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[LOGO] BEA
ADVISOR &
INSTITUTIONAL FUNDS
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BEA LONG-SHORT MARKET NEUTRAL FUND
BEA LONG-SHORT EQUITY FUND
PROSPECTUS June 24, 1998
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TABLE OF CONTENTS
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Annual Fund Operating Expenses..................................................................................... 2
Investment Objectives and Policies................................................................................. 3
Investment Limitations............................................................................................. 5
Risk Factors....................................................................................................... 5
Additional Investment Policies..................................................................................... 9
Management......................................................................................................... 11
Expenses........................................................................................................... 15
How to Purchase Shares............................................................................................. 16
How to Redeem and Exchange Shares.................................................................................. 19
Dividends and Distributions........................................................................................ 21
Taxes.............................................................................................................. 22
Multi-Class Structure.............................................................................................. 23
Description of Shares.............................................................................................. 23
Other Information.................................................................................................. 24
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BEA ADVISOR AND INSTITUTIONAL FUNDS
THE BEA ADVISOR AND INSTITUTIONAL FUNDS CONSIST OF SEVENTEEN CLASSES OF COMMON
STOCK OF THE RBB FUND, INC. (THE "COMPANY"), AN OPEN-END MANAGEMENT INVESTMENT
COMPANY. EACH OF THE BEA LONG-SHORT MARKET NEUTRAL AND BEA LONG-SHORT EQUITY
FUNDS (THE "FUNDS") OFFERS TWO CLASSES OF SHARES, THE ADVISOR SHARES AND THE
INSTITUTIONAL SHARES (COLLECTIVELY WITH THE ADVISOR SHARES, THE "SHARES").
SHARES OF BOTH CLASSES ARE OFFERED BY THIS PROSPECTUS AND REPRESENT INTERESTS IN
THE TWO FUNDS DESCRIBED IN THIS PROSPECTUS. THE INVESTMENT OBJECTIVE OF EACH
FUND IS AS FOLLOWS:
THE BEA LONG-SHORT MARKET NEUTRAL FUND -- seeks long-term capital
appreciation while minimizing exposure to general equity market risk. In
seeking this objective, the Fund attempts to achieve a total return greater
than the total return of the Salomon Smith Barney U.S. 1-Month Treasury Bill
Index-TM-. The Fund pursues its objective by taking long positions in stocks
that the investment adviser has identified as undervalued and short
positions in such stocks that the Adviser has identified as overvalued.
Generally, the Fund's investments will be primarily invested in securities
principally traded in the United States markets.
THE BEA LONG-SHORT EQUITY FUND -- seeks a total return greater than
that of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500
Index"). The Fund pursues its objective by investing in shares of the BEA
Long-Short Market Neutral Fund while simultaneously utilizing S&P 500 Index
futures, options on S&P 500 Index futures and equity swap contracts to gain
exposure to the equity market as measured by the S&P 500 Index. See
"Investment Objectives and Policies -- BEA Long-Short Equity Fund" and
"General Description of Risks and Fund Investments."
There can be no assurance that a Fund's investment objective will be
achieved. Investments in the Funds involve certain risks. See "Risk Factors."
BEA Associates is an investment adviser managing global equity, balanced
fixed income and derivative securities accounts for private individuals, as well
as corporate pension and profit-sharing plans, state pension funds, union funds,
endowments and other charitable institutions. As of December 31, 1997, BEA
Associates managed approximately $34.2 billion in assets.
This Prospectus contains information that a prospective investor needs to
know before investing. Please keep it for future reference. A Statement of
Additional Information, dated June 24, 1998, has been filed with the Securities
and Exchange Commission (the "SEC") and is incorporated by reference in this
Prospectus. It may be obtained free of charge by calling (800) 401-2230. The
Prospectus and Statement of Additional Information are also available for
reference, along with related material, on the SEC website (http://www.sec.gov).
Shares of the Funds are not deposits or obligations of or guaranteed or
endorsed by any bank, and Shares are not federally insured by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Investments in Shares of the Funds involve
investment risks, including the possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS JUNE 24, 1998
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ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)(1)
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BEA BEA
LONG-SHORT LONG-SHORT
MARKET EQUITY BEA BEA
NEUTRAL FUND FUND LONG-SHORT MARKET LONG-SHORT
(INSTITUTIONAL (INSTITUTIONAL NEUTRAL FUND EQUITY FUND
CLASS) CLASS) (ADVISOR CLASS) (ADVISOR CLASS)
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Management Fees (after waivers)(2)(4)............. 1.40% 0 1.40% 0
12b-1 Fees........................................ N/A N/A 0.25% 0.25%
Other Expenses(3)................................. 0.60% 2.50% 0.60% 2.50%
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Total Fund Operating Expenses (after
waivers)(2)...................................... 2.00% 2.50% 2.25% 2.75%
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(1) The annual operating expenses for the Funds are based on expenses expected
to be incurred by the Fund (after expected fee waivers and expense
reimbursements).
(2) The Adviser has undertaken to reduce its management fees and bear certain
expenses until further notice in order to limit the total annual operating
expenses (which do not include nonrecurring account fees and extraordinary
expenses) of each class to the percentage of a Fund's total annual operating
expenses attributable to that class listed under Total Fund Operating
Expenses above plus the performance adjustment referred to in Note (4)
below. Absent such undertaking by the Adviser to waive its fee and bear such
expenses, Management Fees would be 1.50% and 0.10% for the BEA Long-Short
Market Neutral Fund and the BEA Long-Short Equity Fund, respectively; and
Total Fund Operating Expenses would be 2.10% and 2.35%, respectively, for
the Institutional Shares and Advisor Shares of the BEA Long-Short Market
Neutral Fund, and 2.60% and 2.85%, respectively, for the Institutional
Shares and Advisor Shares of the BEA Long-Short Equity Fund.
(3) With respect to the BEA Long-Short Equity Fund, "Other Expenses" includes
the indirect expenses associated with the Fund's investment in Institutional
Shares of the BEA Long-Short Market Neutral Fund.
(4) The Management Fee for the BEA Long-Short Market Neutral Fund may be
increased or decreased by applying a performance adjustment after the Fund's
first year of operations. See "Management -- Investment Adviser."
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EXAMPLE
An investor would pay the following expenses on a $1,000 investment in Shares of
each of the Funds, assuming (1) a 5% annual return, and (2) redemption at the
end of each time period.
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ONE THREE
YEAR YEARS
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BEA Long-Short Market Neutral Fund (Institutional Shares)............. $ 21 $63
BEA Long-Short Market Neutral Fund (Advisor Shares)................... $ 23 $70
BEA Long-Short Equity Fund (Institutional Shares)..................... $ 25 $78
BEA Long-Short Equity Fund (Advisor Shares)........................... $ 28 $85
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The Example in this fee table assumes that all dividends and distributions are
reinvested and that the amounts listed under "Annual Fund Operating Expenses"
remain the same in the years shown. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. Long-term shareholders of the Advisor Shares may pay more
than the maximum front-end sales charges permitted by the National Association
of Securities Dealers, Inc. ("NASD").
This fee table is designed to assist an investor in understanding the various
costs and expenses that an investor in each of the Funds will bear directly or
indirectly. (For more complete descriptions of various costs and expenses, see
"Management" below.) "Other Expenses" are estimated for the current fiscal year.
The fee table reflects expense reimbursements and voluntary waivers of
management fees and administration fees. The Adviser and Administrators are
under no obligation with respect to such fee waivers and reimbursements,
however, and there can be no assurance that any future waivers of management and
administration fees (if any) will not vary from the figures reflected in this
fee table. To the extent any service providers assume additional expenses of any
Fund, such assumption of additional expenses will have the effect of lowering a
Fund's overall expense ratio and increasing its return to investors.
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INVESTMENT OBJECTIVES AND POLICIES
THE BEA LONG-SHORT MARKET NEUTRAL FUND
The investment objective of the BEA Long-Short Market Neutral Fund is to seek
long-term capital appreciation while minimizing exposure to general equity
market risk. The Fund seeks a total return greater than the return of the
Salomon Smith Barney 1-Month Treasury Bill Index-TM-. The Fund attempts to
achieve its objective by taking long positions in stocks principally traded in
the markets of the United States that the Adviser has identified as undervalued
and short positions in such stocks that the Adviser has identified as
overvalued. See "Risk Factors -- Short Sales" below. By taking long and short
positions in different stocks with similar characteristics, the Fund attempts to
minimize the effect of general stock market movements on the Fund's performance.
The Adviser will determine the size of each long or short position by analyzing
the tradeoff between the attractiveness of each position and its impact on the
risk of the overall portfolio. The Fund seeks to construct a portfolio that has
minimal net exposure to the U.S. equity market generally and low to neutral
exposure to specific industries, specific capitalization ranges (e.g., large
cap, mid cap and small cap) and certain other factors.
Although the Fund's investment strategy seeks to minimize the risk associated
with investing in the equity market, an investment in the Fund will be subject
to the risk of poor stock selection by the Adviser. In other words, the Adviser
may not be successful in executing its strategy of taking long positions in
stocks that outperform the market and short positions in stocks that
underperform the market. Further, since the Adviser will manage both a long and
a short portfolio, an investment in the Fund will involve the risk that the
Adviser may make more poor investment decisions than an adviser of a typical
stock mutual fund with only a long portfolio may make. An investment in
one-month U.S. Treasury Bills is different from an investment in the Fund
because Treasury Bills are backed by the full faith and credit of the U.S.
Government, Treasury Bills have a fixed rate of return and investors in Treasury
Bills do not bear the risk of losing their investment.
To meet margin requirements, redemptions or pending investments, the Fund may
also temporarily hold a portion of its assets in full faith and credit
obligations of the United States government (e.g., U.S. Treasury Bills) and in
short-term notes, commercial paper or other money market instruments of high
quality (i.e., rated at least "A-2" or "AA" by Standard & Poor's ("S&P") or
Prime 2 or "Aa" by Moody's Investors Service, Inc. ("Moody's")) issued by
companies having an outstanding debt issue rated at least "AA" by S&P or at
least "Aa" by Moody's, or determined by the Adviser to be of comparable quality
to any of the foregoing.
The Fund's long and short positions may involve (without limit) equity
securities of foreign issuers that are traded in the markets of the United
States as sponsored American Depository Receipts ("ADRs"). ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying foreign securities. Generally, ADRs, in registered form, are designed
for use in U.S. securities markets. The ADRs may not necessarily be denominated
in the same currency as the foreign securities underlying the ADRs. See "Risk
Factors -- Foreign Investments." The Fund will not invest directly in equity
securities that are principally traded outside of the United States.
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THE BEA LONG-SHORT EQUITY FUND
The investment objective of the BEA Long-Short Equity Fund is to seek a total
return greater than that of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index"). The Fund seeks to achieve its objective by
investing in Institutional Shares of the BEA Long-Short Market Neutral Fund
while simultaneously utilizing S&P 500 Index futures, options on S&P 500 Index
futures and equity swap contracts to gain exposure to the equity market as
measured by the S&P 500 Index. See "Investment Objectives and Policies -- BEA
Long-Short Market Neutral Fund" and "Risk Factors -- S&P 500 Index Futures and
Related Options" and "-- Equity Swap Contracts" below. The Fund has applied to
the SEC for an exemptive order allowing it to invest without limit in the BEA
Long-Short Market Neutral Fund. Under normal market conditions, the BEA
Long-Short Equity Fund will invest at least 65% of the value of its total assets
in equity securities (which include shares of the BEA Long-Short Market Neutral
Fund). Once the Fund has indirectly acquired a long and short portfolio through
the purchase of Institutional Shares of the BEA Long-Short Market Neutral Fund,
the Adviser will purchase S&P 500 Index futures, options on S&P 500 Index
futures and equity swap contracts in an amount approximately equal to the net
asset value of the Fund in order to gain full net exposure to the U.S. equity
market as measured by the S&P 500 Index. In addition to purchasing Institutional
Shares of the BEA Long-Short Market Neutral Fund, the Fund may also take long
positions in stocks principally traded in the markets of the United States that
the Adviser has identified as undervalued and short positions in such stocks
that the Adviser has identified as overvalued. See "Risk Factors -- Short
Sales."
The S&P 500 Index is an unmanaged index composed of 500 common stocks, most of
which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative values to the stocks included in the index, weighted according to each
stock's total market value relative to the total market value of the other
stocks included in such index.
To meet margin requirements, redemptions or pending investments, the Fund may
also temporarily hold a portion of its assets in full faith and credit
obligations of the United States government (e.g., U.S. Treasury Bills) and in
short-term notes, commercial paper or other money market instruments of high
quality (i.e., rated at least "A-2" or "AA" by S&P or Prime 2 or "Aa" by
Moody's) issued by companies having an outstanding debt issue rated at least
"AA" by S&P or at least "Aa" by Moody's, or determined by the Adviser to be of
comparable quality to any of the foregoing.
The Fund's long and short positions may involve (without limit) equity
securities of foreign issuers that are traded in the markets of the United
States as ADRs, which are described above under "BEA Long-Short Market Neutral
Fund." See "Risk Factors -- Foreign Investments." The Fund will not invest
directly in equity securities that are traded outside of the United States.
In a typical stock mutual fund the investment adviser attempts to earn an excess
return (return above market return) or "alpha" by identifying and purchasing
undervalued stocks. However, there is another "alpha" possibility -- identifying
and selling short overvalued stocks. The term "double alpha" refers to these two
potential sources of alpha: one from correctly identifying undervalued stocks
and one from correctly identifying overvalued stocks. The market neutral
strategy employed directly by the BEA Long-Short Market Neutral Fund and
indirectly by the BEA Long-Short Equity Fund
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(through investment in shares of the BEA Long-Short Market Neutral Fund) seeks
to capture both alphas. The BEA Long-Short Equity Fund also seeks gain (and
incurs additional cost and expense risk) by investing in S&P 500 Index
instruments.
