments
on the PIKs, even though it receives no cash.
Because each Fund is required to distribute substantially all of its net
investment income (including accrued original issue discount and interest income
attributable to PIKs) in order to be taxed as a regulated investment company,
Asset Allocation Portfolio may be required to distribute an amount greater than
the total cash income the Fund actually receives. Accordingly, in order to make
the required distribution, the Fund may be required to borrow or to liquidate
securities.
If any Fund (other than Growth Fund) invests in options and futures, it may
be obliged to recognize gains and losses on certain options and futures it holds
at the end of the fiscal year. Under the marked-to-market rules, 60% of any net
capital gain or loss recognized is treated as long-term and 40% as short-term.
In addition, the straddle rules of the Code would require deferral of certain
losses realized on positions of a straddle to the extent that a Fund has
unrealized gains in offsetting positions at year end.
Under the Code, each Fund is required to withhold and remit to the U.S.
Treasury 31% of dividend and capital gain income on the accounts of certain
shareholders who fail to provide a correct tax identification number, fail to
certify that they are not subject to backup withholding, or are subject to
backup withholding for some other reason.
The foregoing is a general discussion of the Federal income tax
consequences of an investment in the Funds as of the date of this Statement of
Additional Information. Distributions may also be subject to state and local
taxes. Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, or local taxes.
UNDERWRITER AND DISTRIBUTION OF SHARES
Pursuant to the Underwriting and Distribution Agreement, Investors has
agreed to act as the principal underwriter for the Funds in the sale an
distribution to the public of shares of the Fund, either through dealers or
otherwise. Investors has agreed to offer such shares for sale at all times when
such shares are available for sale and may lawfully be offered for sale and
sold. As compensation for its services, in addition to receiving its
distribution fees pursuant to the
<PAGE>
Distribution Plan discussed above, Investors receives the initial sales charges
on sales of Class A shares of the Funds and any contingent deferred sales
charges and redemptions of certain Class A shares of the Funds that were not
subject to an initial sales charge, as set forth in the Prospectus. The
following tables set forth the amount of underwriting commissions paid by each
Fund and the amount of such commissions retained by Investors.
<TABLE>
<CAPTION>
Total Underwriting Commissions
-------------------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
August 31, 1996 August 31, 1997 August 31, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Asset Allocation Fund $ 559,079 $ 438,308 $ 500,107
Value Fund 58,069 149,014 236,426
Growth & Income Fund 56,833 145,005 246,685
Capital Fund 488,205 461,654 530,929
Growth Fund 1,716,774 1,439,303 1,256,346
Capital Appreciation Fund 572,493 526,432 367,109
<CAPTION>
Underwriting Commissions Retained by Investors
-------------------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
August 31, 1996 August 31, 1997 August 31, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Asset Allocation Fund $ 119,087 $ 70,416 $ 65,123
Value Fund 13,865 28,996 32,703
Growth & Income Fund 14,644 8,377 29,523
Capital Fund 93,932 94,167 66,201
Growth Fund 342,166 254,436 139,000
Capital Appreciation Fund 119,541 101,781 39,408
</TABLE>
Investors received the following compensation from each Fund during its
most recent fiscal year.
<TABLE>
<CAPTION>
Net Compensation on
Underwriting Redemptions
Discounts and and Brokerage Other
Commissions Repurchases Commissions Compensation
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Asset Allocation Fund $ 438,623 $ 61,484 $ 0 $ 0
Value Fund $ 202,655 $ 33,771 $ 0 $ 0
Growth & Income Fund $ 215,428 $ 31,257 $ 0 $ 0
Capital Fund $ 456,456 $ 74,473 $ 0 $ 0
Growth Fund $ 1,051,136 $ 205,210 $ 0 $ 0
Capital Appreciation Fund $ 274,920 $ 92,189 $ 0 $ 0
</TABLE>
PERFORMANCE INFORMATION
Advertisements and other sales literature for the Funds may refer to
"average annual total return," "cumulative total return" and "yield." All such
yield and total return quotations are based on historical earnings and are not
intended to indicate future performance.
<PAGE>
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Average annual total return figures are computed according to the
following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gains
distributions are reinvested at net asset value on the appropriate reinvestment
dates, and includes all recurring fees, such as investment advisory and
management fees, charged to all shareholder accounts. Average annual total
return quotations may be accompanied by quotations which do not reflect the
reduction in value of the initial investment due to the sales charge, and which
thus will be higher.
