HARRIS INSIGHT HEMISPHERE FREE TRADE FUND
HARRIS INSIGHT FUNDS
One Exchange Place, Boston, Massachusetts 02109
Telephone: (800) 982-8782
HT Insight Funds, Inc., doing business as Harris Insight Funds (the
"Company"), currently offers shares representing interests in seven mutual
funds. This Prospectus describes two classes of shares ("Shares") of the
Company's Harris Insight Hemisphere Free Trade Fund (the "Fund"), a global fu nd
investing in equity securities, fixed income securities and/or cash equivalents
of issuers in Canada, Mexico and the United States. The Fund's investment
objective is to provide capital appreciation. Current income is a secondary
objective.
Harris Trust and Savings Bank is the Fund's Investment Adviser and Harris
Investment Management, Inc., a subsidiary of Harris Bankcorp, Inc., acts as the
Fund's Portfolio Management Agent. Jones Heward Investment Counsel Inc., a
subsidiary of Bank of Montreal, and Bancomer Asesora de Fondos, S.A. d e C.V., a
subsidiary of Casa de Bolsa Bancomer, S.A. de C.V., act as Investment
Sub-Advisers to the Fund. Shares of the Fund are offered by Funds Distributor,
Inc., the distributor of the Company's Shares.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. Please read and retain it for future
reference. A Statement of Additional Information dated March 1, 1996, containing
more detailed information about the Fund has been filed with th e Securities and
Exchange Commission (the "Commission") and (together with any supplements
thereto) is incorporated by reference into this Prospectus. The Statement of
Additional Information and the most recent financial statements may be obtained
without charge by writing or calling the Company at the address and telephone
number printed above. Separate Prospectuses for the other investment portfolios
offered by the Company may be obtained without charge by writing or calling the
Company at the address and telephone number printed above.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. AN
INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE L OSS
OF PRINCIPAL.
__________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFF ENSE.
March 1, 1996
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TABLE OF CONTENTS
Page
Expense Table 3
Highlights 4
Investment Objectives and Policies 5
Investment Strategies 6
Investment Limitations 13
Management 14
Determination of Net Asset Value 17
Purchase of Shares 18
Redemption of Shares 20
Service Plan 20
Dividends and Distributions 21
Taxes 21
Account Services 23
Organization and Capital Stock 23
Reports to Shareholders 23
Calculation of Yield and Total Return 24
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND INFORMATION OR
REPRESENTATIONS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO
WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER
WOULD BE UNLAWFUL.
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EXPENSE TABLE
Expenses and fees payable by Class A and Institutional shareholders are
summarized in this table and presented as a percentage of average net assets.
The following table illustrates the expenses and fees expected to be
incurred by an investment in each of the two classes of shares of the Fund.
<TABLE>
<CAPTION>
CLASS A INSTITUTIONAL
SHARES SHARES
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases 4.50% None
ANNUAL FUND OPERATING EXPENSES*:
(as a percentage of average net assets)
Advisory Fees .90% .90%
Rule 12b-1 Fees .25% None
Other Expenses .65% .65%
Total Fund Operating Expenses 1.80% 1.55%
</TABLE>
________________________
* With respect to each class of shares of the Fund, the amount of "Other
Expenses" in the table above is based on estimated expenses and projected assets
of approximately $10 million for the current fiscal year. Customers of a
financial institution, such as Harris Trust and Savings Bank ("Harris Trust"),
may be charged certain fees and expenses by their institution. These fees may
vary depending on the capacity in which the institution provides fiduciary and
investment services to the particular client (e.g., personal trust, estate
settlement, advisory and custodian services).
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) a hypothetical 5% gross
annual return and (2) redemption at the end of
each time period:
CLASS A INSTITUTIONAL
SHARES SHARES
1 year $62 $16
3 years $99 $49
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE WHICH MAY BE MORE OR LESS THAN THOSE SHOWN.
The purpose of the expense table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For more information concerning the various costs and expenses, see
"Management."
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HIGHLIGHTS
At least 65% of the Fund's assets will be invested in companies that the
Portfolio Management Agent and/or Sub-Advisers believe will benefit from
increased trade opportunities among Canada, Mexico and the United States.
HARRIS INSIGHT HEMISPHERE FREE TRADE FUND seeks to provide capital
appreciation and, secondarily, current income by investing, under normal
circumstances, at least 20% of its assets in equity securities, fixed income
securities and/or cash equivalents of issuers in each of Canada and Mexico and
at least 30% of its assets in such securities of issuers in the United States.
Under normal circumstances, the Fund will limit its investment in securities of
issuers in each of Canada, Mexico and the United States to no more than 40%, 40%
and 60%, of its assets, respectively. Under normal circumstances, the Fund will
invest at least 65% of its assets in companies which the Portfolio Management
Agent and/or Investment Sub- Advisers believe will benefit from increased trade
opportunities among Canada, Mexico and the United States.
WHO MANAGES THE FUND'S INVESTMENTS?
Harris Investment Management, Inc. determines the portions of the portfolio to
be allocated among issuers in Canada, Mexico and the United States.
Harris Trust & Savings Bank ("Harris Trust" or the "Investment Adviser") is
the investment adviser for the Fund. Harris Trust has provided investment
management service to clients for over 100 years. Harris Trust provides
investment services for pension, profit-sharing and personal portfolios. As of
December 31, 1995, assets under management total approximately $12 billion.
Harris Investment Management, Inc. ("HIM" or the "Portfolio Management
Agent") provides daily portfolio management services to the Fund. HIM determines
the portions of the portfolio to be allocated among issuers in Canada, Mexico
and the United States. HIM also selects and manages the U.S. secu rities in
which the Fund invests. HIM and its predecessors have managed client assets for
over 80 years. HIM has a staff of 96, including 64 professionals, providing
investment expertise to the management of Harris Insight Funds and for pension,
profit-sharing and institutional portfolios. As of December 31, 1995, assets
under management are exceed $13 billion. HIM is a subsidiary of Harris Bankcorp,
Inc., which in turn is a subsidiary of Bank of Montreal. See page 15.
Jones Heward Investment Counsel Inc. ("JHICI") and Bancomer Asesora de
Fondos, S.A. de C.V. ("Bancomer") serve as Investment Sub-Advisers to the Fund.
JHICI selects and manages the Canadian securities in which the Fund invests and
Bancomer selects and manages the Mexican securities in which the Fund invests.
JHICI is a subsidiary of Bank of Montreal. Bancomer is a subsidiary of Casa de
Bolsa Bancomer, S.A. de C.V. See page 15.
WHAT ADVANTAGES DOES THE FUND OFFER?
The Fund is designed for individual and institutional investors. A single
investment in shares of the Fund gives the investor benefits customarily
available only to large investors, such as diversification of investment,
greater liquidity and professional management, block purchases of securities a
nd relief from bookkeeping, safekeeping of securities and other administrative
details.
WHEN ARE DIVIDENDS PAID?
Dividends from the Fund are declared and paid annually. Any capital gains
distributions will be declared and paid annually. See page 21.
HOW ARE SHARES REDEEMED?
Shares may be redeemed at their next determined net asset value after
receipt of a proper request by the registered representative servicing your
account, the Distributor, or through any Service Agent. See page 20.
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WHAT RISKS ARE ASSOCIATED WITH THE FUND?
The Fund's performance and price per share will change daily based on many
factors, including economic, market and exchange rate factors.
The Fund's performance and price per share will change daily based on many
factors, including the quality of the Fund's investments, U.S. and international
economic conditions, general market conditions and international exchange rates.
The Fund seeks to achieve its investment objective through inv estments in
securities of foreign issuers that involve risks not typically associated with
U.S. issuers. There is no assurance that the Fund will achieve its investment
objective. See "Investment Strategies."
INVESTMENT OBJECTIVES AND POLICIES
This section describes some of the securities that the Fund may purchase and
certain investment techniques that may be used to pursue its investment
objectives.
The investment objective of the Fund is to provide investors with capital
appreciation. Current income is a secondary objective. Although the allocations
among countries will vary, under normal circumstances the Fund will invest in
equity securities, fixed income securities and/or cash equivalents and will
invest at least 20% of its assets in securities of issuers in each of Canada and
Mexico and at least 30% of its assets in securities of issuers in the United
States. Under normal circumstances, the Fund will limit its investments in
securities of issuers in each of Canada, Mexico and the United States to no more
than 40%, 40% and 60% of its assets, respectively. Under normal circumstances,
the Fund will invest at least 65% of its assets in companies which the Portfolio
Management Agent and/or Investment Sub-Advisers believes will benefit from
increased trade opportunities among Cana da, Mexico and the United States. It is
anticipated that investments will be spread among equities, fixed income
securities and/or cash equivalents of issuers in Canada, Mexico and the United
States.
It is anticipated that investments will be spread among equity securities,
fixed income securities or cash equivalents of issuers in Canada and Mexico, as
well as in the United States. Investments may include securities of companies of
varying sizes, measured by assets, sales or capitalization. The Fund may invest
in equity securities of established companies listed on U.S. or foreign
securities exchanges or traded in over-the-counter markets. The selection of
portfolio securities by the Portfolio Management Agent and/or Investment
Sub-Advisers will emphasize companies which the Portfolio Management Agent
and/or Investment Sub-Advisers believes will benefit from increased trade
opportunities among Canada, Mexico and the United States. In selecting
investments for the Fund, the Investment Adviser and Investment Sub-Advisers
seek to identify sources of foreign income for companies, the types of goods and
services sold and overall trade flows among Canada, Mexico and the United
States. In selecting investments for the Fund, the Portfolio Management Agent
and Investment Sub-Advisers will not hedge country or currency risk as part of
the normal investment process. The relative performance of foreign currencies is
an im portant factor in the Fund's performance.
The Fund will be managed as a global portfolio. The Portfolio Management
Agent will seek to enhance returns by investing in equity securities, fixed
income securities and/or cash equivalents and of issuers in Canada, Mexico and
the United States. The Portfolio Management Agent will use quantitative models
to track various capital market factors and to identify undervalued and
overvalued asset classes. The Portfolio Management Agent expects that under
normal circumstances the Fund's average distribution of investments will be as
follows: cash equivalents, 0-30%; bonds, 0-50%; and equity secur ities, 20-100%.
The Fund may invest in U.S. and foreign debt securities, including fixed
income securities of governments, government agencies, instrumentalities or
political subdivisions; supranational agencies; corporate debt securities; bank
or bank holding company debt securities; and other debt securities, including
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asset-backed securities and those securities convertible into common stock.
Similarly, the Fund may invest in short-term obligations denominated in either
U.S. or foreign currencies including, but not limited to, bank deposits,
bankers' acceptances, certificates of deposit, commercial paper , short-term
government obligations, government agency obligations, supranational agency
obligations, corporate obligations, and repurchase agreements.
The Fund will limit its fixed income investments to those determined to be of
investment grade quality by the Portfolio Management Agent and/or Investment
Sub-Advisers.
The Fund will limit its fixed income investments to securities considered
to be investment grade quality (equivalent to securities rated within the four
highest rating categories of Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") or, if unrated, determined b y the
Portfolio Management Agent and/or Investment Sub-Adviser to be of comparable
quality based upon publicly available information and inquiries made of the
issuing entities). Obligations rated in the lowest of the top four rating
categories of ratings agencies in Canada, Mexico or the United Sta tes
(equivalent to "BBB" by S&P or "Baa" by Moody's) may have certain speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade obligations. After purchase by the
Fund, a security may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. Neither event will require the Fund
to sell such security unless the aggregate amount of such securities exceeds
permissible limits. However, the Portfolio Manag ement Agent or an Investment
Sub-Adviser will reassess promptly whether the security presents minimal credit
risks and determine whether continuing to hold the security is in the best
interest of the Fund. The ratings of Moody's and S&P are more fully described in
the Appendix to the Statement of A dditional Information.
Under adverse market, economic, political or currency conditions in North
America or in the world generally, the Fund may assume a temporary defensive
posture and without limitation hold cash and/or U.S. securities as determined by
the Portfolio Management Agent.
Holdings of the Fund are continuously supervised and changes may be made if a
security no longer seems to meet the objectives of the Fund.
Securities owned by the Fund are kept under continuing supervision, and
changes may be made whenever a security no longer seems to meet the objective of
the Fund. Portfolio changes also may be made to increase or decrease investments
in anticipation of changes in security prices in general or to pr ovide funds
required for redemptions, distributions to shareholders or other corporate
purposes. Neither the length of time a security has been held nor the rate of
turnover of the Fund's portfolio is considered a limiting factor on such
changes. See "Investment Strategies -- Portfolio Turnover."
INVESTMENT STRATEGIES
The Fund may invest in Canadian equity and fixed income securities.
CANADIAN SECURITIES. The Fund may invest in Canadian securities, consisting
of the following:
CANADIAN EQUITY SECURITIES. The Fund may invest in Canadian equity
securities consisting of equity securities issued by the following: (1)
companies organized under the laws of Canada or the securities of which are
principally traded in Canada, (2) companies that derive at least 50% of their
revenu es from goods or services produced or provided in Canada or from sales
made in Canada or (3) issuers of depository shares for equity securities which
are listed on the Toronto Stock Exchange, the Montreal Exchange, the Vancouver
Stock Exchange, the Alberta Stock Exchange, the Winnipeg Stock Exchang e or a
recognized Canadian over-the-counter market.
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CANADIAN FIXED INCOME SECURITIES. The Fund may invest in fixed income
securities of Canadian issuers consisting of: (1) debt securities issued or
guaranteed by the Government of Canada or by the government of a province or
municipality of Canada, their agencies or instrumentalities ("Canadian Gove
rnment Securities"); (2) corporate obligations; (3) bank obligations, such as
certificates of deposit, bankers' acceptances or time deposits; and (4)
repurchase agreements.
RISKS AND SPECIAL CONSIDERATIONS RELATING TO CANADIAN SECURITIES. JHICI and
the Fund's Portfolio Management Agent believe that the Canadian dollar does not
have the same level of risk relative to the United States dollar as the
currencies of other countries outside the United States. The markets in which
Canadian dollar-denominated instruments trade, for example, are generally more
liquid than many other foreign markets, and share many characteristics with U.S.
markets. The political system in Canada is also more stable than those in some
other foreign countries, and the Canadian dollar hist orically has been less
volatile than other currencies relative to the U.S. dollar.
In the recent past, various governmental actions have been proposed in
Canada that would recognize the Province of Quebec as having a distinct status
within Canada. If adopted, such a governmental initiative could result in the
withdrawal of Quebec as a part of Canada. The current uncertainty relat ing to
the status of Quebec may have implications for the Canadian economy, as Quebec's
withdrawal from Canada could have material adverse effects on the Canadian
economy and the value of securities of Canadian issuers.