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INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations, which
may not be changed with respect to a Fund without shareholder approval. A
complete list of the Funds' fundamental investment limitations is set forth in
the Statement of Additional Information under "Investment Limitations."
Each Fund may not:
Borrow money or issue senior securities, except that each Fund may
borrow from institutions and enter into reverse repurchase agreements
and dollar rolls for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets, except in connection with
any such borrowing and then in amounts not in excess of one-third of the
value of the Fund's total assets at the time of such borrowing. Each
Fund will not purchase securities while its aggregate borrowings
(including reverse repurchase agreements, dollar rolls and borrowings
from banks) are in excess of 5% of its total assets. Securities held in
escrow or separate accounts in connection with the Fund's investment
practices are not considered to be borrowings or deemed to be pledged
for purposes of this limitation.
Any investment policy or limitation which involves a maximum or minimum
percentage of securities or assets shall not be considered to be violated unless
an excess over or a deficiency under the percentage occurs immediately after,
and is caused by, an acquisition or disposition of securities or utilization of
assets by a Fund.
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RISK FACTORS
SPECIAL RISKS AND OTHER CONSIDERATIONS RELATING TO THE BEA LONG-SHORT EQUITY
FUND. Because the BEA Long-Short Equity Fund may invest up to 100% of its assets
in shares of the BEA Long-Short Market Neutral Fund and other investment
companies, the expenses associated with investing in the Fund may be higher than
those associated with a portfolio that directly invests in securities that are
not themselves investment companies. An investor in the BEA Long-Short Equity
Fund will incur a proportionate share of the expenses of the Fund, as well as a
proportionate share of expenses of the BEA Long-Short Market Neutral Fund and
unaffiliated investment companies in which the BEA Long-Short Equity Fund
invests (collectively, the "underlying funds"). Investors in the BEA Long-Short
Equity Fund should realize that they can invest directly in the underlying
funds.
The BEA Long-Short Equity Fund will seek to avoid duplicative fees and the
layering of expenses to the extent practicable. The Fund will generally invest
in the Institutional Shares of the BEA Long-Short Market Neutral Fund, which are
offered with no sales or redemption charges, distribution fees or shareholder
servicing fees; however, to the extent permitted by the Investment Company Act
of 1940 (the "1940 Act"), the Fund may invest in shares of other investment
companies which may be subject to such fees. The management fees payable to BEA
under the Fund's advisory contract are
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for services that are in addition to, rather than duplicative of, services
provided under the advisory contract for any underlying funds in which the
Portfolio invests. The administration, custody and transfer agency fees borne by
the Fund are also for services that are in addition to, and not duplicative of,
services provided to the underlying funds. In addition, the distribution fees
relating to Advisor Shares of the Fund, when aggregated with any distribution or
shareholder servicing fees paid by the Fund in connection with its investments
in underlying funds will not exceed applicable NASD limits.
As a fund that may invest a substantial portion of its assets in other
investment companies, the BEA Long-Short Equity Fund will be subject to certain
investment risks. The Fund's performance is directly related to the performance
of the BEA Long-Short Market Neutral Fund and the other investment companies in
which it invests. Accordingly, the ability of the Portfolio to meet its
investment objective is directly related to the ability of the underlying funds
to meet their objectives. There can be no assurance that the investment
objective of any underlying fund will be achieved.
From time to time, the BEA Long-Short Market Neutral Fund may experience
relatively large purchases or redemptions due to asset allocation decisions made
by BEA in managing the BEA Long-Short Equity Fund and other client accounts.
These transactions may have a material effect on the BEA Long-Short Market
Neutral Fund. While it is impossible to predict the overall impact of these
transactions over time, there could be adverse effects on the BEA Long-Short
Market Neutral Fund to the extent that it may be required to sell securities at
times when it would not otherwise do so or receive cash that cannot be invested
in an expeditious manner. There may be tax consequences associated with
purchases and sales of securities, and such sales may also increase transaction
costs. BEA is committed to minimizing the impact of these transactions on the
BEA Long-Short Market Neutral Fund to the extent it is consistent with pursuing
the BEA Long-Short Equity Fund's investment objective and will monitor the
impact of the BEA Long-Short Equity Fund's asset allocation decisions on the BEA
Long-Short Market Neutral Fund.
INVESTMENT RISKS. The value of Fund shares may increase or decrease
depending on market, economic, political, regulatory and other conditions
affecting each Fund's portfolio. Investment in Shares of the Funds is more
volatile and risky than some other forms of investment. In addition, if the
Adviser takes long positions in stocks that decline or short positions in stocks
that increase in value, then the losses of the BEA Long-Short Market Neutral
Fund and BEA Long-Short Equity Fund may exceed those of other stock mutual funds
that hold long positions only.
SHORT SALES. When the Adviser anticipates that a security is overvalued, it
may sell the security short by borrowing the same security from a broker or
other institution and selling the security. A Fund will incur a loss as a result
of a short sale if the price of the borrowed security increases between the date
of the short sale and the date on which the Fund replaces such security. A Fund
will realize a gain if there is a decline in price of the security between those
dates, which decline exceeds the costs of the borrowing the security and other
transaction costs. There can be no assurance that a Fund will be able to close
out a short position at any particular time or at an acceptable price. Although
a Fund's gain is limited to the amount at which it sold a security short, its
potential loss is limited only by the maximum attainable price of the security
less the price at which the security was sold. Until a Fund replaces a borrowed
security, it will maintain at all times cash, U.S. Government securities, or
other liquid
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securities in an amount which, when added to any amount deposited with a broker
as collateral will at least equal the current market value of the security sold
short. Depending on arrangements made with brokers, a Fund may not receive any
payments (including interest) on collateral deposited with them. The Funds will
not make a short sale if, after giving effect to such sale, the market value of
all securities sold short exceeds 100% of the value of a Fund's net assets.
S&P 500 INDEX FUTURES AND RELATED OPTIONS (BEA LONG-SHORT EQUITY FUND
ONLY). An S&P 500 Index Future contract (an "Index Future") is a contract to
buy or sell an integral number of units of the S&P 500 Index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value at a given time of the S&P 500 Index. Entering into a contract to buy
units is commonly referred to as buying or purchasing a contract or holding a
long position in the S&P 500 Index. An option on an Index Future gives the
purchaser the right, in return for the premium paid, to assume a long or a short
position in an Index Future. The BEA Long-Short Equity Fund will realize a loss
if the value of the S&P 500 Index declines between the time the Fund purchases
an Index Future or an option transaction in which the Fund has assumed a long
position and may realize a gain if the value of the S&P 500 Index rises between
such dates.
The BEA Long-Short Equity Fund may close out a futures contract purchase by
entering into a futures contract sale. This will operate to terminate the Fund's
position in the futures contract. Positions in Index Futures may be closed out
by the Fund only on the futures exchanges on which the Index Futures are then
traded. There can be no assurance that a liquid market will exist for any
particular contract at any particular time. The liquidity of the market in
futures contracts could be adversely affected by "daily price fluctuation
limits" established by the relevant futures exchange which limit the amount of
fluctuation in the price of an Index Future during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered into
at a price beyond the limit. In such event, it may not be possible for the Fund
to close its futures contract purchase, and, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin (payments to and from a broker made on a daily basis as the
price of the Index Future fluctuates). The futures market may also attract more
speculators than does the securities market, because deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Increased participation by speculators in the futures market may also
cause price distortions.
Further, when the BEA Long-Short Equity Fund purchases an Index Future, it is
required to maintain, at all times while an Index Future is held by the Fund,
cash, U.S. Government securities or other liquid securities in an amount which,
together with the initial margin deposit on the futures contract, is equal to
the current value of the futures contract.
The BEA Long-Short Equity Fund will not invest more than 5% of its total assets
in Interest Rate Futures Contracts. If a Fund enters into such a contract for
any purpose, the Fund will be required to maintain cash or liquid assets in an
amount equal to the value of the Fund's total assets committed to the
consummation of the contract.
EQUITY SWAP CONTRACTS (BEA LONG-SHORT EQUITY FUND ONLY). In an equity swap
contract, the counterparty generally agrees to pay the BEA Long-Short Equity
Fund the amount, if any, by which the notional amount of the equity swap
contract would have increased in value
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had it been invested in the basket of stocks comprising the S&P 500 Index, plus
the dividends that would have been received on those stocks. The Fund agrees to
pay to the counterparty a floating rate of interest (typically the London Inter
Bank Offered Rate) on the notional amount of the equity swap contract plus the
amount, if any, by which that notional amount would have decreased in value had
it been invested in such stocks. Therefore, the return to the Fund on any equity
swap contract should be the gain or loss on the notional amount plus dividends
on the stocks comprising the S&P 500 Index (as if the Fund had invested the
notional amount in stocks comprising the S&P 500 Index) less the interest paid
by the Fund on the notional amount. Therefore, the Fund will generally realize a
loss if the value of the S&P 500 Index declines and will generally realize a
gain if the value of the S&P 500 Index rises. The Fund will enter into equity
swap contracts only on a net basis, i.e., where the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. If there is a default by the counterparty to an equity
swap contract, the Fund will be limited to contractual remedies pursuant to the
agreements related to the transaction.
There is no assurance that the equity swap contract counterparties will be able
to meet their obligations or that, in the event of default, the BEA Long-Short
Equity Fund will succeed in pursuing contractual remedies. The Fund thus assumes
the risk that it may be delayed in or prevented from obtaining payments owed to
it pursuant to these contracts. The Adviser will closely monitor the credit of
equity swap contract counterparties to seek to minimize this risk. The Fund will
not use equity swap contracts for leverage.
The BEA Long-Short Equity Fund will not enter into any equity swap contract
unless, at the time of entering into such transaction, the unsecured senior debt
of the counterparty is rated at least A by Moody's or S&P. In addition, the
staff of the Securities and Exchange Commission (the "SEC") considers equity
swap contracts to be illiquid securities. Consequently, as long as the staff
maintains this position, the Fund will not invest in equity swap contracts if,
as a result of the investment, the total value of such investments together with
that of all other illiquid securities which the Fund owns would exceed 15% of
the Fund's net assets.
The net amount of the excess, if any, of the Fund's obligations over its
entitlement with respect to each equity swap contract will be accrued on a daily
basis, and an amount of cash, U.S. Government Securities or other liquid
securities having an aggregate market value at least equal to the accrued excess
will be maintained in a segregated account. The Fund does not believe that the
Fund's obligations under equity swap contracts are senior securities within the
meaning of the 1940 Act, so long as such a segregated account is maintained, and
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions.
FOREIGN INVESTMENTS. Investing in foreign companies may involve additional
risks and considerations which are not typically associated with investing in
U.S. companies. Since stocks of foreign companies are normally denominated in
foreign currencies, the Funds may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and may incur
costs in connection with conversions between various currencies.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, comparable information may not be readily available about
certain foreign companies. Some
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securities of foreign companies may be less liquid and more volatile than
securities of comparable U.S. companies. In addition, in certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
FIXED INCOME SECURITIES. The value of the fixed income securities held by a
Fund, and thus the net asset value of the Shares of a Fund, generally will vary
inversely in relation to changes in prevailing interest rates. Thus, if interest
rates have increased from the time a debt or other fixed income security was
purchased, such security, if sold, might be sold at a price less than its cost.
Conversely, if interest rates have declined from the time such a security was
purchased, such security, if sold, might be sold at a price greater than its
cost. Also, the value of such securities may be affected by changes in real or
perceived creditworthiness of the issuers. Thus, if creditworthiness is
enhanced, the price may rise. Conversely, if creditworthiness declines, the
price may decline.
GENERAL. Investment methods described in this Prospectus are among those
which the Funds have the power to utilize. Accordingly, reference to any
particular method or technique carries no implication that it will be utilized
or, if it is, that it will be successful.
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ADDITIONAL INVESTMENT POLICIES
This section describes certain investment policies that are common to each Fund.
Investment policies are described in more detail in the Statement of Additional
Information.
TEMPORARY INVESTMENTS. For defensive purposes or during temporary periods
in which BEA believes changes in economic, financial or political conditions
make it advisable, each Fund may reduce its holdings in equity and other
securities and invest up to 100% of its assets in cash or certain short-term
(less than twelve months to maturity) and medium-term (not greater than five
years to maturity) interest-bearing instruments or deposits of United States and
foreign issuers. Such investments may include, but are not limited to,
commercial paper, certificates of deposit, variable or floating rate notes,
bankers' acceptances, time deposits, government securities and money market
deposit accounts. See Statement of Additional Information, "Common Investment
Policies -- Temporary Investments." To the extent permitted by their investment
objectives and policies, the Funds may hold cash or cash equivalents pending
investment.
BORROWING. A Fund may borrow up to 33 1/3 percent of its total assets
without obtaining shareholder approval. The Adviser intends to borrow, or to
engage in reverse repurchase agreements, only for temporary or emergency
purposes. See Statement of Additional Information, "Common Investment Policies
- -- All Funds -- Reverse Repurchase Agreements" and "-- Borrowing."
LENDING OF PORTFOLIO SECURITIES. Each Fund may also lend its portfolio
securities to financial institutions against collateral consisting of cash, U.S.
Government securities or irrevocable bank letters of credit, which are equal at
all times to at least 102% of the value of the securities loaned. Such loans
would involve risks of delay in receiving additional collateral in the event the
value of the collateral decreased below the value of the securities loaned or of
delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans will be made only to borrowers deemed by the Adviser to be of good
standing and only when, in the Adviser's judgment, the income to be
9
<PAGE>
earned from the loans justifies the attendant risks. Any loans of the
Portfolio's securities will be fully collateralized and marked to market daily.