The following tables set forth the average annual total returns for each
Class of shares of each Fund for one year, five years and since inception (10
years with respect to Class A shares of Asset Allocation Fund, Growth & Income,
Capital Fund, Growth Fund and Capital Appreciation Fund for the period ending
August 31, 1998. No information is presented for the Class Z shares of Asset
Allocation Fund, which were not offered prior to the date of this Statement of
Additional Information.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------------------
10 YEARS/SINCE
1 YEAR 5 YEARS INCEPTION
------ ------- ---------
<S> <C> <C> <C>
ASSET ALLOCATION FUND
Class A Shares - 2.17% 9.563% 11.22%
Class B Shares* - 1.46% -- 12.07%
Class C Shares* 1.15% -- 12.50%
Class H Shares* - 1.45% -- 12.05%
Value Fund
Class A Shares** - 7.15% -- 9.84%
Class B Shares** - 6.39% -- 9.89%
Class C Shares** - 4.21% -- 11.06%
Class H Shares** - 6.30% -- 9.83%
GROWTH & INCOME FUND
Class A Shares** - 2.08% -- 10.82%
Class B Shares** - 1.61% -- 10.91%
Class C Shares** .99% -- 12.03%
Class H Shares** 1.61% -- 10.91%
CAPITAL FUND
<PAGE>
Class A Shares 3.26% 12.57% 14.15%
Class B Shares* - 2.80% -- 13.93%
Class C Shares* - .24% -- 14.42%
Class H Shares* - 2.80% -- 13.94%
GROWTH FUND
Class A Shares - 14.83% 6.58% 13.46%
Class B Shares* - 13.98% -- 10.40%
Class C Shares* - 12.01% -- 10.93%
Class H Shares* - 13.98% -- 10.41%
Class Z Shares*** - 10.34% -- 6.19%
CAPITAL APPRECIATION FUND
Class A Shares - 17.76% 2.53% 10.75%
Class B Shares* - 17.16% -- 4.69%
Class C Shares* - 14.98% -- 5.33%
Class H Shares* - 17.16% -- 4.71%
</TABLE>
* Inception date: November 14, 1994.
** Inception date: January 2, 1996.
*** Inception date: March 1, 1996.
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR = ( ERV -P) 10
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period; and
P = initial payment of $1,000
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The following table sets forth the cumulative total returns of each Class
of shares of each Fund for the period from inception through August 31, 1998,
except for the Class Z shares of Asset Allocation Fund, which were not offered
prior to the date of this Statement of Additional Information.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C>
ASSET ALLOCATION FUND
Class A Shares (1) 190.45%
Class B Shares (2) 54.12%
Class C Shares (2) 56.40%
Class H Shares (2) 54.06%
<PAGE>
VALUE FUND
Class A Shares (3) 28.42%
Class B Shares (3) 28.55%
Class C Shares (3) 32.26%
Class H Shares (3) 28.66%
GROWTH & INCOME FUND
Class A Shares (3) 31.51%
Class B Shares (3) 31.76%
Class C Shares (3) 35.36%
Class H Shares (3) 31.76%
CAPITAL FUND
Class A Shares (4) 26,733.83%
Class B Shares (2) 64.07%
Class C Shares (2) 66.79%
Class H Shares (2) 64.14%
GROWTH FUND
Class A Shares (5) 8,086.66%
Class B Shares (2) 45.59%
Class C Shares (2) 48.29%
Class H Shares (2) 45.63%
Class Z Shares (6) 16.22%
CAPITAL APPRECIATION FUND
Class A Shares (1) 202.39%
Class B Shares (2) 19.00%
Class C Shares (2) 21.79%
Class H Shares (2) 19.09%
</TABLE>
(1) Inception date: January 4, 1988.
(2) Inception date: November 14, 1994.
(3) Inception date: January 2, 1996.
(4) Inception date: June 8, 1949.
(5) Inception date: March 31, 1963.
(6) Inception date: March 1, 1996.
The "yield" refers to the income generated by an investment over a 30-day
(or one month) period (which period will be stated in the advertisement). It is
calculated by dividing the net investment income per share (as defined under
Securities and Exchange Commission rules) earned during the computation period
by the maximum offering price per share on the last day of the period, according
to the following formula. The result is then annualized using a formula that
provides for semiannual compounding of income.
6
Yield = 2 [(A-B + 1) - 1]
---
cd
<PAGE>
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; and
d = the maximum offering price per share on the last day of the
period.
None of the Funds currently provide yield information.
The Funds may advertise relative performance as compiled by outside
organizations or refer to publications which have mentioned their performance or
track the performance of investment companies. Following is a list of ratings
services which may be referred to, along with the category in which the Funds
are included. Because some of these organizations do not take into account
sales charges, their ratings may sometimes be different than had they done so.