The relative performance of foreign currencies is an important factor in the
Fund's performance.
CURRENCY EXCHANGE RATES. The relative performance of foreign currencies is
an important factor in the Fund's performance. The value of shares may change
significantly when the Canadian dollar or Mexican peso strengthens or weakens
against the U.S. dollar. Currency exchange rates generally are deter mined by
the forces of supply and demand in the foreign exchange markets and the relative
merits of investments in different countries as seen from an international
perspective. Currency exchange rates can also be unpredictably affected by
intervention by U.S. or foreign governments, central banks, or by currency
controls or political developments in the United States or other countries.
The Fund may purchase instruments having a floating or variable rate of
interest.
FLOATING AND VARIABLE RATE INSTRUMENTS. The Fund may purchase instruments
having a floating or variable rate of interest. These obligations bear interest
at rates that are not fixed, but vary with changes in specified market rates or
indices, such as the prime rate, or at specified intervals. Certa in of these
obligations may carry a demand feature that would permit the holder to tender
them back to the issuer at par value prior to maturity. The Fund will limit its
purchases of floating and variable rate obligations to those of the same quality
as it otherwise is allowed to purchase.
A floating or variable rate instrument may be subject to the Fund's
percentage limitation on illiquid investments if there is no reliable trading
market for the investment or if the Fund may not demand payment of the principal
amount within seven days.
Investment in foreign securities involves certain considerations not typically
associated with investing in U.S. securities.
FOREIGN SECURITIES. Investment in foreign securities involves certain
considerations that are not typically associated with investing in U.S.
securities. Investments in foreign securities typically involve higher
transaction costs than investments in U.S. securities. Foreign investments may
have ri sks associated with currency exchange rates, less complete financial
information about the issuers, less market liquidity and political instability.
Future political and economic developments, possible imposition of withholding
taxes on income, seizure or nationalization of foreign holdings, establ ishment
of exchange controls or the adoption of other governmental restrictions might
adversely affect the payment of principal and interest
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on foreign obligations. In addition, foreign banks and foreign branches of
domestic banks may be subject to less stringent reserve requirements and to
differe nt accounting, auditing and recordkeeping requirements than domestic
banks.
The Fund will not invest more than 10% of the value of its net assets in
securities that are considered illiquid.
ILLIQUID SECURITIES. The Fund will not invest more than 10% of the value of
its net assets in securities that are considered illiquid. Repurchase agreements
and time deposits that do not provide for payment to the Fund within seven days
after notice or which have a term greater than seven days are deemed illiquid
securities for this purpose (unless such securities are variable amount master
demand notes with maturities of nine months or less or unless the Portfolio
Management Agent or an Investment Sub-Adviser has determined under the
supervision and direction of the Company's Board of Direc tors that an adequate
trading market exists for such securities or that market quotations are readily
available).
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the Securities Act of 1933 and commercial
paper issued in reliance upon the exemption in Section 4(2) of the Securities
Act of 1933. These securities may be determined to be liquid in accordan ce with
guidelines established by the Portfolio Management Agent and Investment Sub-
Advisers and approved by the Company's Board of Directors. The Board of
Directors will monitor the Investment Adviser's and Investment Sub-Advisers'
implementation of these guidelines on a periodic basis.
The Fund may invest in securities issued by other investment companies that
invest primarily in securities of Canadian, Mexican or U.S. issuers.
INVESTMENT COMPANY SECURITIES. The Fund may invest in securities issued by
other investment companies that invest primarily in securities of Canadian,
Mexican or U.S. issuers in which the Fund may invest directly. Securities of
other investment companies will be acquired by the Fund within the limi ts
prescribed by the Investment Company Act of 1940, as amended (the "1940 Act").
These limit the Fund so that: (i) not more than 5% of the value of its total
assets will be invested in the securities of any one investment company; (ii)
not more than 10% of the value of its total assets will be i nvested in the
aggregate in securities of investment companies as a group; and (iii) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by the Fund or by the Company as a whole. As a shareholder of another
investment company, the Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Fund bears directly in connection with its own operations.
MEXICAN SECURITIES. The Fund may invest in Mexican securities, consisting
of the following:
MEXICAN EQUITY SECURITIES. The Fund may invest in Mexican equity securities
consisting of equity securities issued by the following: (1) companies organized
under the laws of Mexico or the securities of which are principally traded in
Mexico, (2) companies that derive at least 50% of their revenues from goods or
services produced or provided in Mexico or from sales made in Mexico or (3)
issuers of depository shares for equity securities, which securities are listed
on the Bolsa Mexicana de Valores, S.A. de C.V. (the "Mexican Exchange") or a
recognized Mexican over-the-counter market.
Under Mexican law, the Fund may generally acquire only equity securities
listed on the Mexican Exchange or traded in a recognized Mexican
over-the-c-ounter market that are available for investment directly by
foreigners. In general, foreign
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investment in a Mexican issuer is limited to a maximum of 49% of the issuer's
capital stock, although more restrictive provisions may be contained in the
company's corporate documents or may be provided by law in the case of companies
engaged in certain industries. Securities of Mexican issuers av ailable for
foreign investment are generally issued as a separate class of either Series B
voting stock, shares of which generally count toward any applicable percentage
limitation on foreign investment, or Series N, Series L or Series C stock,
shares of which are considered "neutral" shares prov iding foreign investors
with monetary and economic rights, but not voting rights, with respect to the
shares and which are not subject to any percentage limitations.
Although foreigners, such as the Fund, may not directly acquire listed
securities of a Mexican issuer reserved for Mexican nationals, foreigners may
instruct a trust to acquire those shares for their accounts so long as the
Mexican issuer has received proper authorization from the Mexican Ministry of
Commerce. This type of trust, which is arranged with a Mexican bank, typically
Nacional Financiera, SNC ("Nafin"), a Mexican government development finance
bank, would acquire equity securities that have been determined to be
appropriate for the Fund to purchase. Nafin would then issue Ordinary
Certificates of Participation ("CPOs") that represent the amount and kind of
shares acquired by the trust on behalf of the Fund, but the Fund would have no
voting rights with respect to those shares.
The introduction of the sort of trust arrangement described above has
resulted in the effective elimination of any differential in price between those
shares of Mexican issuers reserved for Mexican nationals and shares that may be
directly held by Non-Mexicans. The Fund currently anticipates enteri ng into
such a trust arrangement with Nafin or another suitable Mexican bank.
MEXICAN FIXED INCOME SECURITIES. The Fund may invest in Mexican fixed
income securities consisting of the following:
The Fund may invest in Mexican government bonds and notes and government-backed
bonds and notes.
OBLIGATIONS OF MEXICAN GOVERNMENTAL ENTITIES. The Fund may invest in bonds
and notes issued by the Mexican government and government-backed bonds and
notes. These instruments are insured by the Mexican federal government and
various federal instrumentalities. Mexican government debt instruments are
frequently listed on stock exchanges but most trading is by authorized dealers
in the Mexican secondary market. Peso-denominated debt obligations currently
issued by the Mexican government in which the Fund may invest are limited to:
Cetes (Certificados de Tesoreria or Treasury Bills), Bondes (Bon os de
Desarrollo or medium-term development bonds) and Ajustabonos (adjustable bonds).
The Fund may invest in "Brady Bonds" which are debt securities generally
denominated in U.S. dollars.
The Fund may also invest in "Brady Bonds." Brady Bonds are debt securities,
generally denominated in U.S. dollars, issued under the framework of the "Brady
Plan," an initiative announced by former U.S. Treasury Secretary Nicholas F.
Brady in 1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness. The Brady Plan framework, as it has
developed, contemplates the exchange of external commercial bank debt for newly
issued bonds (Brady Bonds). Brady Bonds may also be issued with respect to new
money being advanced by existing lenders in connection with the debt
restructuring. Investors should recognize that Brady Bonds have been issued only
recently, and accordingly do not have a long payment history. Brady Bonds issued
to date generally have maturities of between 15 and 30 years from the date of
issuance and have traded at a deep discount from their face value. A substantial
portion of the
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Brady Bonds in which the Fund may invest are likely to be acquired at a discount
which involves certain considerations discussed below under "Zero Coupon
Securities."
Agreements implemented under the Brady Plan to date are designed to achieve
debt and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. These options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of the face va lue of
such debt which carry a below-market stated rate of interest (generally known as
par bonds), bonds issued at a discount from the face value of such debt
(generally known as discount bonds), bonds bearing an interest rate which
increases over time and bonds issued in exchange for the advancem ent of new
money by existing lenders. Discount bonds issued to date under the framework of
the Brady Plan have generally borne interest computed semi-annually at a rate
equal to 13/16 of one percent above the then current six month LIBOR. Regardless
of the stated face amount and stated interest rat e of the various types of
Brady Bonds, the Fund will purchase Brady Bonds in secondary markets, as
described below, in which the price and yield to the investor reflect market
conditions at the time of purchase. Certain sovereign bonds are entitled to
"value recovery payments" in certain circumst ances, which in effect constitute
supplemental interest payments but generally are not collateralized. Certain
Brady Bonds have been collateralized as to principal due at maturity by U.S.
Treasury zero coupon bonds with a maturity equal to the final maturity of such
Brady Bonds, although the collat eral is not available to the investors until
the final maturity of the Brady Bonds. Collateral purchases are financed by the
International Monetary Fund (the "IMF"), the World Bank and the debtor nation's
reserves. In addition, interest payments on certain types of Brady Bonds may be
collateraliz ed by cash or high grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. The Fund may
purchase Brady Bonds with no or limited collateralization, and will be relying
fo r payment of interest and (except in the case of principal collateralized
Brady Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories.
The Fund may invest in obligations of Mexican banks.
OBLIGATIONS OF MEXICAN BANKS. The Fund is permitted to invest in bank bonds
or "bonos bancarios," bills of exchange, certificates of deposit, time deposits
and promissory notes issued by or guaranteed, as to payment of principal and
interest, by Mexican banks. Bonos bancarios generally have matur ities greater
than one year. Bills of exchange are negotiable instruments, issued by Mexican
private entities to finance current transactions, that generally mature within
six months and that are accepted or endorsed by a bank and carry the bank's
credit. Certificates of deposit are negotiable inst ruments issued by banks with
maturities ranging from a few days to several years. These instruments are not
generally insured or guaranteed by a Mexican governmental agency, but are
obligations of the issuing banks. Promissory notes are negotiable instruments
which generally have maximum maturities of 728 days. Certificates of deposit and
promissory notes are usually issued at face value, pay interest periodically or
at maturity, and are traded by dealers in the secondary market in Mexico.
Peso-denominated money market instruments currently issued by Mexican banks in
which the Fund may inves t include: "pagares" (promissory notes), certificates
of deposit and public bankers' acceptances.
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The Fund may invest in investment grade commercial paper issued by Mexican
companies.
OBLIGATIONS OF MEXICAN COMPANIES. The Fund may invest in commercial paper
issued by Mexican companies and determined by Bancomer to be investment grade or
better (equivalent to securities within the four highest rating categories of
S&P or Moody's or, if unrated, of comparable quality). Generally, commercial
paper issued by Mexican companies has a maturity of 28 days, although in some
cases, it may have a maturity of up to 360 days. The Fund may also invest in
"pagares de mediano plazo" or medium-term promissory notes which will generally
have a maturity of three years. Although most Mexic an commercial paper is
peso-denominated, currently less than 5% of such commercial paper is "Papel
comercial Indizado," which is denominated in pesos but includes a foreign
exchange adjustment factor to its face value based on the foreign exchange rate
of the peso at issuance and at maturity. The foreign exchange adjustment factor
is intended to act as a partial hedge against the devaluation of the peso. The
Fund may also invest in "obligaciones" or corporate debentures issued by Mexican
companies. Obligaciones may be issued in secured (hipotecarias) or unsecured
form (quirografarias). Obligaciones generally have one to seven year maturities
and varying amortization schedules.
The Mexican government exercises significant influence over many aspects of the
private sector in Mexico.
RISKS AND SPECIAL CONSIDERATIONS RELATING TO MEXICAN SECURITIES. The
Mexican government has exercised and continues to exercise a significant
influence over many aspects of the private sector in Mexico. Mexican government
actions concerning the economy could, for that reason, have an important effe ct
on private sector entities and the Fund, as well as on market conditions for the
equity securities of Mexican issuers and the market conditions and prices and
yields of Mexican fixed income securities. The value of the Fund's underlying
investments in Mexico may be affected by changes in inflati on, foreign exchange
rates, interest rates, expropriation, taxation, social instability and other
political, economic or diplomatic developments in Mexico. The Fund can provide
no assurance that future developments in the Mexican economy, over which the
Fund has no control, may not impair the Fund' s investment flexibility and
operations.
The Mexican securities markets are not as large or as active as the markets
in certain other countries and Mexican equity and debt securities may be less
liquid and subject to greater price volatility than securities of comparable
issuers in other countries. The limited liquidity and potential trad ing
volatility of the market for Mexican securities may affect the Fund's ability to
acquire or dispose of those securities at a price and time that the Fund deems
advantageous. As a result, in periods of rising market prices, the Fund may be
unable to participate in price increases fully to the ex tent that it is unable
to acquire desired positions quickly; the Fund's inability in declining markets
to dispose fully and promptly of positions may conversely cause its net asset
value to decline as the value of unsold positions is marked to lower prices.
Certain sectors of the Mexican economy such as oil, gas, electricity and
railroads are reserved to the Mexican national patrimony, and equity investments
in those sectors currently are not permitted. Under Mexican law, Petroleos
Mexicanos, S.A. ("Pemex") may not issue equity securities and is the only entity
permitted to engage in oil, gas and most basic petrochemical-related activities
in Mexico.
The Portfolio Management Agent and Sub-Advisers monitor the creditworthiness of
issuers of master demand notes on an ongoing basis.
OTHER SHORT-TERM CORPORATE OBLIGATIONS INCLUDING VARIABLE AMOUNT MASTER
DEMAND NOTES. The Fund may invest in convertible and non-convertible debt
securities of U.S. corporations and of foreign corporations and governments that
are denominated in and pay interest in U.S. dollars, consisting of notes , bonds
and debentures that are rated "Baa" or better by Moody's or "BBB" or better by
S&P, and in variable amount master demand notes. Variable amount master demand
notes differ from ordinary commercial paper in that they are issued pursuant to
a written
11
<PAGE>
agreement between the issuer and the holder. Their amounts may from time to time
be increased by the holder (subject to an agreed maximum) or decreased by the
holder or the issuer; they are payable on demand or after an agreed-upon notice
period, e.g., seven days; and the rates of interest vary pursuant to an
agreed-upon formula. Genera lly, master demand notes are not rated by a rating
agency. The Portfolio Management Agent and Investment Sub-Advisers monitor the
creditworthiness of issuers of master demand notes on an ongoing basis. Transfer
of these notes is usually restricted by the issuer, and there is no secondary
trading ma rket for these notes.