A Portfolio may not make loans in excess of 33 1/3% of the value of its total
assets (including the loan collateral).
RULE 144A SECURITIES. Rule 144A securities are securities which are
restricted as to resale to the general public, but which may be resold to
qualified institutional buyers. A Fund's investment in Rule 144A securities
could have the effect of increasing the level of illiquidity of the Fund during
any period that qualified institutional buyers were no longer interested in
purchasing these securities. For purposes of each Fund's 15% limitation on
purchase of illiquid securities as described below, Rule 144A securities will
not be considered to be illiquid if BEA has determined them to be liquid
pursuant to guidelines established by the Company's Board of Directors.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, by
which a Fund purchases a security and obtains a simultaneous commitment from the
seller (a bank or, to the extent permitted by the 1940 Act, a recognized
securities dealer) to repurchase the security at an agreed-upon price and date
(usually seven days or less from the date of original purchase). The resale
price is in excess of the purchase price and reflects an agreed-upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
the Funds the opportunity to earn a return on temporarily available cash.
Although the underlying security may be a bill, certificate of indebtedness,
note or bond issued by an agency, authority or instrumentality of the U.S.
Government, the obligation of the seller is not guaranteed by the U.S.
Government and there is a risk that the seller may fail to repurchase the
underlying security. In such event, a Fund would attempt to exercise rights with
respect to the underlying security, including possible disposition in the
market. However, a Fund may be subject to various delays and risks of loss,
including (a) possible declines in the value of the underlying security during
the period while a Fund seeks to enforce its rights thereto and (b) inability to
enforce rights and the expenses involved in attempted enforcement.
ILLIQUID SECURITIES. Each Fund may purchase "illiquid securities", defined
as securities which cannot be sold or disposed of in the ordinary course of
business within seven days at approximately the price at which a Fund has valued
such securities, so long as no more than 15% of a Fund's net assets would be
invested in such illiquid securities after giving effect to a purchase.
Investment in illiquid securities involves the risk that, because of the lack of
consistent market demand for such securities, a Fund may be forced to sell them
at a discount from the last offer price.
INVESTMENT COMPANIES. Each Fund may invest in securities issued by
unaffiliated investment companies to the extent permitted by the 1940 Act. As a
shareholder of another investment company, each Fund would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including management fees. These expenses would be in addition to the
management fees and other expenses that a Fund bears directly in connection with
its own operations.
The 1940 Act generally permits the BEA Long-Short Equity Fund to invest without
limitation in other investment companies that are part of the same "group of
investment companies" (as defined in the 1940 Act), provided certain limitations
are observed. Generally, these limitations require that the Fund (a) limit its
investments to shares of other investment companies that are part of the same
"group of investment companies," Government securities and short-term paper; (b)
observe certain limitations on
10
<PAGE>
the amount of sales loads and distribution-related fees that are borne directly
and indirectly by its shareholders; and (c) not invest in other investment
companies structured as "funds of funds." An exemptive order issued by the SEC
permits the BEA Long-Short Equity Fund to hold investments other than those
identified above, including domestic and foreign equity and fixed income
securities, S&P 500 Index futures and related options, equity swap contracts and
shares of unaffiliated investment companies.
PORTFOLIO TURNOVER. BEA will effect portfolio transactions in each Fund
without regard to holding periods if, in its judgment, such transactions are
advisable in light of general market, economic or financial conditions. The
annual portfolio turnover rate for the BEA Long-Short Market Neutral Fund and
the BEA Long-Short Equity Fund is not expected to exceed 150% and 50%,
respectively. Portfolio turnover may vary greatly from year to year as well as
within a particular year. High portfolio turnover rates (100% or more) will
generally result in higher transaction costs to a Fund and may result in the
realization of short-term capital gains that are taxable to shareholders as
ordinary income. The amount of portfolio activity will not be a limiting factor
when making portfolio decisions. See the Statement of Additional Information,
"Portfolio Transactions" and "Taxes."
AMERICAN DEPOSITORY RECEIPTS. Each Fund may invest in ADRs. ADRs are
typically issued by a U.S. bank or trust evidencing ownership of the underlying
foreign securities. Generally, ADRs, in registered form, are designed for use in
U.S. securities markets. ADRs may be listed on a national securities exchange or
may be traded in the over-the-counter market. ADRs traded in the
over-the-counter market which do not have an active or substantial secondary
market will be considered illiquid and therefore will be subject to the Funds'
respective limitations with respect to such securities. ADRs may be denominated
in U.S. dollars although the underlying securities may be denominated in a
foreign currency. Investments in ADRs involve risks similar to those
accompanying direct investments in foreign securities. Certain of these risks
are described above under "Foreign Investments."
The Statement of Additional Information contains additional investment policies
and strategies of the Funds.
- ----------------------------------------------
MANAGEMENT
BOARD OF DIRECTORS
The business and affairs of the Company and of each Fund are managed under the
direction of the Company's Board of Directors.
INVESTMENT ADVISER
BEA serves as the Investment Adviser for each of the Funds pursuant to
investment advisory agreements (the "Advisory Agreements"). BEA is a general
partnership organized under the laws of the State of New York in December 1990
and, together with its predecessor firms, has been engaged in the investment
advisory business for over 60 years. BEA is a wholly-owned subsidiary of Credit
Suisse Group, a Swiss corporation. BEA is a registered investment adviser under
the Investment Advisers Act of 1940, as amended. BEA's principal offices are
located at Tower 49, 12 East 49th Street, New York, NY 10017.
BEA is an investment adviser managing global equity, fixed-income and derivative
securities accounts for corporate pension and profit-sharing plans, state
pension funds, union funds, endowments and other charitable institutions. As of
December 31, 1997, BEA managed approximately $34.2 billion in assets. BEA
currently acts as investment adviser for eleven other investment companies
registered under the 1940 Act, and acts as sub-adviser to certain
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<PAGE>
portfolios of twelve other registered investment companies.
BEA will select investments for each of the Funds and will place purchase and
sale orders on behalf of each of the Funds. The Funds may use affiliates of
Credit Suisse Group in connection with the purchase or sale of securities in
accordance with the rules or exemptive orders adopted by the SEC when BEA
believes that the charge for the transaction does not exceed usual and customary
levels.
The day-to-day portfolio management of the BEA Long-Short Market Neutral and BEA
Long-Short Equity Funds is the responsibility of the BEA Structured Equity Team.
The Team consists of the following investment professionals: William Priest
(Chief Executive Officer), Eric Remole (Managing Director), Marc Bothwell (Vice
President) and Michael Welhoelter (Vice President). Mr. Priest has been engaged
as an investment professional with BEA for more than twenty-five years. Mr.
Remole joined BEA in 1997, prior to which time he was Managing Director for
fourteen years at Citicorp Investment Management, Inc. (now Chancellor/ LGT
Asset Management, Inc.). Mr. Bothwell joined BEA in 1997, prior to which time he
was a vice president and portfolio manager at Chancellor/LGT Asset Management,
Inc., where he was involved in risk management and research on earnings and
earnings surprise modeling. Prior to 1994, he was a programmer and trader at
Keane Dealer Services, Inc. Mr. Welhoelter joined BEA in 1997, prior to which
time he was a portfolio manager and vice president for four years at
Chancellor/LGT Asset Management, Inc., where he developed risk management and
portfolio construction strategies.
The BEA Long-Short Market Neutral Fund pays BEA a basic management fee, computed
daily and payable quarterly, at the annual rate of 1.50% of the average net
assets of the Fund. After the first year of operations, this basic management
fee may be increased or decreased by applying an adjustment formula (the
"Performance Adjustment"). The Performance Adjustment is calculated monthly by
comparing the Fund's investment performance to a target during the most recent
twelve-month period. The target is the investment record of the Salomon Smith
Barney U.S. 1-Month Treasury Bill Index-TM- plus 5 percentage points. The
Performance Adjustment is added to or subtracted from the basic fee. The maximum
annualized Performance Adjustment is .50%.
The Performance Adjustment may increase or decrease the basic fee in five steps.
The first step would occur if the Fund's performance during the most recent
12-month period differed from that of the Target by more than one but not more
than two percentage points. In this event, the Performance Adjustment would be
0.10%, and the annual rate of the total management fee would be either 1.40% or
1.60%. The second step would occur if the Fund's performance during the most
recent 12-month period differed from that of the Target by more than two but not
more than three percentage points. In this event, the Performance Adjustment
would be 0.20%, and the annual rate of the total management fee would be either
1.30% or 1.70%. The third step would occur if the Fund's performance during the
most recent 12-month period differed from that of the Target by more than three
but not more than four percentage points. In this event, the Performance
Adjustment would be 0.30%, and the annual rate of the total management fee would
be either 1.20% or 1.80%. The fourth step would occur if the Fund's performance
during the most recent 12-month period differed from that of the Target by more
than four but not more than five percentage points. In this event, the
Performance Adjustment would be 0.40%, and the annual rate of the total
management fee would be either 1.10% or 1.90%. The fifth step would occur if the
Fund's performance during the most recent 12-month period differed from that of
the Target by five percentage points or more. In this event, the Performance
Adjustment
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<PAGE>
would be 0.50%, and the annual rate of the total management fee would be either
1.00% or 2.00%.
The BEA Long-Short Equity Fund pays BEA a management fee, computed daily and
payable quarterly, at the annual rate of 0.10% of the average net assets of the
Fund.
The Adviser has voluntarily undertaken to waive some or all of its management
fee and, if necessary, to bear certain expenses of each Fund until further
notice to the extent required to limit the total annual operating expenses
(which do not include nonrecurring account fees and extraordinary expenses) of
each class of shares to the percentage of each Fund's average daily net assets
attributable to that class listed in the Expense Limitation column below, plus
the Performance Adjustment applicable to the BEA Long-Short Market Neutral Fund.
The Performance Adjustment would be determined without regard to any waivers or
reimbursements of the basic management fee or other fees or expenses payable by
the Fund.
<TABLE>
<CAPTION>
BASIC EXPENSE
MANAGEMENT FEE LIMITATION
(AS A % OF (AS A % OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS) NET ASSETS)*
--------------- ------------------
<S> <C> <C>
INSTITUTIONAL SHARES
BEA Long-Short Market Neutral Fund.................................................. 1.50% 2.00%
BEA Long-Short Equity Fund.......................................................... 0.10% 2.50%
ADVISOR SHARES
BEA Long-Short Market Neutral Fund.................................................. 1.50% 2.25%
BEA Long-Short Equity Fund.......................................................... 0.10% 2.75%
</TABLE>
- ------------------------
* With respect to the BEA Long-Short Equity Fund, "Other Expenses" includes the
indirect expenses associated with the Fund's investment in Institutional
Shares of the BEA Long-Short Market Neutral Fund.
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<PAGE>
BEA may assume additional expenses of a Fund from time to time. In certain
circumstances, BEA may assume such expenses on the condition that it is
reimbursed by the Fund for such amounts prior to the end of a fiscal year. In
such event, the reimbursement of such amounts by a Fund will have the effect of
increasing its expense ratio and of decreasing return to its investors.
The Advisory Agreements provide that BEA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the matters to which the Advisory Agreements relate and shall be
indemnified for any losses and claims in connection with any claim relating
thereto, except liability resulting from willful misfeasance, bad faith or gross
negligence on BEA's part in the performance of its duties or from reckless
disregard of its obligations and duties under the Advisory Agreements.
CO-ADMINISTRATORS -- ADVISOR CLASS
PFPC Inc. ("PFPC"), an indirect, wholly-owned subsidiary of PNC Bank Corp.,
serves as co-administrator for the Advisor Class of the Funds. As
co-administrator, PFPC will provide various services to the Advisor Class of the
Funds, including determining the net asset value of the Advisor Shares of each
Fund, providing all accounting services for the Advisor Class and generally
assisting in all aspects of the operations of the Advisor Class of each Fund. As
compensation for administrative services, the Funds will pay PFPC a fee
calculated at the annual rate of .125% of the average daily net assets of the
Advisor Class of each Fund. PFPC has its principal offices at 400 Bellevue
Parkway, Wilmington, Delaware 19809.
The Company employs BEA as co-administrator. As co-administrator, BEA generally
assists the Advisor Class of each of the Funds in all aspects of their
administration and shareholder servicing. As compensation, the Company pays to
BEA a fee calculated at an annual rate of .05% of the average daily net assets
of the Advisor Class of each Fund for assets up to $125 million, and .10% of
such assets in excess of $125 million.
ADMINISTRATOR -- INSTITUTIONAL CLASS
PFPC serves as administrator for the Institutional Class of the Funds. As
administrator, PFPC will provide various services to the Institutional Class of
the Funds, including determining the net asset value of the Institutional Shares
of the Funds, providing shareholder servicing and all accounting services for
the Institutional Class and generally assisting in all aspects of the operations
of the Institutional Class of the Funds. As compensation for its administrative
services, the Funds will pay PFPC a fee calculated at the annual rate of .125%
of the average daily net assets of the Institutional Class of each Fund.
ADMINISTRATIVE SERVICES AGENT -- INSTITUTIONAL CLASS
Provident Distributors, Inc., ("PDI") provides certain administrative services
to the Institutional Class of each of the Funds that are not provided by PFPC,
subject to the supervision and direction of the Board of Directors of each of
the Funds. As compensation for such administrative services, each of the Funds
pays PDI each month a fee for the previous month calculated at the annual rate
of .15% of the average daily net assets of the Institutional Class of each Fund.
Provident Distributors' principal business address is Four Falls Corporate
Center, 6th Floor, West Conshohocken, PA 19428.
DISTRIBUTOR
Provident Distributors, Inc., ("PDI"), serves as the Company's distributor.