ASSET ALLOCATION FUND
RATINGS SERVICE CATEGORY
--------------- --------
Lipper Analytical Services, Inc. flexible portfolio
CDA/Wiesenberger asset allocation -- domestic
Morningstar Publications, Inc. asset allocation
Johnson's Charts total return
VALUE FUND
RATINGS SERVICE CATEGORY
--------------- --------
Lipper Analytical Services, Inc. growth and income
CDA/Wiesenberger growth -- domestic
Morningstar Publications, Inc. large value
Johnson's Charts long term growth
GROWTH & INCOME FUND
RATINGS SERVICE CATEGORY
--------------- --------
Lipper Analytical Services, Inc. growth and income
CDA/Wiesenberger growth and income
Morningstar Publications, Inc. large blend
Johnson's Charts growth and income
CAPITAL FUND
RATINGS SERVICE CATEGORY
--------------- --------
Lipper Analytical Services, Inc. growth and income -- multisector
income
CDA/Wiesenberger growth -- domestic
Morningstar Publications, Inc. growth
Johnson's Charts growth and income
GROWTH FUND
RATINGS SERVICE CATEGORY
--------------- --------
Lipper Analytical Services, Inc. capital appreciation
<PAGE>
CDA/Wiesenberger growth -- domestic
Morningstar Publications, Inc. small company growth
Johnson's Charts long term growth
CAPITAL APPRECIATION FUND
RATINGS SERVICE CATEGORY
--------------- --------
Lipper Analytical Services, Inc. small company growth
CDA/Wiesenberger aggressive growth
Morningstar Publications, Inc. small company growth
Johnson's Charts long term growth
FINANCIAL STATEMENTS
The audited financial statements as of August 31, 1998, as set forth in the
Funds' Annual Report to Shareholders, are incorporated herein by reference. The
audited financial statements are provided in reliance on the report of KPMG Peat
Marwick LLP, 4200 Norwest Center, Minneapolis, MN 55402, independent auditors
of the Funds, and given on the authority of such firm as experts in accounting
and auditing. Also incorporated herein by reference are the unaudited
financial statements as of February 28, 1999, as set forth in the Funds'
Semi-Annual Report to Shareholders.
OTHER SERVICE PROVIDERS
U.S. Bank National Association, 601 Second Avenue South, Minneapolis, MN
55480 acts as custodian of each Fund's assets and portfolio securities. Dorsey
& Whitney LLP, 220 South Sixth Street, Minneapolis, MN 55402, is the
independent General Counsel for the Funds. Advisers bears the costs of serving
as the transfer agent and dividend-paying agent for each Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each director of Fortis Advantage, Fortis Equity and
Fortis Growth owes certain fiduciary duties to it and to its shareholders.
Minnesota law provides that a director "shall discharge the duties of the
position of director in good faith, in a manner the director reasonably believes
to be in the best interest of the corporation, and with the care an ordinarily
prudent person in a like position would exercise under similar circumstances."
Fiduciary duties of a director of a Minnesota corporation include, therefore,
both a duty of "loyalty" (to act in good faith and act in a manner reasonably
believed to be in the best interests of the corporation) and a duty of "care"
(to act with the care an ordinarily prudent person in a like position would
exercise under similar circumstances). Minnesota law authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of
"care." Minnesota law does not, however, permit a corporation to eliminate or
limit the liability of a director (i) for any breach of the director's duty of
"loyalty" to the corporation or its shareholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) for authorizing a dividend, stock repurchase or redemption or other
distribution in violation of Minnesota law or for violation of certain
provisions of Minnesota securities laws, or (iv) for any transaction from
<PAGE>
which the director derived an improper personal benefit. The Articles of
Incorporation of Fortis Advantage, Fortis Equity and Fortis Growth limit the
liability of directors to the fullest extent permitted by Minnesota statutes,
except to the extent that such a liability cannot be limited as provided in the
1940 Act (which act prohibits any provisions which purport to limit the
liability of directors arising from such directors' willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the 1940 Act and the rules and regulations
adopted under such act.
ADDITIONAL INFORMATION
The Funds have filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the common stock offered hereby. The
Prospectus and this Statement of Additional Information do not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with Rules and Regulations of the Commission. The
Registration Statement may be inspected at the principal office of the
Commission at 450 Fifth Street, N.W., Washington, D.C., and copies thereof may
be obtained from the Commission at prescribed rates.