PORTFOLIO TURNOVER. Although the Company cannot accurately predict the
portfolio turnover rate of the Fund, it expects that Fund's annual turnover rate
generally will not exceed 100% and that the annual turnover rate for the equity
segment of the portfolio generally will not exceed 150%. High portf olio
turnover rates can result in corresponding increases in brokerage commissions
and other transaction costs, which are borne directly by the Fund, and may
result in the realization of short-term capital gains that are taxable to
shareholders as ordinary income. The Portfolio Management Agent and Investment
Sub-Advisers will not consider the rate of portfolio turnover a limiting factor
in making investment decisions consistent with the Fund's investment objective
and policies.
The Fund may invest in repurchase agreements.
REPURCHASE AGREEMENTS. The Fund may purchase portfolio securities subject
to the seller's agreement to repurchase them at a mutually agreed upon time and
price, which includes an amount representing interest on the purchase price. The
Fund may enter into repurchase agreements only with respect to obligations that
could otherwise be purchased by the Fund. The seller will be required to
maintain in a segregated account the value of the collateral held pursuant to
the repurchase agreement at not less than the repurchase price (including
accrued interest). Default or bankruptcy of the seller wou ld expose the Fund to
possible loss because of adverse market action, delays in connection with the
disposition of the underlying obligations or expenses of enforcing its rights.
The Fund may not enter into a repurchase agreement if, as a result, more
than 10% of the market value of the Fund's total net assets would be invested in
repurchase agreements with a maturity of more than seven days and in other
illiquid securities. The Fund will enter into repurchase agreements on ly with
broker/dealers and commercial banks that meet guidelines established by the
Company's Board of Directors.
UNITED STATES EQUITY SECURITIES. The Fund may invest in United States
equity securities consisting of equity securities issued by the following: (1)
companies organized under the laws of the United States or the securities of
which are principally traded in the United States and (2) companies that derive
at least 50% of their revenues from goods or services produced or provided in
the United States or from sales made in the United States.
U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations consist of bills,
notes and bonds issued by the U.S. Treasury. They are direct obligations of the
U.S. Government and differ primarily in the length of their maturities and
payment of interest.
U.S. GOVERNMENT AGENCY AND INSTRUMENTALITY OBLIGATIONS. Obligations of U.S.
Government agencies and instrumentalities are debt securities issued by U.S.
Government-sponsored enterprises and federal agencies. Some of these obligations
are supported by: (a) the full faith and credit of the U.S. Treas ury (such as
Government National Mortgage Association participation certificates); (b) the
limited authority of the issuer to borrow from the U.S. Treasury (such as
securities of the Federal Home Loan Bank); (c) the authority of the U.S.
Government to
12
<PAGE>
purchase certain obligations of the issuer (suc h as securities of the Federal
National Mortgage Association); or (d) the credit of the issuer only. In the
case of obligations not backed by the full faith and credit of the U.S., the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment.
The Fund may invest up to 5% of its net assets in warrants.
WARRANTS. The Fund may invest up to 5% of its net assets at the time of
purchase in warrants (other than those that have been acquired in units or
attached to other securities) on securities in which it may invest directly.
Warrants represent rights to purchase securities at a specific price valid for a
specific period of time.
WHEN-ISSUED SECURITIES. The Fund may purchase securities on a whenissued
basis, in which case delivery and payment normally take place within 45 days
after the date of the commitment to purchase. The Fund will make commitments to
purchase securities on a when-issued basis only with the intention of actually
acquiring the securities, but may sell them before the s ettlement date, if
deemed advisable. The purchase price and the interest rate that will be received
are fixed at the time of the commitment. When-issued securities are subject to
market fluctuation, and no income accrues to the purchaser prior to issuance.
Purchasing a security on a when-issued bas is can involve a risk that the market
price at the time of delivery may be lower than the agreed upon purchase price.
The Fund will establish a segregated account in which it will maintain
liquid assets in an amount at least equal in value to the Fund's commitments to
purchase when-issued securities. If the value of these assets declines, the Fund
will place additional liquid assets in the account on a daily basis so that the
value of the assets in the account is at least equal to the amount of the Fund's
commitments.
The Fund may invest in debt obligations that do not entitle the holder to
periodic interest payments prior to maturity and are issued and traded at a
discount.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon securities,
which are debt obligations that do not entitle the holder to any periodic
payments of interest prior to maturity and are issued and traded at a discount.
The values of zero coupon securities are subject to greater fluctuations t han
are the values of income securities that distribute income regularly. Zero
coupon securities (which are not issued or guaranteed by the U.S. Government)
may be created by separating the interest and principal component of U.S.
Government Obligations or securities issued by private corporate iss uers. In
addition, the Fund's investment in zero coupon securities will result in special
tax consequences. Although zero coupon securities do not make interest payments,
for tax purposes, a portion of the difference between the security's maturity
value and its purchase price is imputed to be inco me to the Fund each year.
Because imputed income must be paid to shareholders annually, the Fund may need
to borrow money or sell securities to meet certain dividend and redemption
obligations. In addition, the sale of securities by the Fund may increase its
expense ratio and decrease its rate of return.
INVESTMENT LIMITATIONS
Unless otherwise noted, the foregoing investment objectives and related
policies and activities of the Fund are not fundamental and may be changed by
the Board of Directors of the Company without the approval of the shareholders.
If there is a change in the Fund's investment objective, shareholders should
consider whether the Fund remains an appropriate investment in light of their
then current financial position and needs.
This paragraph outlines the Fund's policies that may be changed only by a
majority vote of shareholders.
As matters of fundamental policy, which may be changed only with approval by the
vote of the holders of a majority of the Fund's outstanding voting securities,
as described in the Statement of Additional Information, the Fund may not: (1)
purchase the securities of issuers conducting their principa l business activity
in the same industry if, immediately after the purchase and as a result thereof,
the value of its investments in that industry would exceed 25% of the current
value of its total assets,
13
<PAGE>
provided that there is no limitation with respect to investments in obligations
of the U.S. G overnment, its agencies or instrumentalities; (2) invest more than
5% of the current value of its total assets in the securities of any one issuer,
other than obligations of the U.S. Government, its agencies or
instrumentalities, except that up to 25% of the value of the total assets of the
Fund ma y be invested without regard to this limitation; (3) purchase securities
of an issuer if, as a result, with respect to 75% of its total assets, it would
own more than 10% of the voting securities of such issuer; or (4) borrow from
banks, except that it may borrow up to 10% of the current value of i ts total
assets for temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 10% of the current value of the
Fund's net assets (but investments may not be purchased while borrowings are in
excess of 5%). It is also a fundamental policy that th e Fund may make loans of
portfolio securities, and invest up to 15% of the current value of its net
assets in repurchase agreements having maturities of more than seven days,
variable amount master demand notes having notice periods of more than seven
days, fixed time deposits subject to withdrawal penalties having maturities of
more than seven days, and securities that are not readily marketable. The Fund
considers the securities of foreign governments and supra-national entities to
be separate industries for purposes of the 25% asset limits on investments in
the securities of issuers condu cting their principal business activity in the
same industry.
MANAGEMENT
The Board of Directors has overall responsibility for the conduct of the
affairs of the Fund and Company. The members of the Board and their principal
occupations are as follows:
BOARD OF DIRECTORS
Edgar R. Fiedler Vice President and Economic Counsellor,
The Conference Board.
C. Gary Gerst Chairman of the Board of Directors; Chairman
Emeritus, La Salle Partners, Ltd. (real
estate developer and manager).
John W. McCarter, Jr. Senior Vice President, Booz-Allen & Hamilton,
Inc. (consulting firm); Director of W.W.
Grainger, Inc. and A.M. Castle, Inc.
Ernest M. Roth Consultant; Retired Senior Vice President and
Chief Financial Officer, Commonwealth
Edison Company.
INVESTMENT ADVISER
The Fund has entered into an Advisory Contract with Harris Trust and
Savings Bank ("Harris Trust" or the "Investment Adviser"), located at 111 West
Monroe Street, Chicago, Illinois. The Advisory Contract provides that Harris
Trust is responsible for the supervision and oversight of the Portfoli o
Management Agent's performance (as discussed below). Harris Trust is the
successor to the investment banking firm of N.W. Harris & Co., organized in
1882, and was incorporated in 1907 under the present name of the bank. It is an
Illinois state-chartered bank and a member of the Federal Reserve Sy stem. At
December 31, 1995, Harris Trust had estimated assets under management of more
than $12 billion and was the largest of 14 banks owned by Harris Bankcorp, Inc.
Harris Bankcorp, Inc. is a wholly-owned subsidiary of Bankmont Financial Corp.,
which is a wholly-owned subsidiary of Bank of Montreal, a publicly traded
Canadian banking institution.
14
<PAGE>
As of December 31, 1995, Harris Trust managed more than $9.4 billion in
personal trust assets, and acted as custodian of more than $164 billion in
assets.
For its services under the Advisory Contract with the Fund, Harris Trust is
entitled to receive monthly advisory fees at the annual rate of 0.90% of the
average daily net assets of the Fund. An advisory fee of 0.90% is higher than
that paid by most mutual funds.
PORTFOLIO MANAGEMENT AGENT
The Portfolio Management Agent, Harris Investment Management, provides
investment expertise to various portfolios and manages over $13 billion in
assets.
Harris Trust has entered into a Portfolio Management Contract with Harris
Investment Management, Inc., located at 190 South LaSalle Street, Chicago,
Illinois ("HIM" or the "Portfolio Management Agent"). Under the Portfolio
Management Contract, HIM undertakes to furnish investment guidance and p olicy
direction in connection with the daily portfolio management of the Fund. For the
services provided by HIM, Harris Trust will pay to HIM the advisory fees it
receives from the Fund. As of December 31, 1995, HIM managed an estimated $13.1
billion in assets. HIM determines the allocation of the Fund's assets among
issuers in Canada, Mexico and the United States. HIM also selects and manages
the U.S. securities in which the Fund invests and is responsible for the
supervision and oversight of the Investment Sub-Advisers' performance. HIM and
its predecessors have managed client assets for o ver 80 years. HIM has a staff
of 96, including 64 professionals, providing investment expertise to the
management of the Harris Insight Funds and for pension, profit-sharing and
institutional portfolios. HIM is a subsidiary of Harris Bankcorp, Inc.
INVESTMENT SUB-ADVISERS
JHICI selects and manages the Canadian securities and Bancomer selects and
manages the Mexican securities.
Jones Heward Investment Counsel Inc. ("JHICI") and Bancomer Asesora de
Fondos, S.A. de C.V. ("Bancomer") have each entered into an Investment
Sub-Advisory Agreement (each an "Investment Sub-Advisory Contract") with HIM.
JHICI selects and manages the Canadian securities in which the Fund inves ts and
Bancomer selects and manages the Mexican securities in which the Fund invests.
JHICI is a Canadian corporation which was established in 1982. JHICI is a
subsidiary of Bank of Montreal and as of February 28, 1996, assets under
management were approximately $7 billion (Canadian). Bancomer is a Mexican
corporation which was established in 1994. Bancomer is a wholly-owned subsidiary
of Casa de Bolsa Bancomer, S.A. de C.V., which is a wholly-owned subsidiary of
Grupo Financiero Bancomer, S.A. de C.V., a Mexican financial services holding
company. Neither JHICI nor Bancomer has previously a cted as an investment
adviser to a U.S. registered investment company.
For their services under their respective Investment Sub-Advisory
Contracts, HIM pays each of JHICI and Bancomer, from the advisory fees HIM
receives from Harris Trust, a monthly fee at the annual rate of 0.375% of the
first $25 million in average daily net assets of the Fund under its management,
plus 0.325% of the next $25 million in such assets, plus 0.275% of the next $50
million in such net assets, plus 0.250% of such net assets in excess of $100
million.
Purchase and sale orders of the securities held by the Fund may be combined
with those of other accounts that HIM, JHICI or Bancomer manage and for which
they have brokerage placement authority, in the interest of seeking the most
favorable overall net results. When HIM, JHICI or Bancomer determine that a
particular security should be bought or sold for the Fund and for other accounts
managed by HIM, JHICI or Bancomer, each party undertakes to allocate those
transactions among the participants equitably.
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<PAGE>
PORTFOLIO MANAGEMENT
All investment decisions are to be made by a committee.
All investment decisions by the Investment Adviser, Portfolio Management
Agent or an Investment Sub-Adviser are made by committees comprised of each
party's investment management personnel, and no one person is responsible for
making recommendations to that committee.
GLASS-STEAGALL ACT
The Glass-Steagall Act, among other things, generally prohibits federally
chartered or supervised banks from engaging to any extent in the business of
issuing, underwriting, selling or distributing securities, although bank holding
company subsidiaries such as Harris Trust and HIM are permitted to purchase and
sell securities upon the order and for the account of their customers.
It is the position of Harris Trust and HIM that they may perform the
services contemplated by the Advisory Contract, the Portfolio Management
Contract and this Prospectus without violation of the Glass-Steagall Act or
other applicable federal banking laws or regulations. It is noted, however, that
there are no controlling judicial or administrative interpretations or decisions
and that future judicial or administrative interpretations of, or decisions
relating to, present federal statutes and regulations relating to the
permissible activities of banks and their subsidiaries or affiliates, as well as
future changes in federal statutes or regulations and judicial or administrative
decisions or interpretations thereof, could prevent Harris Trust or HIM from
continuing to perform, in whole or in part, such services. If Harris Trust or
HIM were prohibited from performing any of such servic es, it is expected that
the Board of Directors of the Company would recommend to the Fund's shareholders
that they approve a new agreement with another entity or entities qualified to
perform such services and selected by the Board of Directors.
To the extent permitted by the Commission, the Fund may pay brokerage
commissions to certain affiliated persons.
ADMINISTRATORS, CUSTODIAN AND TRANSFER AGENT
First Data Investor Services Group, Inc. and PFPC Inc. ("PFPC"),
collectively, the "Administrators," serve as the Company's administrators. In
such capacity, the Administrators generally assist the Company in all aspects of
its administration and operation. PFPC also serves as the transfer and dividend
disbursing agent of the Fund (the "Transfer Agent").
PNC Bank, N.A. (the "Custodian") serves as custodian of the assets of the
Fund. PFPC and the Custodian are indirect, wholly-owned subsidiaries of PNC Bank
Corp.