Provident Distributors' principal business address is Four Falls
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<PAGE>
Corporate Center, 6th Floor, West Conshohocken PA 19428. PDI receives a fee at
an annual rate equal to .25% of the Advisor Class's average daily net assets for
distribution services, pursuant to a distribution agreement between PDI and the
Company in accordance with a distribution plan (the "12b-1 Plan") adopted by the
Company pursuant to Rule 12b-1 under the 1940 Act. Amounts paid to PDI under the
Company's 12b-1 Plan may be used by PDI to cover expenses that are related to
(i) the distribution of Advisor Shares of the Funds, (ii) ongoing servicing
and/or maintenance of the accounts of shareholders of the Fund, and (iii)
sub-transfer agency services, subaccounting services or administrative services
related to the sale of the Advisor Shares of the Funds, all as set forth in the
Company's 12b-1 Plan. Payments under the 12b-1 Plan are not tied exclusively to
the expenses actually incurred. PDI may delegate some or all of these functions
to a Service Organization. See "How to Purchase Shares -- Purchases Through
Intermediaries." No compensation is payable by the Company to PDI for
distribution services with respect to the Institutional Shares of the Funds.
BEA, PDI or an affiliate of either may, at its own expense, provide promotional
incentives for qualified recipients who support the sale of Shares of a Fund,
consisting of securities dealers who have sold Fund Shares or others, including
banks and other financial institutions, under special arrangements. Incentives
may include opportunities to attend business meetings, conferences, sales or
training programs for recipients' employees or clients and other programs or
events and may also include opportunities to participate in advertising or sales
campaigns and/or shareholder services and programs regarding one or more Funds.
BEA, PDI or an affiliate of either may pay for travel, meals and lodging in
connection with these promotional activities. In some instances, these
incentives may be offered only to certain institutions whose representatives
provide services in connection with the sale or expected sale of significant
amounts of the Fund's Shares.
TRANSFER AGENT
State Street Bank and Trust Company ("State Street") acts as transfer agent for
the Funds. It has delegated to Boston Financial Data Services, Inc. ("BFDS"), a
50% owned subsidiary, responsibility for most transfer agent servicing
functions. State Street's principal address is 225 Franklin Street, Boston, MA
02110 and BFDS's principal address is 2 Heritage Drive, North Quincy, MA 02171,
telephone number (800) 401-2230.
CUSTODIAN
Custodial Trust Company serves as Custodian for the Funds. The 1940 Act and the
rules and regulations adopted thereunder permit a Fund to maintain its
securities and cash in the custody of certain eligible banks and securities
depositories. In compliance with such rules and regulations, a Fund's portfolio
of securities and cash, when invested in securities of foreign issuers, may be
held by eligible foreign subcustodians appointed by the custodian.
- ----------------------------------------------
EXPENSES
The expenses of each Fund are deducted from its total income before dividends
are paid. Any general expenses of the Company that are not readily identifiable
as belonging to a particular investment portfolio of the Company will be
allocated among all investment portfolios of the Company based upon the relative
net assets of the investment portfolios. The Advisor and Institutional Classes
of the Funds pay their own administration fees, and Advisor Shares bear the
expense associated with the 12b-1 Plan. Each class may pay a different share
than the
15
<PAGE>
other classes of other expenses (excluding management and custodial fees) if
those expenses are actually incurred in a different amount by that class or if
they receive different services.
The expenses for each Fund are set forth in the tables entitled "Annual Fund
Operating Expenses," above.
- ----------------------------------------------
HOW TO PURCHASE SHARES
Shares representing interests in the Funds are offered continuously for sale by
the Distributor.
The Funds offer two classes of shares: Advisor Shares and Institutional Shares.
Whether an investor is eligible to purchase Advisor or Institutional Shares
generally depends on the amount invested in a particular Fund. Advisor Shares
bear a Shareholder Service Fee and Distribution Fee whereas Institutional Shares
do not.
GENERAL
Shares may be purchased on any Business Day. A "Business Day" is any day that
the New York Stock Exchange (the "NYSE") is open for business. Currently, the
NYSE is closed on weekends and New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day and the preceding Friday or subsequent Monday
when these holidays occur on a Saturday or Sunday.
The price paid for Shares purchased will be the net asset value next computed
after an order is received by the Fund's transfer agent prior to its close of
business on such day. Orders received by the Fund's transfer agent after its
close of business are priced at the net asset value next determined on the
following Business Day. For a description of the manner of calculating a Fund's
net asset value, see "Net Asset Value" below.
ADVISOR CLASS
Advisor Shares of the Funds may be purchased without imposition of a sales
charge through the BEA Advisor Funds. Shares of a Fund may be purchased either
by mail or, with special advance instructions, by wire.
BY MAIL
If an investor desires to purchase Advisor Shares by mail, a check or money
order made payable to the "BEA Advisor Funds" (in U.S. currency) should be sent
along with the completed account application to the "BEA Advisor Funds" at the
address set forth below. Checks payable to the investor and endorsed to the
order of the "BEA Advisor Funds" will not be accepted as payment and will be
returned to sender. If payment is received by check in proper form (as described
below) on or before the close of regular trading on the New York Stock Exchange,
Inc. ("NYSE") (generally 4:00 p.m. Eastern Time) on a day that a Fund calculates
its net asset value (a "Business Day"), the purchase will be made at the Fund's
net asset value calculated at the end of that day. If payment is received after
the close of regular trading on the NYSE, the purchase will be effected at the
Fund's net asset value determined for the next Business Day after payment has
been received. Checks or money orders that are not in proper form as described
below or that are not accompanied or preceded by a completed application will be
returned to sender. Shares purchased by check are entitled to receive dividends
and distributions beginning on the day after payment has been received. Checks
should be made payable to the "BEA Advisor Funds" and accompanied by a breakdown
of amounts to be invested in each Fund. If a check used for purchase does not
clear, the Funds will cancel the purchase and the investor
16
<PAGE>
may be liable for losses or fees incurred. For a description of the manner of
calculating a Fund's net asset value, see "Net Asset Value" below.
SEND TO:
BEA ADVISOR FUNDS
P.O. Box 8500
Boston, MA 02266-8500
OVERNIGHT TO:
BFDS
ATTN: BEA ADVISOR FUNDS
2 Heritage Drive
North Quincy, MA 02171
BY WIRE
Investors may also purchase Advisor Shares by wiring funds from their banks.
Telephone orders will not be accepted until a completed account application has
been received and an account number has been established. After telephoning
(800) 401-2230 for instructions, an investor should then wire Federal Funds to
the BEA Advisor Funds, c/o BFDS using the following wire address:
State Street Bank & Trust Company
ABA# 0110 000 28
ATTN: Mutual Fund/Custody Dept.
[BEA Advisor Fund Name]
DDA# 9905-227-6
For Further Credit: [ACCOUNT NUMBER AND
REGISTRATION]
If a telephone order is received by the close of regular trading on the NYSE AND
payment by wire is received on the same day in proper form (in accordance with
instructions stated above), the Shares will be priced according to the net asset
value of the Fund on that day and are entitled to dividends and distributions
beginning on that day. If payment by wire is received in proper form by the
close of the NYSE without a prior telephone order, the Shares will be priced
according to the net asset value of the Fund on that day and are entitled to
dividends and distributions beginning on that day. However, if a wire received
in proper form is not preceded by a telephone order AND is received after the
close of regular trading on the NYSE, the payment will be held uninvested until
the order is effected at the close of business on the next Business Day. Payment
for orders that are not accepted will be returned to the prospective investor
after prompt inquiry. If a telephone order is placed and payment by wire is not
received on the same day, the Fund will cancel the purchase and the investor may
be liable for losses or fees incurred.
Shares of a Fund are sold without a sales charge. The minimum initial investment
in a Fund is $2,500 and minimum subsequent investments must be $250, except that
subsequent minimum investments can be as low as $100 under the Automatic
Investment Plan, Uniform Gifts to Minors Act and through Individual Retirement
Accounts described below. The Funds reserve the right to change the initial and
subsequent minimum investment requirements at any time.
After an investor has made his initial investment, additional Shares may be
purchased at any time by mail or by wire in the manner outlined above. Wire
payments for initial and subsequent investments should clearly indicate the
investor's account number and the name in which Shares are being purchased. Each
Fund reserves the right to suspend the offering of Shares for a period of time
or to reject any specific purchase order. In the interest of economy and
convenience, physical certificates representing Shares in a Fund are not
normally issued.
PURCHASE THROUGH INTERMEDIARIES
The Funds understand that some broker-dealers (other than Provident
Distributors, Inc.), financial institutions, securities dealers and other
17
<PAGE>
industry professionals ("Service Agents") impose certain conditions on their
clients that invest in the Funds, which are in addition to or different from
those described in this Prospectus, and, to the extent permitted by applicable
regulatory authority, may charge their clients direct fees. Certain features of
the Funds, such as the minimum initial or subsequent investments, redemption
fees and certain trading restrictions may be modified or waived by Service
Agents, and administrative charges or other direct fees may be imposed for the
services rendered, which charges or fees would not be imposed if Fund Shares
were purchased directly from the Funds. Therefore, a client or customer should
contact the Service Agent acting on his behalf concerning the fees (if any)
charged in connection with a purchase or redemption of a Fund's shares and
should read this Prospectus in light of the terms governing his accounts with
Service Agents. Service Agents or, if applicable, their designees, will be
responsible for promptly transmitting client or customer purchase and redemption
orders to the Funds in accordance with their agreements with clients or
customers. Service Agents, or, if applicable, their designees that have entered
into agreements with a Fund or its agent, may enter confirmed purchase orders on
behalf of clients and customers with payment to follow no later than the Fund's
pricing on the following Business Day. If payment is not received by such time
the Service Agents could be held liable for resulting fees or losses.
A Fund will be deemed to have received a purchase or redemption order when a
Service Agent, or, if applicable, its authorized designee, receives a purchase
or redemption order correctly completed and signed. Orders received by a Fund in
proper form will be priced at the Fund's net asset value next computed after
they are accepted by the Service Agent or its authorized designee.
For administration, subaccounting, transfer agency and/or other services, BEA,
PDI or an affiliate of either may pay Service Agent and certain recordkeeping
organizations with whom they have entered into agreements a fee of up to .35%
(the "Service Fee") of the average annual value of accounts with the Funds
maintained by such Service Agent or recordkeepers. A portion of the Service Fee
may be borne by the Funds as a transfer agency fee. The Service Fee payable to
any one Service Agent or recordkeeper is determined based upon a number of
factors, including the nature and quality of the services provided, the
operations processing requirements of the relationship and the standardized fee
schedule of the Service Agent or recordkeeper.
AUTOMATIC INVESTMENT PLAN
Additional investments in Advisor Shares may be made automatically on a periodic
basis by authorizing the BEA Advisor Funds to withdraw funds from your bank
account through an Automatic Investment Plan. Investors desiring to participate
in an Automatic Investment Plan should call the BEA Advisor Funds at
(800) 401-2230 to obtain the appropriate forms, or complete the appropriate
section of the Application included with this Prospectus. The minimum initial
investment for an Automatic Investment Plan is $1,000, with minimum monthly
payments of $100.
RETIREMENT PLANS AND UGMA/UTMA ACCOUNTS
Advisor Shares may be purchased in conjunction with Individual Retirement
Accounts ("IRAs"), rollover IRAs, pension, profit-sharing or other employer
benefit plans, and under the Uniform Gifts to Minors Act ("UGMA") or Uniform
Transfers to Minors Act ("UTMA"). The minimum initial investment in conjunction
with such accounts is $1,000, and the minimum subsequent investment is $100. For
further information as
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<PAGE>
to applications and annual fees, please contact the BEA Advisor Funds. To
determine whether the benefits of an IRA and other plans and UGMA and UTMA
accounts are available and/ or appropriate, a shareholder should consult with a
tax adviser.
INSTITUTIONAL CLASS
Except as described below, BEA Institutional Class Shares are currently
available for purchase only by investors who have entered into an investment
management agreement with BEA or its affiliates. Shares may be purchased
initially by completing the application and forwarding the application to the
BEA Institutional Funds. Purchases of Shares may be effected by wire to an
account to be specified by BFDS or by mailing a check or Federal Reserve Draft,
payable to the order of "The BEA Institutional Funds," The BEA Institutional
Funds,
P.O. Box 8500, Boston, MA 02266-8500. The name of the Fund for which Shares are
being purchased must also appear on the check or Federal Reserve Draft. Federal
Reserve Drafts are available at national banks or any state bank which is a
member of the Federal Reserve System. Initial investments in the Institutional
Shares must be at least $3,000,000, except Institutional Shares may be purchased
by existing clients of BEA or its affiliates or by officers of such existing
clients (or those holding similar positions) with an initial investment of at
least $100,000; all subsequent investments for such persons must be at least
$1,000. Subsequent initial investments in any other Fund must be at least
$100,000. Each Fund reserves the right to suspend the offering of Shares for a
period of time or to reject any purchase order.
Shares of the Funds may be purchased by officers and employees of BEA or its
affiliates and any BEA pension or profit-sharing plan, without being subject to
the minimum investment limitation or the requirement that investors enter into
an investment management agreement.
PURCHASES IN-KIND
Subject to the approval of the Adviser, investors may acquire Institutional
Shares of the Funds in exchange for portfolio securities that are eligible for
investment by the relevant Fund or Funds. Such portfolio securities must (a)
meet the investment objectives and policies of the Funds, (b) be acquired for
investment and not for resale, (c) be liquid securities which are not restricted
as to transfer either by law or liquidity of market, and (d) have a value which
is readily ascertainable. Generally an investor will recognize for federal
income tax purposes any gain or loss realized on an exchange of property for
shares. Under certain circumstances, initial investors may not recognize gain or
loss on such an exchange. Investors, particularly initial investors, are urged
to consult their tax advisers in determining the particular federal income tax
consequences of their purchase in-kind. Such exchanges will be subject to each
Fund's minimum investment requirement. Shareholders may be required to bear
certain administrative or custodial costs in effecting purchases in-kind.