<PAGE>
APPENDIX A
DESCRIPTION OF FUTURES, OPTIONS AND FORWARD CONTRACTS
OPTIONS ON SECURITIES
An option on a security provides the purchaser, or "holder," with the
right, but not the obligation, to purchase, in the case of a "call" option, or
sell, in the case of a "put" option, the security or securities underlying the
option, for a fixed exercise price up to a stated expiration date or, in the
case of certain options, on such date. The holder pays a non-refundable purchase
price for the option, known as the "premium." The maximum amount of risk the
purchaser of the option assumes is equal to the premium plus related transaction
costs, although this entire amount may be lost. The risk of the seller, or
"writer," however, is potentially unlimited, unless the option is "covered." A
call option written by a Fund is "covered" if the Fund owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if a Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash and high grade government securities in a segregated account
with its custodian. A put option written by a Fund is "covered" if the Fund
maintains cash and high grade government securities with a value equal to the
exercise price in a segregated account with its custodian, or else holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written. If the writer's obligation is not so covered, it is
subject to the risk of the full change in value of the underlying security from
the time the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option. Options
on securities which have been purchased or written may be closed out prior to
exercise or expiration by entering into an offsetting transaction on the
exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities and options on indexes of securities, discussed
below, are traded on national securities exchanges, such as the Chicago Board
Options Exchange and the New York Stock Exchange, which are regulated by the
SEC. The Options Clearing Corporation guarantees the performance of each party
to an exchange-traded option, by in effect taking the opposite side of each such
option. A holder or writer may engage in transactions in exchange-traded options
on securities and options on indexes of securities only through a registered
broker-dealer which is a member of the exchange on which the option is traded.
<PAGE>
In addition, options on securities and options on indexes of securities may
be traded on exchanges located outside the United States and over-the-counter
through financial institutions dealing in such options as well as the underlying
instruments. The particular risks of transactions on foreign exchanges and
over-the-counter transactions are set forth more fully in the Statement of
Additional Information.
OPTIONS ON STOCK INDEXES
In contrast to an option on a security, an option on a stock index provides
the holder with the right to make or receive a cash settlement upon exercise of
the option, rather than the right to purchase or sell a security. The amount of
this settlement is equal to (i) the amount, if any, by which the fixed exercise
price of the option exceeds (in the case of a call) or is below (in the case of
a put) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier." The purchaser of the option
receives this cash settlement amount if the closing level of the stock index on
the day of exercise is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount
if the option is exercised. As in the case of options on securities, the writer
or holder may liquidate positions in stock index options prior to exercise or
expiration by entering into closing transactions on the exchange on which such
positions were established, subject to the availability of a liquid secondary
market.
A Fund will cover all options on stock indexes by owning securities whose
price changes, in the opinion of Advisers, are expected to be similar to those
of the index, or in such other manner as may be in accordance with the rules of
the exchange on which the option is traded and applicable laws and regulations.
Nevertheless, where a Fund covers a call option on a stock index through
ownership of securities, such securities may not match the composition of the
index. In that event, the Fund will not be fully covered and could be subject to
risk of loss in the event of adverse changes in the value of the index. A Fund
will secure put options on stock indexes by segregating assets equal to the
option's exercise price, or in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and applicable laws and
regulations.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indexes, such as the Standard & Poor's 100 Index, or on indexes of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks so included.
FUTURES CONTRACTS ON FIXED INCOME SECURITIES, STOCK INDEXES AND FOREIGN
CURRENCIES
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and
<PAGE>
acceptance of a cash settlement, at a stated time in the future for a fixed
price. By its terms, a Futures Contract provides for a specified settlement date
on which, in the case of the majority of interest rate and foreign currency
futures contracts, the fixed income securities or currency underlying the
contract are delivered by the seller and paid for by the purchaser, or on which,
in the case of stock index futures contracts and certain interest rate and
foreign currency futures contracts, the difference between the price at which
the contract was entered into and the contract's closing value is settled
between the purchaser and the seller in cash. Futures Contracts differ from
options in that they are bilateral agreements, with both the purchaser and the
seller equally obligated to complete the transaction. Futures Contracts call for
settlement only on the expiration date, and cannot be "exercised" at any other
time during their term.
The purchase or sale of a Futures Contract differs from the purchase or
sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which varies
but may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of the
index or instrument underlying the Futures Contract fluctuates, making positions
in the Futures Contracts more or less valuable, a process known as "marking to
the market."
U.S. Futures Contracts may be purchased or sold only on an exchange, known
as a "contract market," designated by the CFTC for the trading of such contract,
and only through a registered futures commission merchant which is a member of
such contract market. A commission must be paid on each completed purchase and
sale transaction. The contract market clearing house guarantees the performance
of each party to a Futures Contract, by in effect taking the opposite side of
such contract. At any time prior to the expiration of a Futures Contract, a
trader may elect to close out its position by taking an opposite position on the
contract market on which the position was entered into, subject to the
availability of a secondary market, which will operate to terminate the initial
position. At that time, a final determination of variation margin is made and
any loss experienced by the trader is required to be paid to the contract market
clearing house while any profit due to the trader must be delivered to it.