As compensation for their services, the Administrators, the Custodian, and
the Transfer Agent are entitled to receive a combined fee based on the aggregate
average daily net assets of the Fund, certain other investment portfolios
advised by Harris Trust, and the Company's other investment portfolio s (Harris
Insight Government Money Market Fund, Money Market Fund, and Tax-Exempt Money
Market Fund (the "Harris Insight Money Market Funds"), the Harris Insight
Convertible Fund, Equity Fund, and Short/Intermediate Bond Fund (the "Harris
Insight Non-Money Market Funds")), payable monthly at an annual rate of .17% of
the first $300 million of average daily net assets; .15% of the next $300
million, and .13% of average net assets in excess of $600 million. In addition,
a separate fee is charged by PFPC for certain retail transfer agent services and
for various transactional custody charges.
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<PAGE>
DISTRIBUTOR
Funds Distributor, Inc. (the "Distributor") has entered into a Distribution
Agreement with the Company pursuant to which it has the responsibility for
distributing shares of the Fund. The Distributor bears the cost of printing and
mailing prospectuses to potential investors and any advertising ex penses
incurred by it in connection with the distribution of shares, subject to the
terms of the Service Plan described below pursuant to a contractual arrangement
between the Company and the Distributor and approved by the Board of Directors
of the Company.
See "Management" and "Custodian" in the Statement of Additional Information
for additional information regarding the Company's Investment Adviser, Portfolio
Management Agent, Administrators, Custodian, Transfer Agent and Distributor.
EXPENSES
Except for certain expenses borne by the Distributor, Harris Trust and HIM,
the Company bears all costs of its operations, including the compensation of its
directors who are not affiliated with Harris Trust, HIM or the Distributor or
any of their affiliates; advisory and administration fees; payme nts pursuant to
any Service Plan; interest charges; taxes; fees and expenses of its independent
accountants, legal counsel, transfer agent and dividend disbursing agent;
expenses of preparing and printing prospectuses (except the expense of printing
and mailing prospectuses used for promotional pur poses, unless otherwise
payable pursuant to a Service Plan), shareholders' reports, notices, proxy
statements and reports to regulatory agencies; insurance premiums and certain
expenses relating to insurance coverage; trade association membership dues;
brokerage and other expenses connected with th e execution of portfolio
securities transactions; fees and expenses of the Fund's custodian including
those for keeping books and accounts and calculating the net asset value per
share of the Fund; expenses of directors' and shareholders' meetings; expenses
relating to the issuance, registration an d qualification of shares of the Fund;
pricing services; organizational expenses; and any extraordinary expenses.
Expenses attributable to the Fund are charged against the assets of the Fund.
Other general expenses of the Company are allocated among the Fund, the Harris
Insight Non-Money Market Fun ds and the Harris Insight Money Market Funds in an
equitable manner as determined by the Board of Directors.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is determined daily.
Net asset value per share for the Fund is determined on each day that the
New York Stock Exchange ("NYSE") and the Federal Reserve Bank of Philadelphia
(the "Fed") are open for trading. For a list of the days on which the net asset
value will not be determined, see "Determination of Net Asset Value" in the
Statement of Additional Information. The net asset value per share of the Fund
is determined by dividing the value of the total assets of the Fund less all of
its liabilities by the total number of outstanding shares of the Fund.
The net asset value per share of the Fund is determined at the close of
regular trading on the NYSE on each day the Fund is open for business. The value
of
17
<PAGE>
securities owned by the Fund (other than bonds purchased by the Fund and debt
obligations maturing in 60 days or less) is determined based on t he last sale
price on the principal exchange on which the securities are traded as of the
close of regular trading on the NYSE (which is currently 4:00 P.M., New York
City time). In the absence of any sale on the valuation date, the securities are
valued at the closing bid price. Securities traded only on over-the-counter
markets are valued at closing over-the-counter bid prices. Portfolio securities
which are primarily traded on foreign securities exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except when an occurrence subseq uent to the time a value was so
established is likely to have changed such value. In such an event, the fair
value of those securities will be determined through the consideration of other
factors by or under the direction of the Board of Directors. Bonds purchased by
the Fund are valued at the mea n of the last bid and asked prices. In the event
that such prices are not readily available, securities are valued at fair value
as determined in good faith by the Board of Directors. Prices used for
valuations of securities are provided by independent pricing services. Debt
obligations with remain ing maturities of 60 days or less are valued at
amortized cost when the Company's Board of Directors has determined that
amortized cost valuation is fair value.
The different expenses borne by each class of Shares will result in
different net asset values and dividends. The per share net asset value of Class
A Shares of the Fund generally will be lower than that of the Institutional
Shares of the Fund because of the higher expenses borne by Class A Shares.
PURCHASE OF SHARES
Fund shares may be purchased any day the New York Stock Exchange and the Federal
Reserve are open for business.
Shares of the Fund may be purchased on any day the NYSE and the Fed are
open for business through authorized broker/dealers, financial institutions and
service agents ("Institutions"). Institutions are responsible for the prompt
transmission to the Distributor of purchase, exchange or redemption orders, and
may independently establish and charge additional fees to their customers for
such services, which would reduce the customers' yield or return. The Company
does not impose any minimum initial or subsequent investment limitations. Each
Institution through which shares may be purchased ma y establish its own terms
with respect to the requirement of a minimum initial investment and minimum
subsequent investments.
The Company reserves the right to reject any purchase order. All funds net
of sales charge with respect to Class A Shares, received from a share purchase
will be invested in full and fractional shares at their offering price next
determined after receipt of a purchase order by the Distributor. Chec ks will be
accepted for the purchase of the Fund's shares subject to collection at full
face value in U.S. dollars. Inquiries may be directed to the Company at the
address and telephone number on page 1 of this Prospectus.
Purchase orders for shares of the Fund received in good order by the
Distributor prior to the close of regular trading (4:00 P.M., New York City
time) on the NYSE will be executed at the offering price, which includes a sales
charge for Class A Shares, next determined on that day. Orders placed dir ectly
with the Distributor must be paid for by check or bank wire on the next business
day. Payment for the shares purchased through an Institution will not be due
until settlement date, normally three business days after the order has been
executed.
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<PAGE>
Although Class A Shares of the Fund are sold with a sales load of up to 4.50%,
there are a number of ways to reduce the sales load.
When Class A Shares of the Fund are purchased through an Institution, the
Distributor reallows to the Institution a portion of the sales charge. No sales
charge will be assessed on the reinvestment of distributions.
Sales charges for Class A Shares of the Fund are as follows:
<TABLE>
<CAPTION>
SALES
CHARGE DEALER
AS % OF ALLOWANCE
SALES NET AMOUNT AS % OF
AMOUNT OF PURCHASE CHARGE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.25%
$100,000 up to (but less than) $200,000 4.00 4.17 3.75
$200,000 up to (but less than) $400,000 3.50 3.63 3.25
$400,000 up to (but less than) $600,000 2.50 2.56 2.25
$600,000 up to (but less than) $800,000 2.00 2.04 1.75
$800,000 up to (but less than) $1,000,000 1.00 1.01 0.75
$1,000,000 and over .00 .00 .00
</TABLE>
No sales charge will be assessed on purchases by (a) any bank, trust
company, or other institution acting on behalf of its fiduciary customer
accounts or any other trust account maintained (including a pension,
profit-sharing or other employee benefit trusts created pursuant to a plan
qualified und er Section 401 of the Internal Revenue Code of 1986, as amended
(the "Code")); (b) individuals with an investment account or relationship with
HIM; (c) directors and officers of the Company; (d) directors, current and
retired employees of Harris Bankcorp, Inc. or any of its affiliates and the imm
ediate family members of such individuals (spouses and children under 21); (e)
brokers, dealers, and agents who have a sales agreement with the Distributor,
and their employees (and the immediate family members of such individuals); and
(f) financial institutions, financial planners, employee benef it plan
consultants or registered investment advisers acting for the accounts of their
clients.
Depending upon the terms of the particular customer account, financial
services institutions, including Harris Trust and HIM, may charge account fees
for automatic investment and other cash management services which they provide,
including, for example, account maintenance fees, compensating balanc e
requirements, or fees based upon account transactions, assets, or income. This
Prospectus should be read in connection with any related information received
from financial institutions.
The Right of Accumulation allows an investor to combine the amount being
invested in Class A Shares of the non-money market funds of the Company with the
total net asset value of Class A Shares currently being purchased or already
owned of such funds to determine reduced sales charges in accordance with the
above sales charge schedule. To obtain such discount, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase qualifies for the reduced sales charge, and confirmation of the order
is subject to such verification. The Right of Accu mulation may be modified or
discontinued at any time by the Funds with respect to all Class A Shares
purchased thereafter.
A Letter of Intent allows an investor to purchase Class A Shares of the
non-money market funds of the Company over a 13-month period at reduced sales
charges based on the total amount intended to be purchased plus the total net
asset value of Class A Shares already owned pursuant to the terms of th e letter
of such Fund. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the intended investment. If such amount
is not invested within the period, the investor must pay the difference between
the sales charges applicable to the purchases mad e and the charges previously
paid.
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<PAGE>
REDEMPTION OF SHARES
Shares may be redeemed at their next determined net asset value after receipt of
proper request by the Distributor.
Shares may be redeemed at their next determined net asset value after
receipt of a proper request by the Distributor directly or through any
Institution.
The Company makes no charge for redemption transactions, but an Institution
may charge an account-based service fee. Redemption orders received by an
Institution before the close of the NYSE with respect to shares of the Fund and
received by the Distributor before the close of business on the same day will be
executed at the Fund's net asset value per share next determined on that day.
Redemption orders received by an Institution after the close of the NYSE, or not
received by the Distributor prior to the close of business, will be executed at
the Fund's net asset value next determined on th e next business day.
Redemption orders for shares of the Fund that are received in good order by
4:00 P.M. (New York City time) will normally be remitted within five business
days but not more than seven days. In the case of a redemption request made
shortly after a recent purchase, the redemption proceeds will be dist ributed
only upon clearance of the shareholder's check used to purchase the Company's
shares; such clearance may take up to 15 days or more after the investment. The
proceeds may be more or less than cost and, therefore, a redemption may result
in a gain or loss for federal income tax purposes. Pay ment of redemption
proceeds may be made in readily marketable securities.
REDEMPTION THROUGH INSTITUTIONS
Proceeds of a redemption made through an authorized Institution will be credited
to the shareholder's account with the Institution.
Proceeds of a redemption made through an authorized Institution will be
credited to the shareholder's account with the Institution. A redeeming
shareholder may request a check from the Institution or may elect to retain the
redemption proceeds in such shareholder's account. The Institution may bene fit
from the use of the redemption proceeds prior to the clearance of a check issued
to a redeeming shareholder for the proceeds or prior to disbursement or
reinvestment of the proceeds on behalf of the shareholder.
Due to the high cost of maintaining small accounts, the Company reserves
the right to redeem accounts involuntarily on behalf of shareholders whose share
balances fall below $500 in value unless this is due to a decline in the market
value of the Fund's assets. Prior to such a redemption, a shareho lder will be
notified in writing and permitted 30 days to make additional investments to
raise the account balance to the specified minimum.
SERVICE PLAN
Class A Shares of the Fund pay advertising and marketing expenses in addition to
other shareholder servicing costs.
Under its Service Plan, Class A Shares of the Fund bear the costs and
expenses in connection with advertising and marketing the Fund's shares and pay
the fees of financial institutions (which may include banks), securities dealers
and other industry professionals, such as investment advisers, accou ntants and
estate planning firms (collectively, "Service Agents") for servicing activities,
as described below, at a rate up to 0.25% per annum of the average daily net
asset value of Class A Shares of the Fund. However, HIM, from time to time in
its sole discretion, may volunteer to bear the cos ts of such fees to certain
Service Agents that would otherwise be borne by Class A Shares of the Fund. The
Administrators and the Distributor may act as Service Agents and receive fees
under the Service Plan. In addition to the fees paid by Class A Shares of the
Fund, the Fund may, pursuant to the Service Plan, defray all or part of the cost
of
20
<PAGE>
preparing and printing brochures and other promotional materials and of
delivering prospectuses and those materials to prospective shareholders of Class
A Shares of the Fund by paying on an annual basis up to the greater of $100,000
or 0.05% of the average daily net asset value of Class A Shares of the Fund (but
not in any case greater than such costs). For more information concerning
expenses pursuant to the Service Plan, see "Management."
Servicing activities provided by Service Agents to their customers
investing in Class A Shares of the Fund may include, among other things, one or
more of the following: establishing and maintaining shareholder accounts and
records; processing purchase and redemption transactions; answering custome r
inquiries regarding Class A Shares of the Fund; assisting customers in changing
dividend options, account designations and addresses; performing sub-accounting;
investing customer cash account balances automatically in Class A Shares of the
Fund; providing periodic statements showing a customer's account balance and
integrating such statements with those of other transactions and balances in the
customer's other accounts serviced by the Service Agent; arranging for bank
wires; distribution and such other services as the Fund may request, to the
extent the Service Agent is permitted to prov ide such services by applicable
statute, rule or regulation.
DIVIDENDS AND DISTRIBUTIONS
The Fund pays dividends annually.
Dividends from net investment income of the Fund are declared and paid
annually. The Fund's net capital gains, if any, will be distributed at least
annually (to the extent required to avoid imposition of the 4% excise tax
described below). Dividends and other distributions paid by the Fund with res
pect to its Class A and Institutional Shares are calculated at the same time.
Dividends and distributions paid by the Fund are invested in additional shares
of the same class of the Fund at net asset value and credited to the
shareholder's account on the payment date or, at the shareholder's electi on,
paid in cash. Dividend checks and Statements of Account are mailed approximately
two business days after the dividend payment date. The Fund forwards to the
Transfer Agent the monies for dividends to be paid in cash on the payment date.
TAXES
UNITED STATES TAX. The Fund (and each Harris Insight Money Market Fund and
Harris Insight Non-Money Market Fund) will be treated as a separate entity for
tax purposes and thus the provisions of the Code generally will be applied to
each Fund separately, rather than to the Company as a whole. As a r esult, net
capital gains, net investment income, and operating expenses will be determined
separately for the Fund. The Company intends to qualify the Fund as a regulated
investment company under Subchapter M of the Code. As a portfolio of a regulated
investment company, the Fund will not be subjec t to federal income taxes with
respect to net investment income and net capital gains distributed to its
shareholders, as long as it distributes 90% or more of its net investment income
(including net short-term capital gains) each year.
Distributions of net long-term capital gains, if any, will be taxable as
long-term capital gains, whether received in cash or reinvested in additional
shares, regardless of how long the shareholder has held the shares, and will not
qualify for the dividends-received deductions.
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<PAGE>
A taxable gain or loss may also be realized by a holder of shares in the
Fund upon the redemption or exchange of shares of the Fund depending on the tax
basis of the shares and their price at the time of the transaction.