- ----------------------------------------------
HOW TO REDEEM AND EXCHANGE SHARES
An investor of a Fund may redeem (sell) his Shares on any day that the Fund's
net asset value is calculated (see "Net Asset Value" below).
REDEMPTION IN WRITING
Shareholders may redeem for cash some or all of their Shares at any time. To do
so, a written request in proper form (as described below)
19
<PAGE>
must be sent directly to the BEA Advisor Funds or BEA Institutional Funds, P.O.
Box 8500, Boston, MA 02266-8500. The redemption price is the net asset value per
Share next determined after the initial receipt of proper notice of redemption.
The value of Shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
A request for redemption must be signed by all persons in whose names the Shares
are registered or by an authorized party, such as the agent or investment
adviser for the Shareholder. Signatures must conform exactly to the account
registration. Generally, a properly signed written request is all that is
required for a redemption. In some cases, however, other documents may be
necessary. Additional documentary evidence of authority is also required by the
Funds in the event redemption is required by a corporation, partnership, trust,
fiduciary, executor or administrator.
PAYMENT OF REDEMPTION PROCEEDS
Payment of the Redemption Price for Shares redeemed will be made by wire or by
check mailed within seven days after acceptance by the Funds c/o BFDS, of the
request and any other necessary documents in proper order. Such payment may be
postponed or the right of redemption suspended as provided by the SEC. If the
Shares to be redeemed have been recently purchased by check, the Fund's transfer
agent may delay mailing a redemption check, which may be a period of up to 15
days from the date of purchase, pending a determination that the check has
cleared.
INVOLUNTARY REDEMPTION
The Company reserves the right to redeem an account in any Fund of a shareholder
at any time the net asset value of the account in such a Fund falls below $500
as the result of a redemption request. Shareholders will be notified in writing
that the value of their account in a Fund is less than $500 and will be allowed
30 days to make additional investments before the redemption is processed.
REDEMPTION IN-KIND
The Company reserves the right, at its discretion, to honor any request for
redemption of a Fund's Shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value. If payment is made in
securities, a shareholder may incur transaction costs in converting these
securities into cash after they have redeemed their Shares. The Company has
elected, however, to be governed by Rule 18f-1 under the 1940 Act so that a Fund
is obligated to redeem its Shares solely in cash up to the lesser of $250,000 or
1% of its net asset value during any 90-day period for any one shareholder of a
Fund. Redeeming shareholders will be required to bear certain administrative or
custodial costs in effecting redemptions in-kind.
EXCHANGE PRIVILEGE
An investor may exchange Shares of a Fund for Shares of the same class of any
other Fund of the Company at such Fund's respective net asset values. Exchanges
will be effected in the manner described under "Redemption of Shares" above. If
an exchange request is received by the Funds prior to the close of regular
trading on the NYSE, the exchange will be made at each Fund's net asset value
determined on the same Business Day. The exchange privilege may be modified or
terminated at any time upon 60 days' notice to shareholders.
The exchange privilege is available to shareholders residing in any state in
which Shares of the Funds being acquired may legally be sold. When a shareholder
effects an exchange of Shares, the
20
<PAGE>
exchange is treated for federal income tax purposes as a redemption. Therefore,
the shareholder may realize a taxable gain or loss in connection with the
exchange. For further information regarding the exchange privilege, the
shareholder should contact the BEA Funds at (800) 401-2230.
If the exchanging shareholder does not currently own Shares of the Fund whose
Shares are being acquired, a new account will be established with the same
registration, dividend and capital gain options and authorized dealer of record
as the account from which Shares are exchanged, unless otherwise specified in
writing by the shareholder with all signatures guaranteed by an eligible
guarantor institution. If any amount remains in the account from which the
exchange is being made, such amount must not drop below the minimum account
value required by the Fund.
TELEPHONE TRANSACTIONS -- ADVISOR CLASS
In order to request redemptions or exchanges by telephone, investors must have
completed and returned to the BEA Advisor Funds an account application
containing a telephone election. Unless contrary instructions are elected, an
investor will be entitled to make redemptions or exchanges by telephone by
calling the BEA Advisor Funds at (800) 401-2230. To add a telephone redemption
or exchange feature to an existing account that previously did not provide for
this option, a Telephone Redemption or Exchange Authorization Form may be
obtained from the BEA Advisor Funds. Neither the Company, the Funds, the
Distributor, the Co-Administrators, the Transfer Agent nor any other Fund agent
will be liable for following instructions communicated by telephone that they
reasonably believe to be genuine. Reasonable procedures will be employed on
behalf of the Funds to confirm that instructions communicated by telephone are
genuine. Such procedures may include, among others, providing written
confirmation of telephone transactions, tape recording telephone instructions,
requiring that redemption proceeds be sent only by check to the account owners
of record at the address of record or by wire only to the owners of record at
the bank account of record, and requiring specific personal information prior to
acting upon telephone instructions.
- ----------------------------------------------
NET ASSET VALUE
The net asset values for each class of the Funds are determined as of the close
of regular trading on the NYSE on each Business Day. The net asset values of
each class of a Fund are calculated by adding the value of the proportionate
interest of each class in a Fund's securities, cash and other assets, deducting
the actual and accrued liabilities of the class and dividing the result by the
total number of outstanding shares of the class.
Most securities held by a Fund are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices
that are provided by securities dealers or pricing services. Securities for
which market quotations are not readily available are valued at fair market
value as determined in good faith under the procedures established by the Board
of Directors. The amortized cost method of valuation will also be used with
respect to debt obligations with sixty days or less remaining to maturity unless
the Adviser under the supervision of the Board of Directors determines such
method does not represent fair value.
- ----------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Company will distribute substantially all of the net realized capital gains,
if any, of each of the Funds to each Fund's shareholders annually. The Company
will distribute all net investment
21
<PAGE>
income, if any, for both the Advisor and Institutional Classes of the BEA
Long-Short Market Neutral and BEA Long-Short Equity Funds at least annually. All
distributions will be reinvested in the form of additional full and fractional
shares of the relevant Fund unless a contrary election is made on the
application to have distributions paid in cash. If in the future a shareholder
desires to have distributions paid out rather than reinvested, the shareholder
should notify the BEA Funds in writing.
- ----------------------------------------------
TAXES
GENERAL
Each Fund will elect to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). So
long as a Fund qualifies for this tax treatment, it will be relieved of federal
income tax on amounts distributed to shareholders, but shareholders, unless
otherwise exempt, will pay income or capital gains taxes on amounts so
distributed (except distributions that are treated as a return of capital)
regardless of whether such distributions are paid in cash or reinvested in
additional shares.
Distributions out of the "net capital gain" (the excess of net long-term capital
gain over net short-term capital loss) and out of the portion of such net
capital gain that constitutes mid-term capital gain, if any, of a Fund will be
taxed to shareholders as long-term capital gain, if any, of a Fund regardless of
the length of time a shareholder has held his shares or whether such gain was
reflected in the price paid for the shares. All other distributions, to the
extent they are taxable, are taxed to shareholders as ordinary income. The
current nominal maximum marginal rate on ordinary income for individuals, trusts
and estates is generally 39.6%. The maximum rate imposed on long-term capital
gain of such taxpayers is 28% (for the sale of capital assets held more than 12
months but not more than 18 months) or 20% (for the sale of capital assets held
more than 18 months). Corporate taxpayers are taxed on both ordinary income and
capital gains at a maximum nominal rate of 35%.
The Company will send written notices to shareholders annually regarding the tax
status of distributions made by each Fund. Dividends declared in October,
November or December of any year payable to shareholders of record on a
specified date in such a month will be deemed to have been received by the
shareholders on December 31, provided such dividends are paid during January of
the following year. Each Fund intends to make sufficient actual or deemed
distributions prior to the end of each calendar year to avoid liability for
federal excise tax.
Investors should be careful to consider the tax implications of buying Shares
just prior to a distribution. The price of Shares purchased at that time will
reflect the amount of the forthcoming distribution. Those investors purchasing
just prior to a distribution will nevertheless be taxed on the entire amount of
the distribution received.
Shareholders who exchange shares representing interests in one Fund for shares
representing interests in another Fund will generally recognize capital gain or
loss for federal income tax purposes.
Under certain provisions of the Code, some shareholders may be subject to 31%
"backup" withholding on reportable dividends, capital gains distributions and
redemption payments.
To the extent such investments are permissible for a Fund, the Fund's
transactions in options, futures contracts, hedging transactions, forward
contracts and straddles will be subject to special tax rules (including
mark-to-market, constructive sale, straddle, wash sale and short sale rules),
22
<PAGE>
the effect of which may be to accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's securities and
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
shareholders.
The foregoing is a general summary of the federal income tax consequences of
investing in a Fund to shareholders who are U.S. citizens or U.S. corporations.
Shareholders should consult their own tax advisers about the tax consequences of
an investment in the Funds in light of each shareholder's particular tax
situation. Shareholders should also consult their own tax advisers about
consequences under foreign, state, local or other applicable tax laws.
FOREIGN INCOME TAXES
Investment income received by the Funds from sources within foreign countries
may be subject to foreign income taxes withheld at the source. The United States
has entered into tax treaties with many foreign countries which entitle the
Funds to a reduced rate of, or exemption from, taxes on such income. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of each Fund's assets to be invested in various countries is not known.
If more than 50% of the value of a Fund's total assets at the close of each
taxable year consists of the stock or securities of foreign corporations, such
Fund will be eligible to elect to "pass through" to the Company's shareholders
the amount of foreign income taxes paid by each Fund (the "Foreign Tax
Election"). Pursuant to the Foreign Tax Election, shareholders will be required
(i) to include in gross income, even though not actually received, their respec-
tive pro-rata shares of the foreign income taxes paid by a Fund that are
attributable to any distributions they receive; and (ii) either to deduct their
pro-rata share of foreign taxes in computing their taxable income, or to use it
(subject to various Code limitations) as a foreign tax credit against U.S.
federal income tax (but not both). In determining the source and character of
distributions received from a Fund for the purpose of the foreign tax credit
limitation rules of the Code, shareholders will be required to treat allocable
portions of a Fund's distributions as foreign source income. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.
- ----------------------------------------------
MULTI-CLASS STRUCTURE
The Company offers three classes of shares, Advisor, Institutional and Investor
Shares of the Funds, which are offered directly to institutional investors and
financial intermediaries pursuant to separate prospectuses. Shares of a Fund
represent equal pro rata interests in the Funds and accrue dividends and
calculate net asset value and performance quotations in the same manner. The
Company quotes performance of each class of Shares separately. Because different
fees are paid by each class of shares, the total return on such shares can be
expected, at any time, to be different than the total return on another class of
Shares. Information concerning these other classes may be obtained by calling
the BEA Funds at (800) 401-2230.
- ----------------------------------------------
DESCRIPTION OF SHARES
The Company has authorized capital of thirty billion shares of Common Stock,
$.001 par value per share, of which 14.828 billion shares are currently
classified into 82 different classes of Common Stock (as described in the
Statement of Additional Information).
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION
23
<PAGE>
INCORPORATED HEREIN RELATE PRIMARILY TO THE BEA ADVISOR AND INSTITUTIONAL
CLASSES REPRESENTING INTERESTS IN THE BEA LONG-SHORT MARKET NEUTRAL AND BEA
LONG-SHORT EQUITY FUNDS AND DESCRIBE ONLY THE INVESTMENT OBJECTIVE AND POLICIES,
OPERATIONS, CONTRACTS AND OTHER MATTERS RELATING TO THESE FUNDS.
Each share that represents an interest in a Fund has an equal proportionate
interest in the assets belonging to such Fund with each other share that
represents an interest in such Fund. Shares of the Company do not have
preemptive or conversion rights. When issued for payment as described in this
Prospectus, Shares will be fully paid and non-assessable.
The Company currently does not intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The law under
certain circumstances provides shareholders with the right to call for a meeting
of shareholders to consider the removal of one or more directors. To the extent
required by law, the Company will assist in shareholder communication in such
matters.
Holders of shares of each of the Funds will vote in the aggregate and not by
class on all matters, except where otherwise required by law. Furthermore,
shareholders of all investment portfolios of the Company will vote in the
aggregate and not by portfolio except as otherwise required by law or when the
Board of Directors determines that the matter to be voted upon affects only the
interests of the shareholders of a particular investment portfolio. (See the
Statement of Additional Information under "Additional Information Concerning the
Company's Shares" for examples of when the 1940 Act requires voting by
investment portfolio or by class.) Shareholders of the Company are entitled to
one vote for each full share held (irrespective of class or portfolio) and
fractional votes for fractional shares held. Voting rights are not cumulative
and, accordingly, the holders of more than 50% of the aggregate shares of Common
Stock of the Company may elect all of the directors.
As of June 1, 1998, to the Company's knowledge, no person held of record or
beneficially 25% or more of the outstanding shares of all classes of the
Company.
- ----------------------------------------------
OTHER INFORMATION
REPORTS AND INQUIRIES
Shareholders of a Fund will receive unaudited semi-annual reports describing the
Fund's investment operations and annual financial statements audited by
independent accountants. Shareholder inquiries can be made by contacting the BEA
Funds at (800) 401-2230 or by writing to BEA Funds, P.O. Box 8500, Boston, MA
02266-8500.