Futures Contracts may also be traded on foreign exchanges.
Interest rate futures contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities and U.S. Treasury Bills. In addition, interest rate futures contracts
include contracts on indexes of municipal securities. Foreign currency futures
contracts currently are traded on the British pound, Canadian dollar, Japanese
yen, Swiss franc, West German mark and on Eurodollar deposits.
A stock index or Eurodollar futures contract provides for the making and
acceptance of a cash settlement in much the same manner as the settlement of an
option on a stock index. The types of indexes underlying stock index futures
contracts are essentially the same as those underlying stock index options, as
described above. The index underlying a municipal bond index futures contract is
a broad based index of municipal securities designed to reflect movements in the
municipal securities market as a whole. The index assigns weighted values to
<PAGE>
the securities included in the index and its composition is changed
periodically.
OPTIONS ON FUTURES CONTRACTS
An Option on a Futures Contract provides the holder with the right to enter
into a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearing house establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of variation margin
deposits. In addition, the writer of an Option on a Futures Contract, unlike the
holder, is subject to initial and variation margin requirements on the option
position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by affecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by a Fund on
United States exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation by the
CFTC and the performance guarantee of the exchange clearing house. In addition,
Options on Futures Contracts may be traded on foreign exchanges.
An option, whether based on a Futures Contract, a stock index or security,
becomes worthless to the holder when it expires. Upon exercise of an option, the
exchange or contract market clearing house assigns exercise notices on a random
basis to those of its members which have written options of the same series and
with the same expiration date. A brokerage firm receiving such notices then
assigns them on a random basis to those of its customers which have written
options of the same series and expiration date. A writer therefore has no
control over whether an option will be exercised against it, nor over the timing
of such exercise.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Currency Contract is a contractual obligation to purchase or sell a
specific quantity of a given foreign currency for a fixed exchange rate at a
future date. Currency Contracts are individually negotiated and are traded
through the "interbank currency market," an informal network of banks and
brokerage firms which operates around the clock and throughout the world.
Transactions in the interbank market may be executed only through financial
institutions acting as market-makers in the interbank market, or through brokers
executing purchases and sales through such institutions. Market-makers in the
interbank market generally act as principals in taking the opposite side of
their customers' positions in Currency Contracts, and ordinarily
<PAGE>
charge a mark-up commission which may be included in the cost of the Contract.
In addition, market-makers may require their customers to deposit collateral
upon entering into a Currency Contract, as security for the customer's
obligation to make or receive delivery of currency, and to deposit additional
collateral if exchange rates move adversely to the customer's position. Such
deposits may function in a manner similar to the margining of Futures Contracts,
described above.
Prior to the stated maturity date of a Currency Contract, it may be
possible to liquidate the transaction by entering into an offsetting contract.
In order to do so, however, a customer may be required to maintain both
contracts as open positions until maturity and to make or receive a settlement
of the difference owed to or from the market-maker or broker at that time.
OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies are traded in a manner substantially similar
to options on securities. In particular, an option on foreign currency provides
the holder with the right to purchase, in the case of a call option, or to sell,
in the case of a put option, a stated quantity of a particular currency for a
fixed price up to a stated expiration date or, in the case of certain options,
on such date. The writer of the option undertakes the obligation to deliver, in
the case of a call option, or to purchase in the case of a put option, the
quantity of the currency called for in the option, upon exercise of the option
by the holder.
As in the case of other types of options, the holder of an option on foreign
currency is required to pay a one-time, non-refundable premium, which represents
the cost of purchasing the option. The holder can lose the entire amount of this
premium, as well as related transaction costs, but not more than this amount.
The writer of the option, in contrast, generally is required to make initial and
variation margin payments, similar to margin deposits required in the trading of
Futures Contracts and the writing of other types of options. The writer is
therefore subject to risk of loss beyond the amount originally invested and
above the value of the option at the time it is entered into.
Certain options on foreign currencies, like Currency Contracts, are traded
over-the-counter through financial institutions acting as market-makers in such
options and the underlying currencies. Such transactions therefore involve risks
not generally associated with exchange-traded instruments, which are discussed
below. Options on foreign currencies may also be traded on national securities
exchanges regulated by the SEC and on exchanges located in foreign countries.