Any loss realized on a sale or exchange of shares of the Fund will be
disallowed to the extent shares of the Fund are acquired within the 61-day
period beginning 30 days before and ending 30 days after the disposition of
shares.
Income or gain from investments in foreign securities may be subject to foreign
withholding or other taxes.
Income or gain from investments in foreign securities may be subject to
foreign withholding or other taxes. If more than 50% of the value of the Fund's
total assets at the close of any taxable year consists of stock or other
securities of foreign corporations, the Fund may elect, for U.S. federal i ncome
tax purposes, to treat certain foreign taxes paid by it, including generally any
withholding taxes and other foreign income taxes, as paid by its shareholders.
If the Fund makes this election, the amount of such foreign taxes paid by the
Fund will be included in its shareholders' income pro r ata (in addition to
taxable distributions actually received by them), and the shareholders would be
entitled (a) to credit their proportionate amount of such taxes against their
U.S. federal income tax liabilities subject to certain limitations described in
the Statement of Additional Information, or (b) if they itemize their
deductions, to deduct such proportionate amount from their U.S. income.
If you have not furnished us with a correct tax identification number, you may
be subject to a withholding of 31% of dividends and redemption proceeds.
The Company will be required to withhold, subject to certain exemptions,
currently at a rate of 31%, a portion of dividends paid or credited to
individual shareholders and of redemption proceeds, if a correct taxpayer
identification number, certified when required, is not on file with the Company
o r Transfer Agent.
CANADIAN TAX. Interest received by, or credited to, the Fund from Canadian
sources will generally be subject to a 25% withholding tax in Canada. No
Canadian withholding tax is applicable, however, to a debt obligation issued by
the government of Canada a province of Canada or an agency of a provinc e; a
municipality in Canada certain corporations of which at least 90% of the shares
are owned by a province or a Canadian municipality or an educational institution
or hospital, if the repayment of principal and payment of interest with respect
to the obligation is guaranteed by a province. In add ition, interest payable to
the Fund in a currency other than a Canadian currency is generally exempt from
withholding taxes if the principal amount is deposited with a Canadian financial
institution and is not repayable in Canadian currency, and the Fund deals at
arms' length with the institution. The holder of certain Canadian debt
obligations on which interest income has accrued, but has not been paid, may be
deemed to have received the accrued interest and may be subject to a 25%
withholding tax on the amount of the interest.
Gains derived from the disposition of securities will generally be exempt
from Canadian tax so long as the Fund does not carry on business in Canada. The
mere holding of securities usually does not constitute doing business in Canada.
MEXICAN TAX. Profits derived from the sale of equity securities listed on
the Mexican Stock Exchange that are either directly available to foreign
investors or only available to foreign investors through a trust are generally
not subject to tax in Mexico. Gains from off-exchange transactions in bot h
listed and unlisted equity securities are subject to a 20% withholding tax on
the appreciated value of the equity securities at the time of sale. Dividends
paid to the Fund by a company that has paid Mexican corporate tax are not
subject to tax. In the event the company has not paid Mexican corpo rate tax,
dividends paid by the company will be subject to
22
<PAGE>
a tax, which tax is payable by the company at a rate of 34% of the amount that
results from multiplying the amount of the dividend by 1.515.
Interest earned by the Fund from debt obligations that are listed on the
Mexican Stock Exchange with the exceptions of debt obligations of the Mexican
federal government, its agencies and instrumentalities, including money market
instruments issued by the Mexican federal government, are generally s ubject to
a withholding tax on the gross amount at a rate of 4.9%. Interest earned on
unlisted debt securities is subject to a 15% to 21% withholding tax if the
obligor is a credit institution and to a 35% withholding tax in all other cases.
All these taxes are paid directly by the Fund and not its shareholders.
ACCOUNT SERVICES
Shareholders receive a Statement of Account whenever a share transaction,
dividend or capital gain distribution is effected in the accounts, or at least
annually. Shareholders can write or call the Company at the address and
telephone number on page one of this Prospectus with any questions relatin g to
their investment in shares of the Fund.
ORGANIZATION AND CAPITAL STOCK
HT Insight Funds, Inc., doing business as Harris Insight Funds (the
"Company"), was incorporated in Maryland on September 16, 1987 as an open-end,
diversified management investment company.
The authorized capital stock of the Company consists of 10,000,000,000
shares having a par value of $.001 per share. Currently the Company has seven
portfolios in operation. The Board has authorized the Fund to issue two classes
of shares. The Board has also authorized each of the three Harris Mone y Market
Funds to issue three classes of shares, Class A, Class B and Institutional
Shares. Each Harris Non-Money Market Fund, other than the Fund, currently offers
only one class of shares. In the future, the Board of Directors may authorize
the issuance of other classes of capital stock represent ing shares of
additional investment portfolios. All shares of the Company have equal voting
rights and will be voted in the aggregate, and not by class, except where voting
by class is required by law or where the matter involved affects only one class.
A more detailed statement of the voting right s of shareholders is contained in
the Statement of Additional Information. All shares of the Company, when issued,
will be fully paid and non-assessable. The Directors, when requested by holders
of at least 10% of the Company's outstanding shares, will call a meeting of
shareholders for the purpose of voting upon the question of removal of a
director or directors and will assist in communications with other shareholders
as required by Section 16(c) of the 1940 Act. The Company does not hold annual
meetings of shareholders.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31. The Company sends to
its shareholders a semi-annual report showing the investments held by each of
the Funds and other information (including unaudited financial statements)
pertaining to the Company. An annual report, containing financial stateme nts
audited by the Company's independent accountants, is also sent to shareholders.
23
<PAGE>
CALCULATION OF YIELD AND TOTAL RETURN
"Yield" refers to the amount of income generated over a 30-day period which is
then "annualized."
"Total return" shows what would have been earned over a specified period of time
assuming payment of the maximum sales load and reinvestment of dividends and
distributions less recurring fees.
From time to time the Fund may advertise the yield and total return of each
class of the Fund. These figures are based on historical earnings and are not
intended to indicate future performance. The yield of a class of the Fund refers
to the income generated by an investment in that class of the Fu nd over a
30-day period (which period will be stated in the advertisement). This income is
then "annualized." That is, the amount of income generated by the investment
during the 30-day period is assumed to be earned and reinvested at a constant
rate and compounded semi-annually. The annualized i ncome is then shown as a
percentage of the investment. The total return of a class of the Fund shows what
an investment in that class of the Fund would have earned over a specified
period of time (such as one, five or ten years, or the period of time since
commencement of operations, if shorter) as suming the reinvestment of all
distributions and dividends by the class of Fund shares on their reinvestment
dates during the period less all recurring fees and, with respect to Class A
Shares, the payment of the maximum sales load when the investment was first
made. When the Fund compares its tota l return to that of other mutual funds or
relevant indices, its total return may also be computed without reflecting the
sales load so long as the sales load is stated separately in connection with the
comparison.
The Fund's performance figures for a class of shares represent past
performance, will fluctuate and should not be considered as representative of
future results. The yield of any investment is generally a function of portfolio
quality and maturity, type of instrument and operating expenses.
24
<PAGE>
INVESTMENT ADVISER
Harris Trust and Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
PORTFOLIO MANAGEMENT AGENT
Harris Investment Management, Inc.
190 South LaSalle Street
Chicago, Illinois 60603
INVESTMENT SUB-ADVISERS
Jones Heward Investment
Counsel Inc.
77 King Street West
Suite 4200
P.O. Box 279
Toronto, Canada
Ontario M5K 1J5
Bancomer Asesora de Fondos,
S.A. de C.V.
Av. Insurgentes Sur 1811
01020, Mexico, D.F.
ADMINISTRATORS
First Data Investor Services Group, Inc.
53 State Street
Boston, Massachusetts 02109
PFPC Inc.
103 Bellevue Parkway
Wilmington, Delaware 19809
DISTRIBUTOR
Funds Distributor, Inc.
One Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
PNC Bank, N.A.
Broad and Chestnut Streets
Philadelphia, Pennsylvania 19101
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
PFPC Inc.
P.O. Box 8950
Wilmington, Delaware 19885-9628
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Philadelphia, Pennsylvania
LEGAL COUNSEL
Bell, Boyd & Lloyd
Chicago, Illinois
<PAGE>
HARRIS INSIGHT HEMISPHERE FREE TRADE FUND
HARRIS INSIGHT FUNDS
One Exchange Place, Boston, Massachusetts 02109
Telephone: (800) 982-8782
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1996
The Harris Insight Hemisphere Free Trade Fund (the "Fund") is one of
seven portfolios of HT Insight Funds, Inc., doing business as Harris Insight
Funds (the "Company"), a professionally managed, open-end, diversified
management investment company. The investment objective of the Fund is described
in the Prospectus. See "Investment Objectives and Policies."
This Statement of Additional Information is not a prospectus and is
authorized for distribution only when preceded or accompanied by the Fund's
Prospectus dated March 1, 1996 and any supplement thereto (the "Prospectus").
This Statement of Additional Information contains additional information that
should be read in conjunction with the Prospectus, additional copies of which
may be obtained without charge from the Company's distributor, Funds
Distributor, Inc., by writing or calling the Company at the address or telephone
number given above.
TABLE OF CONTENTS
Investment Strategies......... 2 Capital Stock................. 19
Ratings....................... 9 Other......................... 20
Investment Restrictions....... 9 Custodian..................... 21
Management.................... 11 Independent Accountants....... 21
Service Plan.................. 14 Experts....................... 21
Calculation of Yield and Appendix...................... A-1
Total Return................ 16
Determination of Net
Asset Value ................ 17
Portfolio Transactions........ 17
Taxes......................... 18
<PAGE>
INVESTMENT STRATEGIES
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pool of assets, or as debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. Payments of
principal and interest may be guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the entities issuing the securities.
The estimated life of an asset-backed security varies with the
prepayment experience with respect to the underlying debt instruments. The rate
of such prepayments, and hence the life of the asset-backed security, will be
primarily a function of current market interest rates, although other economic
and demographic factors may be involved.
CONVERTIBLE SECURITIES
Because they have the characteristics of both fixed-income securities
and common stock, convertible securities sometimes are called "hybrid"
securities. Convertible bonds, debentures and notes are debt obligations
offering a fixed interest rate; convertible preferred stocks are senior
securities offering a fixed dividend rate. Convertible securities will at times
be priced in the market like other fixed income securities: that is, their
prices will tend to rise when interest rates decline and will tend to fall when
interest rates rise. However, because a convertible security provides an option
to the holder to exchange the security for a specified number of the issuer's
common shares at a stated price per share, the security market price will tend
to fluctuate in relationship to the price of the common shares into which it is
convertible. Thus, convertible securities ordinarily will provide opportunities
both for producing current income and longer-term capital appreciation. Because
convertible securities are usually viewed by the issuer as future common stock,
they are generally subordinated to other senior securities and therefore are
rated one category lower than the issuer's non-convertible debt obligations or
preferred stock.
Fixed income securities frequently have call or buy-back features that
permit their issuers to call or repurchase the securities from their holders,
such as the Fund. If an issuer exercises these rights during periods of
declining interest rates, the Fund may have to replace the security with a lower
yielding security, thus resulting in a decreased return to the Fund.
FLOATING AND VARIABLE RATE OBLIGATIONS
The Investment Adviser, or Investment Sub-Adviser with respect to
Canadian or Mexican securities, will monitor, on an ongoing basis, the ability
of an issuer of a Floating or Variable Rate demand instrument to pay principal
and interest on demand. The Fund's right
<PAGE>
to obtain payment at par on a demand instrument could be affected by events
occurring between the date the Fund elects to demand payment and the date
payment is due that may affect the ability of the issuer of the instrument to
make payment when due, except when such demand instrument permits same day
settlement. To facilitate settlement, these same day demand instruments may be
held in book entry form at a bank other than the Company's custodian subject to
a sub-custodian agreement approved by the Company between the bank and the
Company's custodian.
The floating and variable rate obligations that the Fund may purchase
include certificates of participation in such obligations purchased from banks.
A certificate of participation gives the Fund an undivided interest in the
underlying obligations in the proportion that the Fund's interest bears to the
total principal amount of the obligation. Certain certificates of participation
may carry a demand feature that would permit the holder to tender them back to
the issuer prior to maturity. The income received on certificates of
participation in tax-exempt municipal obligations constitutes interest from
tax-exempt obligations.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS (DELAYED-DELIVERY).
When-issued purchases and forward commitments (delayed-delivery) are commitments
by the Fund to purchase or sell particular securities with payment and delivery
to occur at a future date (perhaps one or two months later). These transactions
permit the Fund to lock in a price or yield on a security, regardless of future
changes in interest rates.
When the Fund agrees to purchase securities on a when-issued or forward
commitment basis, the Custodian will segregate on the books of the Fund the
liquid assets of the Fund. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Fund may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Fund's commitments. Because the Fund's liquidity and ability to manage its
portfolio might be affected when it sets aside cash or portfolio securities to
cover such purchase commitments, the Investment Adviser expects that its
commitments to purchase when-issued securities and forward commitments will not
exceed 25% of the value of the Fund's total assets absent unusual market
conditions.
The Fund will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, the Fund may dispose of or renegotiate a
commitment after it is entered into, and may sell securities it has committed to
purchase before those securities are delivered to the Fund on the settlement
date. In these cases the Fund may realize a capital gain or loss for federal
income tax purposes.
When the Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
3
<PAGE>
The market value of the securities underlying a when-issued purchase or
a forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
REPURCHASE AGREEMENTS. The Fund may purchase portfolio securities
subject to the seller's agreement to repurchase them at a mutually agreed upon
time and price, which includes an amount representing interest on the purchase
price. The Fund may enter into repurchase agreements only with respect to
obligations that could otherwise be purchased by the Fund. The seller will be
required to maintain in a segregated account the value of the collateral held
pursuant to the repurchase agreement at not less than the repurchase price
(including accrued interest). Default or bankruptcy of the seller would expose
the Fund to possible loss because of adverse market action, delays in connection
with the disposition of the underlying obligations or expenses of enforcing its
rights.
The Fund may not enter into a repurchase agreement if, as a result,
more than 10% of the market value of the Fund's total net assets would be
invested in repurchase agreements with a maturity of more than seven days and in
other illiquid securities. The Fund will enter into repurchase agreements only
with registered broker/dealers and commercial banks that meet guidelines
established by the Company's Board of Directors.