PERFORMANCE INFORMATION
From time to time, each of the Funds may advertise its performance, including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the average
annual total return over one, five and ten year periods or, if such periods have
not yet elapsed, shorter periods corresponding to the life of a Fund. Such total
return quotations will be computed by finding the compounded average annual
total return for each time period that would equate the assumed initial
investment of $1,000 to the ending redeemable value, net of any redemption and
other fees, according to a required standardized calculation. The standard
calculation is required by the SEC to provide consistency and comparability in
investment
24
<PAGE>
company advertising. The Funds may also from time to time include in such
advertising an aggregate total return figure or a total return figure that is
not calculated according to the standardized formula in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, a Fund's total return or expense ratio may be compared with data
published by Lipper Analytical Services, Inc., CDA/Weisenberger Investment
Technologies, Inc., Mutual Fund Forecaster or Morningstar, Inc., or with the
performance of the Standard & Poor's 500 Stock Index, Standard & Poor's MidCap
400 Index, Consumer Price Index, Salomon Smith Barney 1-Month Treasury Bill
Index-TM-, Dow Jones Industrial Average, national publications such as MONEY,
FORBES, BARRON'S, THE WALL STREET JOURNAL or the NEW YORK TIMES or publications
of a local or regional nature, and other industry publications. For these
purposes, the performance of a Fund, as well as the performance published by
such services or experienced by such indices, will usually not reflect
redemption fees, the inclusion of which would reduce performance results. If a
Fund advertises non-standard computations, however, the Fund will disclose such
fees, and will also disclose that the performance data do not reflect such fees
and that inclusion of such fees would reduce the performance quoted.
25
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE COMPANY OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
<PAGE>
BEA ADVISOR &INSTITUTIONAL FUNDS
QUICK REFERENCE GUIDE
BEA ADVISOR &INSTITUTIONAL FUNDS
BEA Long-Short Market Neutral Fund
BEA Long-Short Equity Fund
WORLD WIDE WEB
Please visit our website at: www.beafunds.com.
FUND AND ACCOUNT INFORMATION
Shareholders and all interested investors may direct
their inquiries and requests for information to the
Funds' information line at 1-800-401-2230.
AUTOMATIC REINVESTMENT PROGRAM
Dividend and capital gain distributions are
automatically reinvested in shares of the same
Fund at the current net asset value.
EXCHANGE PRIVILEGES
Shareholders may sell fund shares and buy shares
of other BEA Funds by telephone or in
writing. Please refer to the Prospectus section
entitled "Exchange Privilege."
STATEMENTS AND REPORTS
As a shareholder you will receive the following:
- - Confirmation Statements -- after every transaction
that affects your account balance or account
registration
- - Account Statements -- quarterly
- - Financial Reports -- semi-annually
INVESTMENT ADVISER
BEA Associates
Tower 49
12 East 49th Street
New York, NY 10017
DISTRIBUTOR
Provident Distributors, Inc.
Four Falls Corporate Center 6th Floor
West Conshohocken, PA 19428
ADMINISTRATOR (INSTITUTIONAL CLASS)
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
CO-ADMINISTRATOR (ADVISOR CLASS)
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
CO-ADMINISTRATOR (ADVISOR CLASS)
BEA Associates
Tower 49
12 East 49th Street
New York, NY 10017
ADMINISTRATIVE SERVICES AGENT
(INSTITUTIONAL CLASS)
Provident Distributors, Inc.
Four Falls Corporate Center 6th Floor
West Conshohocken, PA 19428
CUSTODIAN
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
TRANSFER AGENT
State Street Bank and Trust Co.
225 Franklin Street
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
LEGAL COUNSEL
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107-3496
<PAGE>
BEA
ADVISOR AND INSTITUTIONAL FUNDS
BEA LONG-SHORT MARKET NEUTRAL FUND
BEA LONG-SHORT EQUITY FUND
(INVESTMENT PORTFOLIOS OF THE RBB FUND, INC.)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary
information pertaining to shares of the BEA Advisor and Institutional Classes
representing interests in two investment portfolios (the "Funds") of The RBB
Fund, Inc. (the "Company"): the BEA Long-Short Market Neutral Fund and the BEA
Long-Short Equity Fund (collectively, the "Funds"). This Statement of
Additional Information is not a prospectus, and should be read only in
conjunction with the Prospectus of the Company relating to the Funds, dated June
24, 1998 (the "Prospectus"). A copy of the Prospectus may be obtained from the
Fund's transfer agent by calling toll-free (800) 401-2230. This Statement of
Additional Information is dated June 24, 1998.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION IN
CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ITS DISTRIBUTOR. THE STATEMENT OF ADDITIONAL INFORMATION DOES
NOT CONSTITUTE AN OFFERING BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Prospectus
Page Page
---- ----
<S> <C> <C>
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 __
Common Investment Policies --
BEA Long-Short Market Neutral Fund and BEA Long-Short
Equity Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 __
Supplemental Investment Policies --
BEA Long-Short Equity Fund . . . . . . . . . . . . . . . . . . . 8 __
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . 10 __
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 __
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . 14 N/A
Investment Advisory and Servicing
Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . 19 __
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . 27 N/A
Purchase and Redemption Information. . . . . . . . . . . . . . . . 29 __
Valuation of Shares. . . . . . . . . . . . . . . . . . . . . . . . 29 __
Performance and Yield Information. . . . . . . . . . . . . . . . . 31 __
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 __
Additional Information Concerning the
Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . 41 __
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 45 N/A
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 N/A
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 N/A
</TABLE>
<PAGE>
GENERAL
The RBB Fund, Inc. (the "Company") is an open-end management
investment company currently operating or proposing to operate twenty-six
separate investment portfolios. The Company was organized as a Maryland
corporation on February 29, 1988.
Unless otherwise indicated, the following investment policies may be
changed by the Board of Directors without an affirmative vote of shareholders.
Capitalized terms used herein and not otherwise defined have the same meanings
as are given to such terms in the Prospectus.
COMMON INVESTMENT POLICIES -- BEA LONG-SHORT MARKET NEUTRAL FUND AND BEA
LONG-SHORT EQUITY FUND
The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of, and techniques used by the
Funds.
NON-DIVERSIFIED STATUS. Each Fund is classified as non-diversified
within the meaning of the Investment Company Act of 1940 (the "1940 Act"), which
means that each Fund is not limited by such Act in the proportion of its assets
that it may invest in securities of a single issuer. Each Fund's investments
will be limited, however, in order to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"). See "Taxes." To qualify, each Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of each
Fund's total assets will be invested in the securities of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of each Fund's total assets will be invested in the
securities of a single issuer and each Fund will not own more than 10% of the
outstanding voting securities of a single issuer. To the extent that each Fund
assumes large positions in the securities of a small number of issuers, each
Fund's return may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.
TEMPORARY INVESTMENTS. The short-term and medium-term debt securities
in which a Fund may invest for temporary defensive purposes consist of: (a)
obligations of the United States or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign banks denominated in any currency; (c) floating rate securities and
other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign corporations;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase securities
from a bank or recognized securities dealer and simultaneously commit to resell
the securities to the
-1-
<PAGE>
bank or dealer at an agreed-upon date and price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities
("repurchase agreements"). Such Fund would maintain custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or dealer
to pay the repurchase price on the date agreed to would be, in effect, secured
by such securities. If the value of such securities were less than the
repurchase price, plus interest, the other party to the agreement would be
required to provide additional collateral so that at all times the collateral is
at least equal to the repurchase price plus accrued interest. Default by or
bankruptcy of a seller would expose a Fund to possible loss because of averse
market action, expenses and/or delays in the connection with the disposition of
the underlying obligations. The financial institutions with which a Fund may
enter into repurchase agreements will be banks and non-bank dealers of U.S.
Government securities that are listed on the Federal Reserve Bank of New York's
list of reporting dealers, if such banks and non-bank dealers are deemed
creditworthy by the Fund's adviser. A Fund's adviser will continue to monitor
creditworthiness of the seller under a repurchase agreement, and will require
the seller to maintain during the term of the agreement the value of the
securities subject to the agreement to equal at least the repurchase price
(including accrued interest). In addition, the Fund's adviser will require that
the value of this collateral, after transaction costs (including loss of
interest) reasonably expected to be incurred on a default, be equal to or
greater than the repurchase price (including accrued premium) provided in the
repurchase agreement or the daily amortization of the difference between the
purchase price and the repurchase price specified in the repurchase agreement.
The Fund's adviser will mark-to-market daily the value of the securities. There
are no percentage limits on a Fund's ability to enter into repurchase
agreements. Repurchase agreements are considered to be loans by the Fund under
the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse
repurchase agreements with respect to portfolio securities for temporary
purposes (such as to obtain cash to meet redemption requests when the
liquidation of portfolio securities is deemed disadvantageous or inconvenient by
the Adviser). Reverse repurchase agreements involve the sale of securities held
by a Fund pursuant to such Fund's agreement to repurchase them at a mutually
agreed upon date, price and rate of interest. At the time a Fund enters into a
reverse repurchase agreement, it will establish and maintain a segregated
account with an approved custodian containing cash or liquid securities having a
value not less than the repurchase price (including accrued interest). The
assets contained in the segregated account will be marked-to-market daily and
additional assets will be placed in such account on any day in which the assets
fall below the repurchase price (plus accrued interest). A Fund's liquidity and
ability to manage its assets might be affected when it sets aside cash or
portfolio securities to cover such commitments. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale may decline below the price of the securities a Fund has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce a Fund's obligation to repurchase the securities, and a Fund's use of
the proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. The Funds do not presently intend to invest more
than 5% of net assets in reverse repurchase agreements.
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ILLIQUID SECURITIES. Each Fund does not presently intend to invest
more than 15% of its net assets in illiquid securities (including repurchase
agreements which have a maturity of longer than seven days), including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the securities. Such securities may include, among
other things, equity swaps, loan participations and assignments, options
purchased in the over-the-counter markets, repurchase agreements maturing in
more than seven days, structured notes and restricted securities other than Rule
144A securities that BEA has determined are liquid pursuant to guidelines
established by the Company's Board of Directors. Because of the absence of any
liquid trading market currently for these investments, a Fund may take longer to
liquidate these positions than would be the case for publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized on such sales could be less than those originally paid by a
Fund. Securities that have legal or contractual restrictions on resale but have
a readily available market are not considered illiquid for purposes of this
limitation. With respect to each Fund, repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
Mutual funds do not typically hold a significant amount of restricted
or other illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
If otherwise consistent with their investment objectives and policies,
the Funds may purchase securities that are not registered under the Securities
Act but which may be sold to "qualified institutional buyers" in accordance with
Rule 144A under the Securities Act. These securities will not be considered
illiquid so long as it is determined by the Adviser, under guidelines approved
by the Board of Directors, that an adequate trading market exists for the
securities. This investment practice could have the effect of increasing the
level of illiquidity in a Fund during any period that qualified institutional
buyers become uninterested in purchasing restricted securities.
The Adviser will monitor the liquidity of restricted securities in a
Fund under the supervision of the Board of Directors. In reaching liquidity
decisions, the Adviser may consider, among others, the following factors: (1)
the unregistered nature of the security; (2) the frequency of trades and quotes
for the security; (3) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (4) dealer undertakings
to make a market in the security and (5) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
Where there are no readily available market quotations, the security shall be
valued at fair value as determined in good faith by the Board of Directors of
the Company.
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SECURITIES OF UNSEASONED ISSUERS. Each Fund will not invest in
securities of unseasoned issuers, including equity securities of unseasoned
issuers which are not readily marketable, if the aggregate investment in such
securities would exceed 5% of such Fund's net assets. The term "unseasoned"
refers to issuers which, together with their predecessors, have been in
operation for less than three years.
LENDING OF PORTFOLIO SECURITIES. To increase income on its
investments, a Fund may lend its portfolio securities with an aggregate value of
up to 33 1/3% of its total assets (including the loan collateral) to
broker/dealers and other institutional investors. Each Fund may lend its
portfolio securities on a short or long term basis to broker-dealers or
institutional investors that the Adviser deems qualified, but only when the
borrower maintains, with a Fund's custodian, collateral either in cash or money
market instruments, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends, determined on a daily
basis and adjusted accordingly. Collateral for such loans may include cash,
securities of the U.S. Government or its agencies or instrumentalities or an
irrevocable letter of credit issued by a bank which is deemed creditworthy by
the Adviser. In determining whether to lend securities to a particular
broker-dealer or institutional investor, the Adviser will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. Such loans could involve risks
of delay in receiving additional collateral in the event the value of the
collateral decreased below the value of the securities loaned or of delay in
recovering the securities loaned or even the loss of rights in the collateral
should the borrower of the securities fail financially. Default by or
bankruptcy of a borrower would expose the Funds to possible loss because of
adverse market action, expenses and/or delays in connection with the disposition
of the underlying securities.
BORROWING. Each Fund may borrow up to 33 1/3 percent of its total
assets. The Adviser intends to borrow only for temporary or emergency purposes,
including to meet portfolio redemption requests so as to permit the orderly
disposition of portfolio securities, or to facilitate settlement transactions on
portfolio securities. Additional investments will not be made when borrowings
exceed 5% of a Fund's total assets. Although the principal of such borrowings
will be fixed, a Fund's assets may change in value during the time the borrowing
is outstanding. Each Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with a
suitable subcustodian, which may include the lender.
U.S. GOVERNMENT SECURITIES. The U.S. Government securities in which a
Fund may invest include direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds) and obligations issued by U.S. Government
agencies and instrumentalities, including securities that are supported by the
full faith and credit of the United States and securities that are supported
primarily or solely by the creditworthiness of the issuer (such as securities of
the Federal Home Loan Banks, the Student Loan Marketing Association and the
Tennessee Valley Authority).
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<PAGE>
OPTIONS AND FUTURES CONTRACTS. The Funds may write covered call
options, buy put options, buy call options and write put options, without
limitation except as noted in this paragraph. Such options may relate to
particular securities or to various indexes and may or may not be listed on a
national securities exchange and issued by the Options Clearing Corporation.