Over-the-counter transactions can only be entered into with a financial
institution willing to take the opposite side, as principal, of a Fund's
position unless the institution acts as broker and is able to find another
counterparty willing to enter into the transaction with the Fund. Where no such
counterparty is available, it will not be possible to enter into a desired
transaction. There also may be no liquid secondary market in the trading of
over-the-counter contracts, and a Fund could be required to retain options
purchased or written until exercise, expiration or maturity. This in turn could
limit the Fund's ability to profit from open positions or to reduce losses
<PAGE>
experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearing house, and a Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. A
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by Advisers.
<PAGE>
APPENDIX B
CORPORATE BOND, PREFERRED STOCK AND COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS SERVICES. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2, and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong.
MOODY'S INVESTORS SERVICE, INC. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term promissory
obligations.
Prime-2 Strong capacity for repayment of short-term promissory
obligations.
Prime-3 Acceptable capacity for repayment of short-term promissory
obligations.
CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS SERVICES. Its ratings for corporate bonds have
the following definitions:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay
<PAGE>
interest and repay principal for debt in this category than in higher rated
categories.
Debt rated "BB," "B," "CCC," "CC," and "C" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Debt rated "BB" 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.
Debt rated "B" 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.
Debt rated "CCC" 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.
The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
The rating "C" 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.
Debt rated "D" is in payment default. The "D" rating category 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 period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The rating "C1" is reserved for income bonds on which no interest is being
paid.
"NR" indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
<PAGE>
BOND INVESTMENT QUALITY STANDARDS. Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states impose certain rating or other standards for
obligations eligible for investment by savings banks, trust companies, insurance
companies and fiduciaries generally.
MOODY'S INVESTORS SERVICE, INC. Its ratings for corporate bonds include
the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable 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.
Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
<PAGE>
Bonds which are rated "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Bonds which rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
PREFERRED STOCK RATING
STANDARD & POOR'S RATINGS SERVICES. Its ratings for preferred stock have
the following definitions:
An issue rated "AAA" has the highest rating that may be assigned by
Standard & Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
"NR" indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<PAGE>
MOODY'S INVESTORS SERVICE, INC. Its ratings for preferred stock include
the following:
An issue which is rated "Aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
An issue which is rated "Aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rated "A" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
An issue which is rated "Baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
An issue which is rated "Ba" is considered to have speculative elements and
its future cannot be considered will assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
Bonds which are rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "Caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments. An issue which is rated "Ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue rated "C" is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
PART C
Fortis Asset Allocation Portfolio
and
Fortis Capital Appreciation Portfolio
each a series of
Fortis Advantage Portfolios, Inc.
OTHER INFORMATION
ITEM 23. EXHIBITS
THE FUND IS FILING OR INCORPORATING BY REFERENCE THE FOLLOWING EXHIBITS:
(a).1 Articles of Amendment and Amended and Restated Articles of
Incorporation adopted 8/23/94 (1)
(a).2 Certification of Designation of Classes A, B, C & H dated
10/31/94 (1)
(a).3 Articles of Amendment dated 2/29/96 to Restated Articles of
Incorporation dated as of 9/9/94 (1)
(a).4 Certificate of Designation of Class Z Shares of Series C (Asset
Allocation Portfolio dated _______________ *
(b) Amended and Restated Bylaws dated 1/31/92 (1)
(c) Instruments Defining Rights of Security Holders - not applicable
(d) Investment Advisory and Management Agreement dated 1/31/92 (1)
(e).1 Underwriting and Distribution Agreement dated 11/14/94 (1)
(e).2 Dealer Sales Agreement (4)
(e).3 Mutual Fund Supplement to Dealer Sales Agreement (4)
(f) Bonus or Profit Sharing Contracts - not applicable
(g) Custody Agreement dated 3/21/92 (1)
(h) Other Material Contracts - not applicable
(i) Legal Opinion - not applicable
(j) Consent of KPMG Peat Marwick LLP *
(k) Omitted Financial Statements - not applicable
(l) Initial Capital Agreements - not applicable
(m) Rule 12b-1 Plan (2)
(n) Financial Data Schedule - not applicable
(o) Rule 18f-3 Plan (3)
- ---------------------
(1) Incorporated by reference to a Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form N-1A filed with the Commission
on December 1, 1998.
(2) Incorporated by reference to Post-Effective Amendment No. 11 to the
Registration Statement of Fortis Worldwide Portfolios, Inc. on Form N-1A
filed with the Commission on February 26, 1998.
(3) Incorporated by reference to a Post-Effective Amendment No. 13 to the
Registrant's Registration Statement on Form N-1A filed with the Commission
on July 31, 1995.
(4) Incorporated by reference to Post-Effective Amendment No. 45 to the
Registration Statement of Fortis Income Portfolios, Inc. on Form N-1A filed
with the Commission on December 1, 1998.