UNITED STATES GOVERNMENT OBLIGATIONS. United States Government
obligations are obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Obligations of the United States Government
agencies and instrumentalities are debt securities issued by United States
Government-sponsored enterprises and federal agencies. Some of these obligations
are supported by: (a) the full faith and credit of the United States Treasury
(such as Government National Mortgage Association participation certificates);
(b) the limited authority of the issuer to borrow from the United States
Treasury (such as securities of the Federal Home Loan Bank); (c) the
discretionary authority of the United States Government to purchase certain
obligations (such as securities of the Federal National Mortgage Association);
or (d) the credit of the issuer only. In the case of obligations not backed by
the full faith and credit of the United States, the investor must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. In cases where United States Government support of agencies or
instrumentalities is discretionary, no assurance can be given that the United
States Government will provide financial support, since it is not lawfully
obligated to do so.
LETTERS OF CREDIT
Debt obligations, including municipal obligations, certificates of
participation, commercial paper and other short-term obligations, may be backed
by an irrevocable letter of credit of a bank that assumes the obligation for
payment of principal and interest in the event of default by the issuer. Only
banks that, in the opinion of the Investment Adviser, or
4
<PAGE>
Investment Sub-Adviser with respect to Canadian or Mexican securities, are of
investment quality comparable to other permitted investments of the Fund, may be
used for letter of credit backed investments.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to brokers, dealers and financial institutions
securities from its portfolio representing up to 5% of the Fund's net assets if
cash or cash equivalent collateral, including letters of credit,
marked-to-market daily and equal to at least 100% of the current market value of
the securities loaned (including accrued interest and dividends thereon) plus
the interest payable to the Fund with respect to the loan is maintained by the
borrower with the Fund in a segregated account. In determining whether to lend a
security to a particular broker, dealer or financial institution, the Investment
Adviser, will consider all relevant facts and circumstances, including the
creditworthiness of the broker, dealer or financial institution. The Fund will
not enter into any portfolio security lending arrangement having a duration
longer than one year. Any securities that the Fund may receive as collateral
will not become part of the Fund's portfolio at the time of the loan and, in the
event of a default by the borrower, the Fund will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Fund is permitted to invest. During the time securities are on loan, the
borrower will pay the Fund any accrued income on those securities, and the Fund
may invest the cash collateral and earn additional income or receive an agreed
upon fee from a borrower that has delivered cash equivalent collateral. Loans of
securities by the Fund will be subject to termination at the Fund's or the
borrower's option. The Fund may pay reasonable administrative and custodial fees
in connection with a securities loan and may pay a negotiated fee to the
borrower or the placing broker. Borrowers and placing brokers may not be
affiliated, directly or indirectly, with the Company, the Investment Adviser,
the Investment Sub-Advisers or the Distributor.
UNITED STATES MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-backed securities, including
collateralized mortgage obligations ("CMOs") and Government Stripped
Mortgage-Backed Securities. Mortgage-backed securities may be considered to be
derivative instruments. CMOs are types of bonds secured by an underlying pool of
mortgages or mortgage pass-through certificates that are structured to direct
payments on underlying collateral to different series or classes of the
obligations. To the extent that CMOs are considered to be investment companies,
investments in such CMOs will be subject to the percentage limitations described
under "Investment Company Securities."
Government Stripped Mortgage-Backed Securities are mortgage-backed
securities issued or guaranteed by Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA"), or Federal Home Loan
Mortgage Corporation ("FHLMC"). These securities represent beneficial ownership
interests in either periodic principal distributions ("principal-only") or
interest distributions ("interest-only") on mortgage-backed certificates issued
by GNMA, FNMA or FHLMC, as the case may be. The
5
<PAGE>
certificates underlying the Government Stripped Mortgage-Backed Securities
represent all or part of the beneficial interest in pools of mortgage loans.
Mortgage-backed securities provide a monthly payment consisting of
interest and principal payments. Additional payments may be made out of
unscheduled repayments of principal resulting from the sale of the underlying
residential property, refinancing or foreclosure, net of fees or costs that may
be incurred. Prepayments of principal on mortgage-related securities may tend to
increase due to refinancing of mortgages as interest rates decline. Prompt
payment of principal and interest on Government National Mortgage Association
("GNMA") mortgage pass-through certificates is backed by the full faith and
credit of the United States. Federal National Mortgage Association ("FNMA")
guaranteed mortgage pass-through certificates and Federal Home Loan Mortgage
Corporation ("FHLMC") participation certificates are solely the obligations of
those entities but are supported by the discretionary authority of the U.S.
Government to purchase the agencies' obligations.
The Fund will invest in interest-only Government Stripped
Mortgage-Backed Securities in order to enhance yield or to benefit from
anticipated appreciation in value of the securities at times when the Investment
Adviser believes that interest rates will remain stable or increase. In periods
of rising interest rates, the value of interest-only Government Stripped
Mortgage-Backed Securities may be expected to increase because of the diminished
expectation that the underlying mortgages will be prepaid. In this situation the
expected increase in the value of interest-only Government Stripped
Mortgage-Backed Securities may offset all or a portion of any decline in value
of the portfolio securities of the Fund. Investing in Government Stripped
Mortgage-Backed Securities involves the risks normally associated with investing
in mortgage-backed securities issued by government or government-related
entities. In addition, the yields on interest-only and principal-only Government
Stripped Mortgage-Backed Securities are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on
interest-only Government Stripped Mortgage-Backed Securities and increasing the
yield to maturity on principal-only Government Stripped Mortgage-Backed
Securities. Conversely, if an increase in the level of prevailing interest rates
results in a rate of principal prepayments lower than anticipated, distributions
of principal will be deferred, thereby increasing the yield to maturity on
interest-only Government Stripped Mortgage-Backed Securities and decreasing the
yield to maturity on principal-only Government Stripped Mortgage-Backed
Securities. Sufficiently high prepayment rates could result in the Fund not
fully recovering its initial investment in an interest-only Government Stripped
Mortgage-Backed Security. Government Stripped Mortgage-Backed Securities are
currently traded in an over-the-counter market maintained by several large
investment banking firms. There can be no assurance that the Fund will be able
to effect a trade of a Government Stripped Mortgage-Backed Security at a time
when it wishes to do so. The Fund will acquire Government Stripped
Mortgage-Backed Securities only if a liquid secondary market for the securities
exists at the time of acquisition.
6
<PAGE>
SECURITIES WITH PUTS
A put is not transferable by the Fund, although the Fund may sell the
underlying securities to a third party at any time. If necessary and advisable,
the Fund may pay for certain puts either separately, in cash or by paying a
higher price for portfolio securities that are acquired subject to such a put
(thus reducing the yield to maturity otherwise available for the same
securities). The Fund expects, however, that puts generally will be available
without the payment of any direct or indirect consideration.
The Fund intends to enter into puts solely to maintain liquidity and
does not intend to exercise its right thereunder for trading purposes. The puts
will only be for periods substantially less than the life of the underlying
security. The acquisition of a put will not affect the valuation by the Fund of
the underlying security. Where the Fund pays directly or indirectly for a put,
its costs will be reflected as an unrealized loss for the period during which
the put is held by the Fund and will be reflected in realized gain or loss when
the put is exercised or expires. If the value of the underlying security
increases, the potential for unrealized or realized gain is reduced by the cost
of the put.
PUT AND CALL OPTIONS
The Fund may invest up to 5% of its net assets in covered put and
covered call options and write covered put and covered call options on
securities in which it may invest directly and that are traded on registered
domestic securities exchanges. Put and call options may be considered to be
derivative instruments. The writer of a call option, who receives a premium, has
the obligation, upon exercise of the option, to deliver the underlying security
against payment of the exercise price during the option period. The writer of a
put, who receives a premium, has the obligation to buy the underlying security,
upon exercise, at the exercise price during the option period.
The Fund may write put and call options on stocks only if they are
"covered," and such options must remain "covered" as long as the Fund is
obligated as a writer. A call option 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 if 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 the Fund holds on a share-for-share or equal principal
amount basis a call on the same security as the call written where the exercise
price of the call held is equal to or less than the exercise price of the call
written or greater than the exercise price of the call written if the difference
is maintained by the Fund in cash, Treasury bills or other high-grade short-term
obligations in a segregated account with its custodian. A put option is
"covered" if the Fund maintains cash, Treasury bills, or other high-grade
short-term obligations with a value equal to the exercise price in a segregated
account with its custodian, or owns on a share-for-share or equal principal
amount basis a put on the same security 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.
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<PAGE>
The principal reason for writing call options is to attempt to realize,
through the receipt of premiums, a greater current return than would be realized
on the underlying securities alone. In return for the premium, the Fund would
give up the opportunity for profit from a price increase in the underlying
security above the exercise price so long as the option remains open, but
retains the risk of loss should the price of the security decline. Upon exercise
of a call option when the market value of the security exceeds the exercise
price, the Fund would receive less total return for its portfolio than it would
have if the call had not been written, but only if the premium received for
writing the option is less than the difference between the exercise price and
the market value. Put options are purchased in an effort to protect the value of
a security owned against an anticipated decline in market value. The Fund may
forego the benefit of appreciation on securities sold or be subject to
depreciation on securities acquired pursuant to call or put options,
respectively, written by the Fund. The Fund may experience a loss if the value
of the securities remains at or below the exercise price, in the case of a call
option, or at or above the exercise price, in the case of a put option.
The Fund may purchase put options in an effort to protect the value of
a security owned against an anticipated decline in market value. Exercise of a
put option will generally be profitable only if the market price of the
underlying security declines sufficiently below the exercise price to offset the
premium paid and the transaction costs. If the market price of the underlying
security increases, the Fund's profit upon the sale of the security will be
reduced by the premium paid for the put option less any amount for which the put
is sold.
The Staff of the Commission has taken the position that purchased
options not traded on registered domestic securities exchanges and the assets
used as cover for written options not traded on such exchanges are illiquid
securities. The Company has agreed that, pending resolution of the issue, the
Fund will treat such options and assets as subject to the Fund's limitation on
investment in securities that are not readily marketable.
Writing of options involves the risk that there will be no market in
which to effect a closing transaction. An exchange-traded option may be closed
out only on an exchange that provides a secondary market for an option of the
same series, and there is no assurance that a liquid secondary market on an
exchange will exist.
UNITED STATES ZERO COUPON SECURITIES
A zero coupon security, which may be purchased by the Fund, is a debt
obligation that does not entitle the holder to any periodic payments of interest
prior to maturity and therefore is issued and traded at a discount from its face
amount. Zero coupon securities may be created by separating the interest and
principal components of securities issued or guaranteed by the United States
Government or one of its agencies or instrumentalities or issued by private
corporate issuers. These securities are not obligations issued or guaranteed by
the United States Government. Typically, a custodian bank or investment
brokerage firm holding the security has separated ("stripped") the unmatured
interest coupons from the underlying principal. The holder may then resell the
stripped securities. The stripped coupons are sold separately from the
underlying principal, usually at a deep discount because the buyer receives
8
<PAGE>
only the right to receive a fixed payment on the security upon maturity and does
not receive any rights to reinvestment of periodic interest (cash) payments.
Because the rate to be earned on these reinvestments may be higher or lower than
the rate quoted on the interest-paying obligations at the time of the original
purchase, the investor's return on investments is uncertain even if the
securities are held to maturity. This uncertainty is commonly referred to as
reinvestment risk. With zero coupon securities, however, there are no cash
distributions to reinvest, so investors bear no reinvestment risk if they hold
the zero coupon securities to maturity; holders of zero coupon securities,
however, forego the possibility of reinvesting at a higher yield than the rate
paid on the originally issued security. With both zero coupon securities and
interest-paying securities there is no reinvestment risk on the principal amount
of the investment. When held to maturity, the entire return from such
instruments is determined by the difference between such instrument's purchase
price and its value at maturity. Because interest on zero coupon securities is
not paid on a current basis, the values of securities of this type are subject
to greater fluctuations than are the values of securities that distribute income
regularly.
RATINGS
After purchase by the Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require the Fund to sell such security unless the amount of
such securities exceeds permissible limits established in the Prospectus.
However, the Company's Portfolio Management Agent will reassess promptly whether
the security presents minimal credit risks and determine whether continuing to
hold the security is in the best interests of the Fund. To the extent the
ratings given by any nationally recognized statistical rating organization may
change as a result of changes in such organizations or in their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
Statement of Additional Information.
For additional information on ratings, see Appendix A to this Statement
of Additional Information.
INVESTMENT RESTRICTIONS
In addition to the fundamental investment limitations disclosed in the
Fund's Prospectus, the Fund is subject to the investment limitations enumerated
in this section which may be changed only when permitted by law and approved by
the holders of a majority of the Fund's outstanding voting securities, as
described under "Capital Stock."
The Fund may not:
(1) issue senior securities or borrow money (except that the Fund may
borrow from banks up to 10% of the current value of the Fund's net assets for
temporary purposes only in order to meet redemptions, and these borrowings may
be secured by the pledge of not more than 10% of the current value of the Fund's
total assets, but investments may not be purchased by the Fund while any such
borrowing exists):
9
<PAGE>
(2) pledge or mortgage its assets (except that the Fund may pledge its
assets as described in (1) above and (i) to secure letters of credit solely for
the purpose of participating in a captive insurance company sponsored by the
Investment Company Institute to provide fidelity and directors' and officers'
liability insurance or (ii) to a broker for the purpose of collateralizing
investments, such as stock index futures contracts and put options);
(3) make loans, except loans of portfolio securities and except that
the Fund may purchase or hold a portion of an issue of publicly distributed
bonds, debentures or other obligations, purchase negotiable certificates of
deposit and bankers' acceptances and enter into repurchase agreements with
respect to its portfolio securities;
(4) purchase or sell real estate (other than securities secured by real
estate or interests therein, securities backed by mortgages or securities issued
by companies that invest in real estate or interests therein), real estate
limited partnerships, commodities or commodity contracts (except futures,
options and options on futures);
(5) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions and margin payments in connection
with transactions in futures, options and options on futures) or make short
sales of securities;
(6) underwrite securities of other issuers, except to the extent that
the purchase of municipal obligations or other permitted investments directly
from the issuer thereof or from an underwriter for an issuer and the later
disposition of such securities in accordance with the Fund's investment program
may be deemed to be an underwriting; or
(7) make investments for the purpose of exercising control or
management.
In addition, the Fund may not invest more than 5% of the current value
of its net assets in securities of issuers that have been in business less than
three years. (For purposes of the above-described investment limitation, issuers
include predecessors, sponsors, controlling persons, general partners,
guarantors and originators of underlying assets which have less than three years
of continuous operation or relevant business experience.)
Each of the foregoing investment restrictions is a fundamental policy
of the Fund that may be changed only when permitted by law and approved by the
holders of a majority of the Fund's outstanding voting securities, as described
under "Capital Stock."
In addition to the above fundamental investment policies, each of the
following investment restrictions may be changed at any time by the Board of
Directors.