These Funds may also invest in futures contracts and options on futures
contracts (index futures contracts or interest rate futures contracts, as
applicable) for hedging purposes (including currency hedging) or for other
purposes so long as aggregate initial margins and premiums required for
non-hedging positions do not exceed 5% of its net assets, after taking into
account any unrealized profits and losses on any such contracts it has entered
into. See Appendix "B" for a description of futures contracts and options on
futures contracts and the risks thereof.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. Options on particular securities may be more
volatile than the underlying securities, and therefore, on a percentage basis,
an investment in the underlying securities themselves. A Fund will write call
options only if they are "covered." In the case of a call option on a security,
the option is "covered" if a Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, liquid assets
in such amount as are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if a Fund maintains with its custodian liquid
assets equal to the contract value. A call option is also covered if a Fund
holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian.
When a Fund purchases a put option, the premium paid by it is recorded
as an asset of the Fund. When a Fund writes an option, an amount equal to the
net premium (the premium less the commission) received by the Fund is included
in the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the mean between the last bid and asked
prices. If an option purchased by a Fund expires unexercised the Fund realizes
a loss equal to the premium paid. If the Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options
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<PAGE>
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded over-the-counter
or on a national securities exchange ("Exchange"), may be absent for reasons
which include the following: there may be insufficient trading interest in
certain options; restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities; unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; the facilities of an Exchange or the
Options Clearing Corporation may not at all times be adequate to handle current
trading volume; or one or more Exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
SHORT SALES. The BEA Long-Short Market Neutral Fund will seek, and
the BEA Long-Short Equity Fund may seek, to realize additional gains through
short sales. Short sales are transactions in which a Fund sells a security it
does not own, in anticipation of a decline in the value of that security
relative to the long positions held by the Fund. To complete such a
transaction, a Fund must borrow the security to make delivery to the buyer. A
Fund then is obligated to replace the security borrowed by purchasing it at the
market price at or prior to the time of replacement. The price at such time may
be more or less than the price at which the security was sold by a Fund. Until
the security is replaced, a Fund is required to repay the lender any dividends
or interest that accrue during the period of the loan. To borrow the security,
a Fund also may be required to pay a premium, which would increase the cost of
the security sold. The net proceeds of the short sale will be retained by the
broker (or by the Fund's custodian in a special custody account), to the extent
necessary to meet margin requirements, until the short position is closed out.
A Fund also will incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest or expenses a Fund may be required to pay in connection with
a short sale. An increase in the value of a security sold short by a Fund over
the price at which it was sold short will result in a loss to the Fund, and
there can be no assurance that the Fund will be able to close out the position
at any particular time or at an acceptable price.
Each Fund may engage in short sales if at the time of the short sale
it owns or has the right to obtain, at no additional cost, an equal amount of
the security being sold short. This investment technique is known as a short
sale "against the box."
SECTION 4(2) PAPER. "Section 4(2) paper" is commercial paper which is
issued in reliance on the "private placement" exemption from registration which
is afforded by Section
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4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as to
disposition under the federal securities laws and is generally sold to
institutional investors such as the Company which agree that they are purchasing
the paper for investment and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) paper normally
is resold to other institutional investors through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. See "Illiquid Securities" above. See Appendix "A" for a
list of commercial paper ratings.
SUPPLEMENTAL INVESTMENT POLICIES -
BEA LONG-SHORT EQUITY FUND
S&P 500 INDEX FUTURES AND RELATED OPTIONS. An S&P 500 Index Future
contract (an "Index Future") is a contract to buy or sell an integral number of
units of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500
Index") at a specified future date at a price agreed upon when the contract is
made. A unit is the value of the S&P 500 Index from time to time. Entering
into a contract to buy units is commonly referred to as buying or purchasing a
contract or holding a long position in the S&P 500 Index.
Index Futures can be traded through all major commodity brokers.
Currently, contracts are expected to expire on the tenth day of March, June,
September and December. The BEA Long-Short Equity Fund will ordinarily be able
to close open positions on the United States futures exchange on which Index
Futures are then traded at any time up to and including the expiration day.
In contrast to purchases of a common stock, no price is paid or
received by the BEA Long-Short Equity Fund upon the purchase of a futures
contract. Upon entering into a futures contract, the Fund will be required to
deposit with its custodian in a segregated account in the name of the futures
broker a specified amount of cash or securities. This is known by participants
in the market as "initial margin". The type of instruments that may be
deposited as initial margin, and the required amount of initial margin, are
determined by the futures exchange(s) on which the Index Futures are traded.
The nature of initial margin in futures transactions is different from that of
margin in securities transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments, called "variation margin", to and from the broker, will be
made on a daily basis as the price of the S&P 500 Index fluctuates, making the
position in the futures contract more or less valuable, a process known as
"marking to the market". For example, when the Fund has purchased an Index
Future and the price of the S&P 500 Index has risen, that position will have
increased in value and the Fund will receive from the broker a variation margin
payment equal to that increase in value. Conversely, when the Fund has
purchased an Index Future and the price of the S&P 500 Index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the broker. When the Fund terminates a position in
a futures contract, a final
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determination of variation margin is made, additional cash is paid by or to the
Fund, and the Fund realizes a gain or a loss.
The price of Index Futures may not correlate perfectly with movement
in the underlying index due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the S&P 500 Index and futures
markets. Secondly, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than does the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions.
Options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
The ability to establish and close out positions in options on futures
contracts will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such a market will develop. Although
the BEA Long-Short Equity Fund generally will purchase only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an exchange will exist for any particular option or
at any particular time. In the event no such market exists for particular
options, it might not be possible to effect closing transactions in such
options, with the result that the Fund would have to exercise the options in
order to realize any profit.
INVESTMENT LIMITATIONS
The Company has adopted the following fundamental investment
limitations which may not be changed without the affirmative vote of the holders
of a majority of each Fund's outstanding Shares (as defined in Section 2(a)(42)
of the 1940 Act). Each Fund may not:
1. Borrow money, except from banks, and only if after such borrowing
there is asset coverage of at least 300% for all borrowings of the Fund; or
mortgage, pledge or hypothecate any of its assets except in connection with any
such borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 33 1/3% of the value of the Fund's total
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<PAGE>
assets at the time of such borrowing, provided that: (a) short sales and related
borrowings of securities are not subject to this restriction; and, (b) for the
purposes of this restriction, collateral arrangements with respect to options,
short sales, stock index, interest rate, currency or other futures, options on
futures contracts, collateral arrangements with respect to initial and variation
margin and collateral arrangements with respect to swaps and other derivatives
are not deemed to be a pledge or other encumbrance of assets.
2. Issue any senior securities, except as permitted under the 1940
Act;
3. Act as an underwriter of securities within the meaning of the
Securities Act except insofar as it might be deemed to be an underwriter upon
disposition of certain portfolio securities acquired within the limitation on
purchases of restricted securities;
4. Purchase or sell real estate (including real estate limited
partnership interests), provided that a Fund may invest in securities secured by
real estate or interests therein or issued by companies that invest in real
estate or interests therein;
5. Purchase or sell commodities or commodity contracts, except that
a Fund may deal in forward foreign exchange transactions between currencies of
the different countries in which it may invest and purchase and sell stock index
and currency options, stock index futures, financial futures and currency
futures contracts and related options on such futures;
6. Make loans, except through loans of portfolio instruments and
repurchase agreements, provided that for purposes of this restriction the
acquisition of bonds, debentures or other debt instruments or interests therein
and investment in government obligations, Loan Participations and Assignments,
short-term commercial paper, certificates of deposit and bankers' acceptances
shall not be deemed to be the making of a loan; and
7. Purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued or guaranteed by the United States, any state, territory
or possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, and (ii)
repurchase agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
For purposes of Investment Limitation No. 1, collateral arrangements
with respect to, if applicable, the writing of options, futures contracts,
options on futures contracts, forward currency contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be a
pledge of assets and neither such arrangements nor the purchase or sale of
futures
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<PAGE>
or related options are deemed to be the issuance of a senior security for
purposes of Investment Limitation No. 2.
In addition to the fundamental investment limitations specified above,
a Fund may not:
1. Make investments for the purpose of exercising control or
management, but investments by a Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making of
investments for the purpose of exercising control or management;
2. Purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions, and except that a Fund may
make margin deposits in connection with its use of options, futures contracts,
options on futures contracts and forward contracts;
3. Purchase or sell interests in mineral leases, oil, gas or other
mineral exploration or development programs, except that a Fund may invest in
securities issued by companies that engage in oil, gas or other mineral
exploration or development activities; and
4. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Company, the Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
The policies set forth above are not fundamental and thus may be
changed by the Company's Board of Directors without a vote of the shareholders.
Except as required by the 1940 Act with respect to the borrowing of
money, if a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in market
values of portfolio securities or amount of total or net assets will not be
considered a violation of any of the foregoing restrictions.
Securities held by a Fund generally may not be purchased from, sold or
loaned to the Adviser or its affiliates or any of their directors, officers or
employees, acting as principal, unless pursuant to a rule or exemptive order
under the 1940 Act.
RISK FACTORS
FOREIGN SECURITIES. Investments in foreign securities are subject to
certain risks, discussed below.
Since the securities of foreign companies are frequently denominated
in foreign currencies, the Funds may be affected favorably or unfavorably by
changes in currency rates and
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<PAGE>
in exchange control regulations, and may incur costs in connection with
conversions between various currencies.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and they may have policies that are
not comparable to those of domestic companies, there may be less information
available about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Funds will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
Certain foreign governments levy withholding taxes on dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recoverable portion of foreign withholding taxes will
reduce the income received from the companies in which the Funds invest.
However, these foreign withholding taxes are not expected to have a significant
impact.
REPORTING STANDARDS. Most of the foreign securities held by the Funds
will not be registered with the SEC, nor will the issuers thereof be subject to
SEC or other U.S. reporting requirements. Accordingly, there will be less
publicly available information concerning foreign issuers of securities held by
the Fund than will be available concerning U.S. companies. Foreign companies,
and in particular, companies in emerging markets, are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
EXCHANGE RATE FLUCTUATIONS. Because foreign securities ordinarily
will be denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect a Fund's net asset value, the value of
interest and dividends earned, gains and losses realized on the sale of
securities and net investment income and capital gain, if any, to be distributed
to shareholders by a Fund. If the value of a foreign currency rises against the
U.S. dollar, the value of a Fund's assets denominated in that currency will
increase; conversely, if the value of a foreign currency declines against the
U.S. dollar, the value of a Fund's assets denominated in that currency will
decrease. The exchange rates between the U.S. dollar and other currencies are
determined by supply and demand in the currency exchange markets, international
balances of payments, government intervention, speculation and other economic
and political conditions.
OPERATING EXPENSES. The costs attributable to foreign investing that
a Fund must bear frequently are higher than those attributable to domestic
investing. For example, the cost of
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maintaining custody of foreign securities exceeds custodian costs for domestic
securities. Investment income on certain foreign securities in which a Fund may
invest may be subject to foreign withholding or other taxes that could reduce
the return on those securities. Tax treaties between the United States and
foreign countries however, may reduce or eliminate the amount of foreign tax to
which a Fund would be subject.
DIRECTORS AND OFFICERS
The directors and executive officers of the Company, their ages,
business addresses and principal occupations during the past five years are:
Position Principal Occupation
Name, Address and Age with the Company During Past Five Years
- --------------------- ---------------- ----------------------
Arnold M. Reichman - 49* Director Senior Managing Director,
466 Lexington Avenue Chief Operating
New York, NY 10017 Officer and Assistant
Secretary, Warburg Pincus
Asset Management, Inc.;
Director and Executive
Officer, Counsellors
Securities Inc;
Director/Trustee of various
investment companies advised
by Warburg Pincus Asset
Management, Inc.
Robert Sablowsky - 59** Director Senior Vice President,
10 Wall Street Fahnestock Co., Inc. (a
New York, NY 10005 registered broker-dealer);
prior to October 1996,
Executive Vice President of
Gruntal & Co., Inc., (a
registered broker-dealer).
Francis J. McKay - 62 Director Since 1963, Executive
7701 Burholme Avenue Vice President, Fox Chase
Philadelphia, PA 19111 Cancer Center (biomedical
research and medical care.)
Marvin E. Sternberg - 63 Director Since 1974, Chairman,
937 Mt. Pleasant Road Director and President,
Bryn Mawr, PA 19010 Moyco Industries, Inc.
(manufacturer of dental
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<PAGE>
Position Principal Occupation
Name, Address and Age with the Company During Past Five Years
- --------------------- ---------------- ----------------------
supplies and precision coated
abrasives); since 1968,
Director and President, Mart
MMM, Inc. (formerly
Montgomeryville Merchandise
Mart Inc.) and Mart PMM, Inc.
(formerly Pennsauken
Merchandise Mart, Inc.)
(Shopping Centers); and since
1975, Director and Executive
Vice President, Cellucap Mfg.
Co., Inc. (manufacturer of
disposable headwear).
Julian A. Brodsky - 64 Director Director and Vice Chairman
Comcast Corporation since 1969, Comcast
1234 Market Street Corporation (cable television
16th Floor and communications);
Philadelphia, PA 19107-3723 Director, Comcast Cablevision
of Philadelphia (cable
television and communications)
and Nextel (wireless
communications).
Donald van Roden - 73 Director and Self-employed businessman.
1200 Old Mill Lane Chairman of From February 1980 to
Wyomissing, PA 19610 the Board March 1987, Vice Chairman,
Smith Kline Beecham
Corporation (pharmaceuticals);
Director, AAA Mid-Atlantic
(auto service); Director,
Keystone Insurance Co.