1
<PAGE>
* To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
THE FOLLOWING IS A LIST OF ALL PERSONS DIRECTLY OR INDIRECTLY CONTROLLED BY
OR UNDER COMMON CONTROL WITH THE FUND:
No person is directly or indirectly controlled by or under common control
with the Registrant.
ITEM 25. INDEMNIFICATION
STATE THE GENERAL EFFECT OF ANY CONTRACT, ARRANGEMENTS OR STATUTE UNDER
WHICH ANY DIRECTOR, OFFICER, UNDERWRITER OR AFFILIATED PERSON OF THE FUND IS
INSURED OR INDEMNIFIED AGAINST ANY LIABILITY INCURRED IN THEIR OFFICIAL
CAPACITY, OTHER THAN INSURANCE PROVIDED BY ANY DIRECTOR, OFFICER, AFFILIATED
PERSON, OR UNDERWRITER FOR THEIR OWN PROTECTION.
Paragraph 8(d) of the Registrant's Articles of Incorporation provides that
the Registrant shall indemnify such person for such expenses and liabilities, in
such manner, under such circumstances, and to the full extent permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereinafter amended, and any rules, regulations, or releases promulgated
thereunder.
The Registrant may indemnify its officers and directors and other "persons"
acting in an "official capacity" (as such terms are defined in Section 302A.521)
pursuant to a determination by the board of directors or shareholders of the
Registrant as set forth in Section 302A.521, by special legal counsel selected
by the board or a committee thereof for the purpose of making such a
determination, or by a Minnesota court upon application of the person seeking
indemnification. If a director is seeking indemnification for conduct in the
capacity of director or officer of the Registrant, then such director generally
may not be counted for the purposes of determining either the presence of a
quorum or such director's eligibility to be indemnified.
In any case, indemnification is proper only if the eligibility determining
body decides that the person seeking indemnification:
(a) has not received indemnification for the same conduct from any other
party or organization;
(b) acted in good faith;
(c) received no improper personal benefit;
(d) in the case of criminal proceedings, has no reasonable cause to
believe the conduct was unlawful;
(e) reasonably believed that the conduct was in the best interest of the
Registrant, or in certain contexts, was not opposed to the best
interest of the Registrant; and
(f) had not otherwise engaged in conduct which precludes indemnification
under either Minnesota or Federal law (including, without limitation,
conduct constituting willful misfeasance, bad faith, gross negligence,
or reckless disregard
2
<PAGE>
of duties as set forth in Section 17(h) and (i) of the Investment
Company Act of 1940).
ADVANCES. If a person is made or threatened to be made a party to a
proceeding, the person is entitled, upon written request to the Registrant, to
payment or reimbursement by the Registrant of reasonable expenses, including
attorneys fees and disbursements, incurred by the person in advance of the final
disposition of the proceeding, (a) upon receipt by the Registrant of a written
affirmation by the person of a good faith belief that the criteria for
indemnification set forth in Section 302A.521 have been satisfied and a written
undertaking by the person to repay all amounts so paid or reimbursed by the
Registrant, if it is ultimately determined that the criteria for indemnification
have been satisfied, and (b) after a determination that the facts then known to
those making the determination would not preclude indemnification under
302A.521. The written undertaking required by clause (a) is an unlimited
general obligation of the person making it, but need not be secured and shall be
accepted without reference to financial ability to make the repayment.
UNDERTAKING. The Registrant undertakes that insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provision, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless, in the opinion of its counsel, the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
DESCRIBE ANY OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT OF A
SUBSTANTIAL NATURE THAT EACH INVESTMENT ADVISER, AND EACH DIRECTOR, OFFICER OR
PARTNER OF THE ADVISER, IS OR HAS BEEN ENGAGED WITHIN THE LAST TWO FISCAL YEARS
FOR HIS OR HER OWN ACCOUNT OR IN THE CAPACITY OF DIRECTOR, OFFICER, EMPLOYEE,
PARTNER OR TRUSTEE.
Information on the business of the Adviser, its directors and officers is
described in the Statement of Additional Information. The following officers
are not listed in the Statement of Additional Information:
Other Business/Employment
NAME POSITION WITH ADVISER DURING PAST TWO YEARS
- ---- --------------------- ---------------------
Michael D. O'Connor Qualified Plan Officer Qualified Plan Officer of Fortis
Benefits Insurance Company
David C. Greenzang Money Market Portfolio Debt securities manager with
Officer Fortis, Inc.