The Fund may not:
(1) invest more than 5% of the current value of its net assets in
warrants, valued at the lower of cost or market, and no more than 2% of its net
assets may be invested in warrants that are not listed on the New York or
American Stock Exchanges. (Warrants acquired in units
10
<PAGE>
or attached to securities may be deemed to be without value.);
(2) invest in oil, gas and other mineral leases, exploration or
development programs; or
(3) purchase or retain the securities of any issuer if the officers,
directors or partners of the Company, its Investment Adviser, Portfolio
Management Agent, Investment Sub-Advisers or Administrator owning beneficially
more than one-half of 1% of the securities of each issuer together own
beneficially more than 5% of such securities.
Whenever any investment restriction states a maximum percentage of the
Fund's assets, it is intended that if the percentage limitation is met at the
time the action is taken, subsequent percentage changes resulting from
fluctuating asset values will not be considered a violation of such
restrictions.
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of
the Company for the past five years are listed below. The address of each,
unless otherwise indicated, is One Exchange Place, Boston, Massachusetts 02109.
Directors deemed to be "interested persons" of the Company for purposes of the
1940 Act are indicated by an asterisk.
*EDGAR R. FIEDLER, Director - 845 Third Avenue, New York, New York 10022. Age
65. Vice President and Economic Counsellor, The Conference Board since 1975;
Director or Trustee, The Stanley Works, AARP Income Trust, AARP Insured Tax Free
Income Trust, AARP Cash Investment Fund, Brazil Fund, Scudder Institutional
Fund, Scudder Fund, Inc., Zurich American Insurance Company, Emerging Mexico
Fund and Center for Policy Research of the American Council for Capital
Formation. Formerly Assistant Secretary of the Treasury for Economic Policy
(1971-1975).
C. GARY GERST, Director - 11 South La Salle Street, Chicago, Illinois 60603. Age
56. Chairman Emeritus since 1993 and formerly Co-Chairman, La Salle Partners
Ltd. (Real Estate Developer and Manager). Director, Trustee or Partner, La Salle
Street Fund Inc., La Salle Street Fund Inc. of Delaware, DEL-LPL Limited
Partnership and DEL-LPAML Limited Partnership
JOHN W. MCCARTER, JR., Director - 225 West Wacker Drive, Suite 1700, Chicago,
Illinois 60606. Age 57. Senior Vice President and former Director of Booz Allen
& Hamilton, Inc. (Consulting Firm); Director of W.W. Grainger, Inc. and A.M.
Castle, Inc.
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<PAGE>
ERNEST M. ROTH, Director - 205 Abingdon Avenue, Kenilworth, Illinois 60043. Age
67. Consultant since 1992. Formerly, Senior Vice President and Chief Financial
Officer, Commonwealth Edison Company. Director of LaRabida Children's Hospital
and Chairman of LaRabida Children's Foundation.
RICHARD H. ROSE, Treasurer - Age 39. Vice President, First Data Investor
Services Group, Inc., since May 6, 1994. Formerly, Senior Vice President with
The Boston Company Advisors, Inc.
PATRICIA L. BICKIMER, President and Secretary - Age 42. Vice President and
Associate General Counsel, First Data Investor Services Group, Inc., since May
6, 1994. Formerly, Vice President and Associate General Counsel with The Boston
Company Advisors, Inc.
LISA ANNE ROSEN, Assistant Secretary - Age 28. Counsel, First Data Investor
Services Group, Inc., since May 6, 1994. Formerly, Assistant Vice President and
Counsel with The Boston Company Advisors, Inc.; Associate with Hutchins, Wheeler
& Dittmar.
Directors of the Company who are not interested persons receive from
the Company an annual fee in addition to a fee for each Board of Directors and
Board committee meeting attended and are reimbursed for all out-of-pocket
expenses relating to attendance at meetings.
The following table summarizes the compensation paid by the Company to
the directors of the Company for the fiscal year ended December 31, 1994:
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Benefits Estimated Annual Total Compensation
Name of Person, Compensation Accrued as Part Benefits upon from the Company
Position from the Company of Fund Expenses Retirement and Fund Complex
- -------- ---------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Edgar R. Fiedler, $19,000 (1)
Director None None $19,000
C. Gary Gerst, $18,000
Director None None $18,000
Ernest M. Roth, $19,000
Director None None $19,000
- --------------------------
</TABLE>
(1) For the period June 1988 through December 31, 1994, the total amount of
compensation (including interest) payable or accrued for Mr. Fiedler was
$142,776.52 pursuant to the Company's Deferred Compensation Plan for its
Independent Directors.
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<PAGE>
Investment Adviser, Portfolio Management Agent and Investment
Sub-Advisers. The Fund is advised by Harris Trust and Savings Bank ("Harris
Trust"). Harris Trust has entered into a Portfolio Management Contract with
Harris Investment Management, Inc. ("HIM"), under which HIM is responsible for
providing daily portfolio management services to the Fund. Under the Portfolio
Management Contract, Harris Trust remains responsible for the supervision and
oversight of HIM's performance. HIM controls the allocation of the Fund's assets
among issuers in Canada, Mexico and the United States. HIM selects and manages
the U.S. securities in which the Fund invests.
HIM has entered into Sub-Investment Advisory Agreements (the
"Investment Sub-Advisory Contracts") with Bancomer Asesora de Fondos, S.A. de
C.V. ("Bancomer") and Jones Heward Investment Counsel Inc. ("JHICI"). Bancomer
is responsible for all Fund purchase and sale transactions in Mexican
securities. Bancomer selects and manages the Mexican securities in which the
Fund invests. JHICI is responsible for all Fund purchase and sale transactions
in Canadian securities. JHICI selects and manages the Canadian securities in
which the Fund invests. Under the Investment Sub-Advisory Contracts HIM remains
responsible for the supervision and oversight of Bancomer's and JHICI's
performance.
The Advisory Contract, Portfolio Management Contract and Investment
Sub-Advisory Contract with respect to the Fund will continue in effect for a
period of two years from the commencement of the Fund's operations, and
thereafter from year to year provided the continuance is approved annually (i)
by the holders of a majority of the Fund's outstanding voting securities or by
the Company's Board of Directors and (ii) by a majority of the Directors of the
Company who are not parties to the Advisory Contract or "interested persons" (as
defined in the 1940 Act) of any such party. Such Contracts may be terminated on
60 days' written notice by either party and will terminate automatically if
assigned.
Administrators. First Data Investor Services Group, Inc. ("First Data")
and PFPC Inc. ("PFPC") (the "Administrators") serve as the Company's
administrators pursuant to an Administration Agreement and an Administration and
Accounting Services Agreement, respectively. First Data has agreed to maintain
office facilities for the Company; furnish clerical support and stationery and
office supplies, prepare and file various reports with the appropriate
regulatory agencies and prepare various materials required by the Securities and
Exchange Commission ("SEC") or any state securities commission having
jurisdiction over the Company. PFPC has agreed to provide accounting and
bookkeeping services for the Fund, including the computation of the Fund's net
asset value, net income and realized capital gains, if any.
Distributor. Funds Distributor, Inc. (the "Distributor") has entered
into a Distribution Agreement with the Company pursuant to which it has the
responsibility of distributing shares of the Fund.
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<PAGE>
Other Information Pertaining to Distribution, Administration, Custodian
and Transfer Agency Agreements. PFPC Inc., the Company's Transfer Agent and one
of its two administrators, is an affiliate of PNC Bank, N.A., the Company's
Custodian. PFPC Inc. and PNC Bank, N.A. are not affiliates of First Data and
Funds Distributor, Inc., and none of the aforenamed entities is an affiliate of
HIM, Bancomer or JHICI.
The Company's contracts with the Investment Adviser, Portfolio
Management Agent, Administrators, Transfer Agent and Custodian (the
"Contractors") provide that if, in any fiscal year, the total expenses of the
Fund incurred by, or allocated to, the Fund (excluding taxes, interest,
brokerage commissions and other portfolio transaction expenses, other
expenditures that are capitalized in accordance with generally accepted
accounting principles and extraordinary expenses and payments under plans of the
Fund adopted pursuant to Rule 12b-1 under the Act (the "Service Plans"), but
including the fees provided for in the Advisory Contract and the Administration
Agreement) exceed the most restrictive expense limitation applicable to the Fund
imposed by the securities laws or regulations of the states in which the Fund's
shares are registered for sale, such parties shall waive their fees
proportionately under the Advisory Contract with respect to the Fund and fee
agreement with the Fund's Administrators, Transfer Agent and Custodian for the
fiscal year to the extent of the excess or reimburse the excess, but only to the
extent of their respective fees. The Company believes that currently the most
restrictive applicable expense limitation is 2.5% of the first $30 million of
average net assets, 2% of the next $70 million of average net assets and 1.5% of
average net assets in excess of $100 million.
SERVICE PLAN
As indicated in the Prospectus, the Fund has adopted a Service Plan
under Section 12(b) of the 1940 Act and Rule 12b-1 promulgated thereunder ("Rule
12b-1") with respect to Class A Shares of the Fund. The Service Plan has been
adopted by the Board of Directors, including a majority of the Directors who
were not "interested persons" (as defined by the 1940 Act) of the Company and
who had no direct or indirect financial interest in the operation of the Service
Plan or in any agreement related to the Plan (the "Qualified Directors"). The
Service Plan will continue in effect from year to year if such continuance is
approved by a majority vote of both the Directors of the Company and the
Qualified Directors. Agreements related to the Service Plan must also be
approved by such vote of the Directors and the Qualified Directors. The Service
Plan will terminate automatically if assigned, and may be terminated at any
time, without payment of any penalty, by a vote of a majority of the outstanding
voting securities of the Fund. The Service Plan may not be amended to increase
materially the amounts payable to Service Agents without the approval of a
majority of the outstanding voting securities of the Fund, and no material
amendment to the Service Plan may be made except by a majority of both the
Directors of the Company and the Qualified Directors.
The Service Plan requires that certain service providers furnish to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefore) under the Service Plan. Rule
12b-1 also requires that the selection and
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<PAGE>
nomination of Directors who are not "interested persons" of the Company be made
by such disinterested directors.
Class A Shares of the Fund bear the costs and expenses in connection
with advertising and marketing the Fund's Class A Shares and pay the fees of
financial institutions (which may include banks), securities dealers and other
industry professionals, such as investment advisors, accountants and estate
planning firms (collectively, "Service Agents") for servicing activities, as
described below, at a rate of up to 0.25% per annum of the value of Class A
Shares of the Fund's average daily net assets.
Servicing activities provided by Service Agents to their customers
investing in Class A Shares of the Fund may include, among other things, one or
more of the following: establishing and maintaining shareholder accounts and
records; processing purchase and redemption transactions; answering customer
inquiries regarding Class A Shares of the Fund; assisting customers in changing
dividend options; account designations and addresses; performing sub-accounting;
investing customer cash account balances automatically in Class A Shares of the
Fund; providing periodic statements showing a customer's account balance and
integrating such statements with those of other transactions and balances in the
customer's other accounts serviced by the Service Agent; arranging for bank
wires; distribution and such other services as the Fund may request, to the
extent the Service Agent is permitted by applicable statute, rule or regulation.
CALCULATION OF YIELD AND TOTAL RETURN
The Company may make available 30-day yield quotations with respect to
each class of shares of the Fund. As required by regulations of the Securities
and Exchange Commission, the 30-day yield is computed by dividing the Fund's net
investment income per share earned during the period by the net asset value on
the last day of the period. The average daily number of shares outstanding
during the period that are eligible to receive dividends is used in determining
the net investment income per share. Income is computed by totaling the interest
earned on all debt obligations during the period and subtracting from that
amount the total of all recurring expenses incurred during the period. The
30-day yield is then annualized assuming semi-annual reinvestment and
compounding of net investment income.
The Company may also make available total return quotations for the
Fund. Total return is computed by assuming a hypothetical initial investment of
$1,000 and reflects the imposition of the maximum sales charge. It is assumed
that all of the dividends and distributions by the Fund over the specified
period of time were reinvested. It is then assumed that at the end of the
specified period, the entire amount was redeemed. The average annual total
return is then calculated by calculating the annual rate required for the
initial investment to grow to the amount that would have been received upon
redemption.
The Fund may also calculate an aggregate total return which reflects
the cumulative percentage change in value over the measuring period. The
aggregate total return can be calculated by dividing the amount received upon
redemption by the initial investment and
15
<PAGE>
subtracting one from the result.
Current yield and total return for the Fund will fluctuate from time to
time, unlike bank deposits or other investments which pay a fixed yield for a
stated period of time, and do not provide a basis for determining future yields.
Yield (or total return) is a function of portfolio quality, composition,
maturity and market conditions as well as expenses allocated to the Fund.
Performance data of the Fund may be compared to those of other mutual
funds with similar investment objectives and to other relevant indices, such as
those prepared by Salomon Brothers Inc. or Lehman Brothers Inc., or any of their
affiliates or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
such data is reported in national financial publications such as IBC/Donoghue's
Money Fund Report and Bank Rate Monitor (for money market deposit accounts
offered by the 50 leading banks and thrift institutions in the top five
metropolitan statistical areas). Money, Forbes, Barron's, The Wall Street
Journal and The New York Times, reports prepared by Lipper Analytical Services
and publications of a local or regional nature. Performance information may be
quoted numerically or may be presented in a table, graph or other illustrations.
All performance information advertised by the Fund is historical in nature and
is not intended to represent or guarantee future results.
In addition, investors should recognize that changes in the net asset
value of shares of the Fund will affect the yield of the Fund for any specified
period, and such changes should be considered together with the Fund's yield in
ascertaining the Fund's total return to shareholders for the period. Yield
information for the Fund may be useful in reviewing the performance of the Fund
and for providing a basis for comparison with investment alternatives. The yield
of the Fund, however, may not be comparable to other investment alternatives
because of differences in the foregoing variables and differences in the methods
used to value portfolio securities, compute expenses and calculate yield.
DETERMINATION OF NET ASSET VALUE
As described under "Determination of Net Asset Value" in the
Prospectus, net asset value per share is determined at least as often as each
day that the Federal Reserve Board of Philadelphia and the New York Stock
Exchange are open, i.e., each weekday other than New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day (the third Monday in February), Good Friday,
Memorial Day (the last Monday in May), Independence Day, Labor Day (the first
Monday in September), Columbus Day, Veterans' Day, Thanksgiving Day and
Christmas Day (each, a "Holiday").
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Company's Board of Directors, HIM is responsible for
the Fund's portfolio decisions and the
16
<PAGE>
placing of such portfolio transactions with respect to U.S. securities. Bancomer
and JHICI are responsible for the Fund's portfolio decisions and the placing of
such portfolio transactions with respect to Mexican and Canadian securities,
respectively. In placing orders, it is the policy of the Company to obtain the
best results taking into account the dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities involved. While HIM, Bancomer and
JHICI generally seek reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available.