3
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) STATE THE NAME OF EACH INVESTMENT COMPANY (OTHER THAN THE FUND) FOR WHICH
EACH PRINCIPAL UNDERWRITER CURRENTLY DISTRIBUTING THE FUND'S SECURITIES ALSO
ACTS AS A PRINCIPAL UNDERWRITER, DEPOSITOR, OR INVESTMENT ADVISER.
Investors also acts as the principal underwriter for: Fortis Equity
Portfolios, Inc., Fortis Income Portfolios, Inc., Fortis Money Portfolios, Inc.,
Fortis Tax Free Portfolios, Inc., Fortis Securities, Inc., Fortis Series Fund,
Inc., Fortis Worldwide Portfolios, Inc., Fortis Growth Fund, Inc., Variable
Account C of Fortis Benefits Insurance Company and Variable Account D of Fortis
Benefits Insurance Company.
(b) PROVIDE THE INFORMATION REQUIRED BY THE FOLLOWING TABLE FOR EACH DIRECTOR,
OFFICER, OR PARTNER OF EACH PRINCIPAL UNDERWRITER NAMED IN RESPONSE TO ITEM 20.
In addition to those listed in the Statement of Additional Information with
respect to Investors, the following are also officers of Investors. The
principal business address of each individual is 500 Bielenberg Drive, Woodbury,
Minnesota 55125.
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Fund
- --------------------- ---------------------------- -----------------------
Carol M. Houghtby Director, Vice President & None
Treasurer
Roger W. Arnold Senior Vice President None
Peter M. Delehanty Senior Vice President None
John E. Hite Vice President & Secretary None
(c) PROVIDE THE INFORMATION REQUIRED BY THE FOLLOWING TABLE FOR ALL COMMISSIONS
AND OTHER COMPENSATION RECEIVED, DIRECTLY OR INDIRECTLY, FROM THE FUND DURING
THE LAST FISCAL YEAR BY EACH PRINCIPAL UNDERWRITER WHO IS NOT AN AFFILIATED
PERSON OF THE FUND OR ANY AFFILIATED PERSON OF AN AFFILIATED PERSON.
Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
STATE THE NAME AND ADDRESS OF EACH PERSON MAINTAINING PHYSICAL POSSESSION
OF EACH ACCOUNT, BOOK, OR OTHER DOCUMENT REQUIRED TO BE MAINTAINED BY SECTION
31(a) AND THE RULES UNDER THAT SECTION.
The physical possession of the accounts, books, and other documents
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and Rules 3la-1 to 3la-3 promulgated thereunder is maintained by the Registrant
at Fortis Advisers, Inc., 500 Bielenberg Drive, Woodbury, MN 55125.
4
<PAGE>
ITEM 29. MANAGEMENT SERVICES
PROVIDE A SUMMARY OF THE SUBSTANTIVE PROVISIONS OF ANY MANAGEMENT-RELATED
SERVICE CONTRACT NOT DISCUSSED IN PART A OR B, DISCLOSING THE PARTIES TO THE
CONTRACT AND THE TOTAL AMOUNT PAID AND BY WHOM FOR THE FUND FOR THE LAST THREE
FISCAL YEARS.
All contracts were discussed in Part A or B.
ITEM 30. UNDERTAKINGS
(a) IN INITIAL REGISTRATION STATEMENTS FILED UNDER THE SECURITIES ACT, PROVIDE
AN UNDERTAKING TO FILE AN AMENDMENT TO THE REGISTRATION STATEMENT WITH
CERTIFIED FINANCIAL STATEMENTS SHOWING THE INITIAL CAPITAL RECEIVED BEFORE
ACCEPTING SUBSCRIPTIONS FROM MORE THAN 25 PERSONS IF THE FUND INTENDS TO
RAISE ITS INITIAL CAPITAL UNDER SECTION 14(a)(3).
Not applicable.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Woodbury and State of Minnesota on the 30th day
of April 1999.
FORTIS ADVANTAGE PORTFOLIOS, INC.
(Registrant)
By /s/ Dean C. Kopperud
--------------------------------
Dean C. Kopperud, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
/s/ Dean C. Kopperud President (principal April 30, 1999
- --------------------------- executive officer)
Dean C. Kopperud
/s/ Tamara L. Fagely Treasurer (principal financial April 30, 1999
- --------------------------- and accounting officer)
Tamara L. Fagely
Richard W. Cutting* Director
Allen R. Freedman* Director
Robert M. Gavin* Director
Benjamin S. Jaffray* Director
Jean L. King* Director
Edward M. Mahoney* Director
Robb L. Prince* Director
Leonard J. Santow* Director
Noel S. Shadko Director
Joseph M. Wikler* Director
*By /s/ Dean C. Kopperud April 30, 1999
-------------------------
Dean C. Kopperud, Attorney-in-Fact