Purchases and sales of securities will usually be principal
transactions. Portfolio securities normally will be purchased or sold from or to
dealers serving as market makers for the securities at a net price. The Fund
will also purchase portfolio securities in underwritten offerings and will, on
occasion, purchase securities directly from the issuer. Generally, municipal
obligations and taxable money market securities are traded on a net basis and do
not involve brokerage commissions. The cost of executing the Fund's portfolio
securities transactions will consist primarily of dealer spreads, and
underwriting commissions. Under the 1940 Act, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the Commission.
HIM, Bancomer and/or JHICI may, in circumstances in which two or more
dealers are in a position to offer comparable results for the Fund, give
preference to a dealer that has provided statistical or other research services
to such adviser. By allocating transactions in this manner, HIM, Bancomer and/or
JHICI are able to supplement their own research and analysis with the views and
information of other securities firms. Information so received will be in
addition to, and not in lieu of, the services required to be performed under the
Portfolio Management and Investment Sub-Advisory Contracts, and the expenses of
such adviser will not necessarily be reduced as a result of the receipt of this
supplemental research information. Furthermore, research services furnished by
dealers through whom HIM, Bancomer or JHICI effect securities transactions for
the Fund may be used by HIM, Bancomer or JHICI in servicing their other
accounts, and not all of these services may be used by HIM, Bancomer or JHICI in
connection with advising the Fund.
Purchases and sales of securities on a securities exchange are effected
through brokers who charge a negotiated commission for their services. Orders
may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Harris Investors direct. In the over-the-counter
market, securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. The Fund will not deal with the Distributor, Harris
Investors Direct, or an affiliate of Bancomer or JHICI in any transaction in
which either one acts as principal except as may be permitted by the Securities
and Exchange Commission.
17
<PAGE>
In placing orders for portfolio securities of the Fund, HIM, Bancomer
and JHICI are required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that HIM, Bancomer and JHICI
will seek to execute each transaction at a price and commission, if any, that
provide the most favorable total cost or proceeds reasonably attainable in the
circumstances. While HIM, Bancomer and JHICI will generally seek reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread or commission available. Commission rates are established pursuant
to negotiations with the broker based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Board of Directors.
TAXES
The Prospectus describes generally the tax treatment of distributions
by the Company. This section of the Statement includes additional information
concerning federal taxes.
The Fund will be treated as a separate entity for federal income tax
purposes and thus the provisions of the Code generally will be applied to each
portfolio of the Company separately, rather than to the Company as a whole.
Qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code") generally requires, among other
things, that (a) at least 90% of the Fund's annual gross income (without offset
for losses) be derived from interest, payments with respect to securities loans,
dividends and gains from the sale or other disposition of stocks, securities or
options thereon and certain other income including, but not limited to, gains
from futures contracts; (b) the Fund derives less than 30% of its gross income
from gains (without offset for losses) from the sale or other disposition of
stocks, securities or options thereon and certain futures contracts held for
less than three months; and (c) the Fund diversifies its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash, government securities and
other securities, with such other securities limited in respect of any one
issuer to an amount not greater than 5% of each Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government securities). As a regulated investment company, each Fund will
not be subject to federal income tax on its net investment income and net
capital gains distributed to its shareholders, provided that it distributes to
its shareholders at least 90% of its net investment income (including net
short-term capital gains) earned in each year.
The Fund will generally be subject to an excise tax of 4% of the amount
of any income or capital gains distributed to shareholders on a basis such that
such income or gain is not taxable to shareholders in the calendar year in which
it was earned by the Fund. The Fund intends that it will distribute
substantially all of its net investment income and net capital gains in
accordance with the foregoing requirements, and, thus, expects not to be subject
to the excise tax. Dividends declared by the Fund in October, November or
December payable to shareholders of record on a specified date in such a month
and paid in the following January
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will be treated as having been paid by the Fund and received by shareholders on
December 31 of the calendar year in which declared.
Income received by the Fund from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested in
various countries is not known.
Gains or losses on sales of securities by the Fund generally will be
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon. Other gains or losses on the sale of securities will be
short-term capital gains or losses.
If an option written by the Fund lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund may realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction.
If securities are sold by the Fund pursuant to the exercise of a call
option written by it, the Fund will add the premium received to the sale price
of the securities delivered in determining the amount of gain or loss on the
sale. If securities are purchased by the Fund pursuant to the exercise of a put
option written by it, the Fund will subtract the premium received from its cost
basis in the securities purchased. The requirement that the Fund derive less
than 30% of its gross income from gains from the sale of securities held for
less than three months may limit the Fund's ability to write options.
If, in the opinion of the Company, ownership of its shares has or may
become concentrated to an extent that could cause the Company to be deemed a
personal holding company within the meaning of the Code, the Company may require
the redemption of shares or reject any order for the purchase of shares in an
effort to prevent such concentration.
CAPITAL STOCK
The authorized capital stock of the Company consists of an aggregate of
10,000,000,000 shares ("Shares"), par value of $.001 per share currently
classified as follows: "Government Money Market Fund-Class A," consisting of
500,000,000 Shares, "Government Money Market Fund-Class B," consisting of
200,000,000 Shares, "Government Money Market Fund-Institutional Shares,"
consisting of 500,000,000 Shares, "Money Market Fund-Class A," consisting of
500,000,000 Shares, "Money Market Fund-Class B," consisting of 200,000,000
Shares, "Money Market Fund-Institutional Shares," consisting of 500,000,000
Shares, "Tax-Exempt Money Market Fund-Class A," consisting of 500,000,000
Shares, "Tax-Exempt Money Market Fund-Class B," consisting of 200,000,000
Shares, "Tax-Exempt Money Market Fund-Institutional Shares," consisting of
500,000,000 Shares, "Class D," referred to as the Harris Insight Convertible
Fund, consisting of 100,000,000 Shares, "Equity Fund
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Intermediate Bond Fund - Class A," consisting of 100,000,000 Shares,
"Equity-Institutional Shares" consisting of 100,000,000 Shares,
"Short/Intermediate Bond Fund - Class A," consisting of 100,000,000 Shares,
"Short/Intermediate Bond Fund Institutional Shares," consisting of 100,000,000
Shares, "Class G," referred to as the Harris Insight Intermediate Municipal
Income Fund, consisting of 50,000,000 Shares, "Prime Reserve Fund-Class A,"
consisting of 200,000,000 Shares, "Prime Reserve Fund-Class B," consisting of
700,000,000 Shares, "Prime Reserve Fund-Institutional Shares," consisting of
300,000,000 Shares, "Hemisphere Free Trade Fund-Class A," consisting of
50,000,000 Shares and "Hemisphere Free Trade Fund-Institutional Shares,
consisting of 50,000,000 Shares.
Generally, all shares of the Company have equal voting rights and will
be voted in the aggregate, and not by class, except where voting by class is
required by law or where the matter involved affects only one class. As used in
the Prospectus and in this Statement of Additional Information, the term
"majority," when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Funds (e.g., annual election of
directors and ratification of independent accountants), means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of more than 50% of the outstanding shares are present in person or by
proxy, or (ii) more than 50% of the Company's outstanding shares. The term
"majority," when referring to the approvals to be obtained from shareholders in
connection with matters affecting a single Fund or any other single Fund (e.g.,
annual approval of advisory contracts), means the vote of the lesser of (i) 67%
of the shares of the Fund represented at a meeting if the holders of more than
50% of the outstanding shares of the Fund are present in person or by proxy or
(ii) more than 50% of the outstanding shares of the Fund. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
Each share of the Fund represents an equal proportionate interest in
the Fund with each other share of the Fund and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared in the discretion of the Company's Board of Directors.
Notwithstanding the foregoing, the Fund's Class A Shares bear exclusively the
expense of fees paid to Service Organizations with respect to Class A Shares. In
the event of the liquidation or dissolution of the Company (or the Fund),
shareholders of the Fund are entitled to receive the assets attributable to the
Fund that are available for distribution, and a distribution of any general
assets not attributable to a particular Fund that are available for distribution
in such manner and on such basis as the Directors in their sole discretion may
determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and non-assessable by the Company.
OTHER
The Registration Statement, including the Prospectus, the Statement of
Additional Information and the exhibits filed therewith, may be examined at the
office of the Commission in Washington, D.C. Statements contained in the
Prospectuses or this Statement of Additional
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Information as to the contents of any contract or other document referred to
herein or in the Prospectuses are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
CUSTODIAN
As the Company's custodian, PNC Bank, N.A., among other things,
maintains a custody account or accounts in the name of each Fund, receives and
delivers all assets for each Fund upon purchase and upon sale or maturity,
collects and receives all income and other payments and distributions on account
of the assets of each Fund, and pays all expenses of each Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP has been selected as the independent accountants
for the Company. Price Waterhouse LLP provides audit services and assistance and
consultation in connection with review of certain Commission filings. Price
Waterhouse LLP's address is 30 South 17th Street, 17th Floor, Philadelphia, PA
19103.
EXPERTS
The financial statements included or incorporated by reference into the
Prospectuses and included in this Statement of Additional Information have been
included or incorporated by reference in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of that firm as
experts in auditing and accounting.
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APPENDIX A
Description of Bond Ratings
The following summarizes the highest four ratings used by Standard &
Poor's Corporation ("S&P") for corporate and municipal debt:
AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in a small
degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for those in higher rated categories.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major rating categories.
The following summarizes the highest four ratings used by Moody's
Investors Service, Inc. ("Moody's") for corporate and municipal long-term debt:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger
than in Aaa securities.
A-1
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A - Bonds that are rated A possess many favorable investment
attributes and are to be considered upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds that are rated Baa are considered medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Moody's applies numerical modifiers (1, 2 and 3) with respect to
corporate bonds rated Aa, A and Baa. The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category. With regard to municipal
bonds, those bonds in the Aa, A and Baa groups which Moody's believes possess
the strongest investment attributes are designated by the symbols Aa1, A1 or
Baa1, respectively.
The following summarizes the highest four ratings used by Duff & Phelps
Credit Rating Co. ("D&P") for bonds:
AAA - Debt rated AAA is of the highest credit quality. The risk
factors are considered to be negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA - Debt rated AA is of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A - Bonds that are rated A have protection factors which are
average but adequate. However risk factors are more variable and
greater in periods of economic stress.
BBB - Bonds that are rated BBB have below average protection
factors but are still considered sufficient for prudent
investment. Considerable variability in risk during economic
cycles.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major categories.
A-2
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The following summarizes the ratings used by IBCA Limited and IBCA Inc.
("IBCA") for bonds:
Obligations rated AAA by IBCA have the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial, such that adverse changes in business,
economic or financial conditions are unlikely to increase
investment risk significantly.
IBCA also assigns a rating to certain international and U.S.
banks. An IBCA bank rating represents IBCA's current assessment
of the strength of the bank and whether such bank would receive
support should it experience difficulties. In its assessment of a
bank, IBCA uses a dual rating system comprised of Legal Ratings
and Individual Ratings. In addition, IBCA assigns banks Longand
Short-Term Ratings as used in the corporate ratings discussed
above. Legal Ratings, which range in gradation from 1 through 5,
address the question of whether the bank would receive support
provided by central banks or shareholders if it experienced
difficulties, and such ratings are considered by IBCA to be a
prime factor in its assessment of credit risk. Individual
Ratings, which range in gradations from A through E, represent
IBCA's assessment of a bank's economic merits and address the
question of how the bank would be viewed if it were entirely
independent and could not rely on support from state authorities
or its owners.
Description of Municipal Notes Ratings
The following summarizes the two highest ratings used by Moody's for
short-term notes and variable rate demand obligations:
MIG-1/VMIG-1. Obligations bearing these designations are of the
best quality, enjoying strong protection by established cash
flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing.
MIG-2/VMIG-2. Obligations bearing these designations are of high
quality with margins of protection ample although not as large as
in the preceding group.
The following summarizes the two highest ratings by Standard & Poor's
for short-term municipal notes:
SP-1 - Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics are given a "plus" (+) designation.
A-3
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SP-2 - Satisfactory capacity to pay principal and interest.
The three highest rating categories of D&P for short-term debt are Duff
1, Duff 2, and Duff 3. D&P employs three designations, Duff 1+, Duff 1 and Duff
1-, within the highest rating category. Duff 1+ indicates highest certainty of
timely payment. Short-term liquidity, including internal operating factors
and/or access to alternative sources of funds, is judged to be "outstanding, and
safety is just below risk-free U.S. Treasury short-term obligations." Duff 1
indicates very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
considered to be minor. Duff 1- indicates high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small. Duff 2 indicates good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small. Duff 3 indicates satisfactory liquidity
and other protection factors qualify issue as to investment grade. Risk factors
are larger and subject to more variation. Nevertheless, timely payment is
expected.
D&P uses the fixed-income ratings described above under "Description of
Bond Ratings" for tax-exempt notes and other short-term obligations.
Description of Commercial Paper Ratings
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted in A-1+. Capacity for timely payment
on commercial paper rated A-2 is satisfactory but the relative degree of safety
is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated
Prime-2 (or related supporting institutions) are considered to have
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics of issuers rated Prime-1
but to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
A-4
<PAGE>
The highest rating of D&P for commercial paper is Duff 1. D&P employs
three designations, Duff 1 plus, Duff 1 and Duff 1 minus, within the highest
rating category. Duff 1 plus indicates highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or ready access
to alternative sources of funds, is judged to be "outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations" Duff 1 indicates very
high certainty of timely payment. Liquidity factors are excellent and supported
by strong fundamental protection factors. Risk factors are considered to be
minor. Duff 1 minus indicates high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
The following summarizes the highest ratings used by Fitch for
short-term obligations:
F-1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
F-1 securities possess exceptionally strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated F-1+.
Commercial paper rated A-1 by Standard & Poor's indicates that the
degree of safety regarding timely payment is strong. Those issued determined to
possess extremely strong safety characteristics are denoted A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations.
D&P uses the short-term ratings described above for commercial paper.
Fitch uses the short-term ratings described above for commercial paper.
Thomson BankWatch, Inc. (TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
A-5
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TBW-1 The highest category; indicates a very high degree
of likelihood that principal and interest will be
paid on a timely basis.
TBW-2 The second highest category; while the degree of
safety regarding timely repayment of principal and
interest is strong, the relative degree of safety
is not as high as for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates
that while more susceptible to adverse developments
(both internal and external) than obligations with
higher ratings, capacity to service principal and
interest in a timely fashion is considered
adequate.
TBW-4 The lowest rating category; this rating is regarded
as non-investment grade and therefore speculative.
A-6
<PAGE>