Edward J. Roach - 73 President and Certified Public Accountant;
Suite 100 Treasurer Vice Chairman of the Board,
Bellevue Park Fox Chase Cancer Center;
Corporate Center Trustee Emeritus,
400 Bellevue Parkway Pennsylvania School for the
Wilmington, DE 19809 Deaf; Trustee Emeritus,
Immaculata College; President
or Vice President
-13-
<PAGE>
Position Principal Occupation
Name, Address and Age with the Company During Past Five Years
- --------------------- ---------------- ----------------------
and Treasurer of various
investment companies advised
by PNC Institutional
Management Corporation;
Director, the Bradford Funds,
Inc.
Morgan R. Jones - 58 Secretary Chairman of the law firm of
Drinker Biddle & Reath LLP Drinker Biddle & Reath LLP;
1345 Chestnut Street Director, Nobel Education
Philadelphia, PA 19107-3496 Dynamics, Inc.
- -------------------------
* Mr. Reichman is an "interested person" of the Company, as that term is
defined in the 1940 Act, by virtue of his positions with Counsellors Securities
Inc., a registered broker-dealer.
** Mr. Sablowsky is an "interested person" of the Company, as that term is
defined in the 1940 Act, by virtue of his position with Fahnestock Co., Inc., a
registered broker-dealer.
Messrs. McKay, Sternberg and Brodsky are members of the Audit
Committee of the Board of Directors. The Audit Committee, among other things,
reviews results of the annual audit and recommends to the Company the firm to be
selected as independent auditors.
Messrs. Reichman, McKay and van Roden are members of the Executive
Committee of the Board of Directors. The Executive Committee may generally
carry on and manage the business of the Company when the Board of Directors is
not in session.
Messrs. McKay, Sternberg, Brodsky and van Roden are members of the
Nominating Committee of the Board of Directors. The Nominating Committee
recommends to the Board all persons to be nominated as directors of the Company.
The Company pays directors who are not "affiliated persons" (as that
term is defined in the 1940 Act) of any investment adviser or sub-adviser of the
Company or the Distributor and Mr. Sablowsky who is considered to be an
affiliated person, $12,000 annually and $1,000 per meeting of the Board or any
committee thereof that is not held in conjunction with a Board meeting. In
addition, the Chairman of the Board receives an additional $5,000 per year for
his services in this capacity. Such Directors are reimbursed for any expenses
incurred in attending meetings of the Board of Directors or any committee
thereof. For the year ended August 31, 1997, each of the following members of
the Board of Directors received compensation from the Company in the following
amounts:
-14-
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS' COMPENSATION
Pension or
Retirement Total Compensation
Benefits Estimated from Registrant
Aggregate Accrued as Part Annual Benefits and Fund
Name of Person/ Compensation of Fund Upon Complex(1)
Position from Registrant Expenses Retirement Paid to Directors
- --------------- --------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Julian A. Brodsky, $16,000 N/A N/A $16,000
Director
Francis J. McKay, $19,000 N/A N/A $19,000
Director
Arnold M. Reichman, -0- N/A N/A -0-
Director
Robert Sablowsky, $ 8,000 N/A N/A $ 8,000
Director
Marvin E. Sternberg, $19,000 N/A N/A $19,000
Director
Donald van Roden, $24,000 N/A N/A $24,000
Director and Chairman
</TABLE>
- -------------------------
(1) A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and investor
services, or have a common investment adviser or have an investment adviser that
is an affiliated person of the investment adviser of any other investment
companies.
On October 24, 1990 the Company adopted, as a participating employer,
the Fund Office Retirement Profit-Sharing Plan and Trust Agreement, a retirement
plan for employees (currently Edward J. Roach is the Fund's sole employee),
pursuant to which the Company will contribute on a quarterly basis amounts equal
to 10% of the quarterly compensation of each eligible employee. By virtue of
the services performed by the Company's advisers, custodians, administrators and
distributor, the Company itself requires only one part-time employee. Drinker
Biddle & Reath LLP, of which Mr. Jones is a partner, receives legal fees as
counsel to the Company. No officer, director or employee of BEA or the
Distributor currently receives any compensation from the Company.
INVESTMENT ADVISORY AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENTS. BEA Associates (sometimes referred to as the
"Adviser") renders advisory and administrative services to each of the Funds
pursuant to Investment Advisory Agreements. Such advisory agreements are
hereinafter collectively referred to as the "Advisory Agreements."
-15-
<PAGE>
BEA Associates is an investment adviser managing global equity,
balanced fixed income and derivative securities accounts for private
individuals, as well as corporate pension and profit-sharing plans, state
pension funds, union funds, endowments and other charitable institutions. As of
December 31, 1997, BEA Associates managed approximately $34.2 billion in assets.
BEA is a wholly-owned subsidiary of Credit Suisse Group, a Swiss corporation.
BEA Associates is a registered investment advisor under the Investment Advisors
Act of 1940, as amended.
BEA currently acts as investment adviser for eleven other investment
companies registered under the 1940 Act. They are: BEA Strategic Global Income
Fund, Inc., BEA Income Fund, Inc., The Brazilian Equity Fund, Inc., The Chile
Fund, Inc., The Emerging Markets Infrastructure Fund, Inc., The Emerging Markets
Telecommunications Fund, Inc., The First Israel Fund, Inc., The Indonesia Fund,
Inc., The Latin America Equity Fund, Inc., The Latin America Investment Fund,
Inc., and The Portugal Fund, Inc. In addition, BEA acts as sub-adviser to
certain portfolios of twelve other registered investment companies: Frank
Russell Investment Company (Fixed Income III Fund and Multi-strategy Bond Fund),
Oppenheimer (LifeSpan Balanced Fund, LifeSpan Income Fund and LifeSpan Growth
Fund), Panorama (LifeSpan Balanced Account, LifeSpan Capital Appreciation
Account and LifeSpan Diversified Income Account), SEI Institutional Managed
Trust (High Yield Bond Fund), WNL Series Trust (BEA Growth and Income Fund),
Touchstone International Equity Fund and Touchstone Variable Annuity
International Equity Fund.
BEA Associates has sole investment discretion for the Funds and will
make all decisions affecting assets in the Funds under the supervision of the
Company's Board of Directors and in accordance with each Fund's stated policies.
BEA Associates will select investments for the Funds and will place purchase and
sale orders on behalf of the Funds.
The BEA Long-Short Market Neutral Fund pays BEA a basic management
fee, computed daily and payable monthly, at the annual rate of 1.50% of the
average net assets of the Fund. After the first year of operations, this basic
management fee may be increased or decreased by applying an adjustment formula
(the "Performance Adjustment"). The Performance Adjustment is calculated
monthly by comparing the Fund's investment performance to a Target (as defined
below) during the most recent twelve-month period. The "Target" is the
investment record of the Salomon Smith Barney 1-Month U.S. Treasury Bill
Index-TM- plus 5 percentage points. The Performance Adjustment is added to or
subtracted from the basic fee.
The Performance Adjustment may increase or decrease the basic fee in
five steps. The first step would occur if the Fund's performance during the
most recent 12-month period differed from that of the Target by more than one
but not more than two percentage points. In this event, the Performance
Adjustment would be 0.10%, and the annual rate of the total management fee would
be either 1.40% or 1.60%. The second step would occur if the Fund's performance
during the most recent 12-month period differed from that of the Target by more
than two but not more than three percentage points. In this event, the
Performance Adjustment would be 0.20%, and the annual rate of the total
management fee would be either 1.30% or
-16-
<PAGE>
1.70%. The third step would occur if the Fund's performance during the most
recent 12-month period differed from that of the Target by more than three but
not more than four percentage points. In this event, the Performance Adjustment
would be 0.30%, and the annual rate of the total management fee would be either
1.20% or 1.80%. The fourth step would occur if the Fund's performance during
the most recent 12-month period differed from that of the Target by more than
four but not more than five percentage points. In this event, the Performance
Adjustment would be 0.40%, and the annual rate of the total management fee would
be either 1.10% or 1.90%. The fifth step would occur if the Fund's performance
during the most recent 12-month period differed from that of the Target by five
percentage points or more. In this event, the Performance Adjustment would be
0.50%, and the annual rate of the total management fee would be either 1.00% or
2.00%. Thus:
<TABLE>
<CAPTION>
PERFORMANCE TOTAL MANAGEMENT
BASIC RATE ADJUSTMENT FEE RATE
<S> <C> <C> <C>
No adjustment 1.50% N/A 1.50%
First Step:
Performance Exceeds
Target by more than 1
but not more than 2
percentage points 1.50 .10% 1.60
Performance lags
Target by more than
1 but not more than 2
percentage points 1.50 (.10) 1.40
Second Step:
Performance exceeds
Target by more than 2
but not more than 3
percentage points 1.50 .20 1.70
Performance lags
Target by more than
2 but not more than 3
percentage points 1.50 (.20) 1.30
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE TOTAL MANAGEMENT
BASIC RATE ADJUSTMENT FEE RATE
<S> <C> <C> <C>
Third Step:
Performance exceeds
Target by more than 3
but not more than 4
percentage points 1.50 .30 1.80
Performance lags
Target by more than
3 but not more than 4
percentage points 1.50 (.30) 1.20
Fourth Step:
Performance exceeds
Target by more than
4 but not more than 5
percentage points 1.50 .40 1.90
Performance lags
Target by more than
4 but not more than 5
percentage points 1.50 (.40) 1.10
Fifth Step:
Performance exceeds
Target by more than
5 percentage points 1.50 .50 2.00
Performance lags
Target by more than 5
percentage points 1.50 (.50) 1.00
</TABLE>
The BEA Long-Short Equity Fund pays BEA a management fee, computed
daily and payable quarterly, at the annual rate of 0.10% of the average net
assets of the Fund.
As disclosed in the Prospectus, each of the Funds has agreed to pay
the Adviser a management fee at the annual percentage rate of the relevant
Fund's average daily net assets set forth in the Prospectus. The Adviser has
informed the Company that it will voluntarily waive some or all of its
management fees under the Advisory Agreements and, if necessary, will bear
certain expenses of each Fund until further notice so that each Fund's total
annual operating expenses (including the management fee but not including
nonrecurring account fees and extraordinary expenses) applicable to each class
will not exceed the percentage of each Fund's average daily net assets
attributable to that class as set forth in the Prospectus plus the Performance
Adjustment applicable to the BEA Long-Short Market Neutral Fund. The
-18-
<PAGE>
Performance Adjustment would be determined without regard to any waivers of the
basic management fee.
Each class of the Fund bears all of its own expenses not specifically
assumed by the Adviser. General expenses of the Company not readily
identifiable as belonging to a Fund of the Company are allocated among all
investment funds by or under the direction of the Company's Board of Directors
in such manner as the Board determines fair and equitable. The BEA Advisor and
Institutional Classes of the Funds pay their own administration fees, and may
pay a different share than the other classes of the Funds of other expenses
(excluding management and custodial fees) if those expenses are actually
incurred in a different amount by each Class or if it receives different
services.
Under the Advisory Agreements, BEA Associates will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Company
or a Fund in connection with the performance of the Advisory Agreements, and
shall be indemnified for any losses and expenses in connection with any claim
relating thereto, except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of BEA Associates in the performance of its duties
or reckless disregard by it of its obligations and duties under the Advisory
Agreements.
The Advisory Agreements are dated June 24, 1998. The Advisory
Agreements were approved by each Fund's initial shareholder. Each Advisory
Agreement is terminable by vote of the Company's Board of Directors or by the
holders of a majority of the outstanding voting securities of the relevant Fund,
at any time without penalty, on 60 days' written notice to BEA Associates. Each
of the Advisory Agreements may also be terminated by BEA Associates on 60 days'
written notice to the Company. Each of the Advisory Agreements terminates
automatically in the event of assignment thereof.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. Custodial Trust Company
("CTC") acts as the custodian for the Funds and also acts as the custodian for
the Funds' foreign securities pursuant to a Custodian Agreement (the "Custodian
Agreement"). Under the Custodian Agreement, CTC (a) maintains a separate
account or accounts in the name of each Fund, (b) holds and transfers Portfolio
securities on account of each Fund, (c) accepts receipts and makes disbursements
of money on behalf of each Fund, (d) collects and receives all income and other
payments and distributions on account of each Fund's portfolio securities, and
(e) makes periodic reports to the Company's Board of Directors concerning each
Fund's operations. CTC is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Company, provided CTC
remains responsible for the performance of all its duties under the Custodian
Agreement and holds the Company harmless from the negligent acts and omissions
of any sub-custodian. For its services to the Company under the Custodian
Agreement, CTC receives a fee which is calculated based upon each Fund's average
daily gross assets, exclusive of transaction charges and out-of-pocket expenses,
which are also charged to the Company.
State Street Bank and Trust Company ("State Street") serves as the
transfer agent for the Funds. It has delegated to Boston Financial Data
Services, Inc. ("BFDS"), a 50%- owned
-19-
<PAGE>
subsidiary, responsibility for most transfer agent servicing functions. State
Street serves as the transfer and dividend disbursing agent for the Funds
pursuant to a Transfer Agency Agreement, as supplemented (collectively, the
"Transfer Agency Agreement"), under which it (a) issues and redeems shares of
each of the Funds, (b) addresses and mails all communications by each Fund to
record owners of shares of each such Fund, including reports to shareholders,
dividend and distribution notices and proxy materials for its meetings of
shareholders, (c) maintains shareholder accounts and, if requested, sub-accounts
and (d) makes periodic reports to the Company's Board of Directors concerning
the operations of each Fund. For its services to the Company under the Transfer
Agency Agreement, State Street receives a fee on a per transaction basis.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENTS -- ADVISOR CLASS.
PFPC Inc. ("PFPC"), an indirect, wholly-owned subsidiary of PNC Bank Corp.,
serves as the administrator to the Advisor Class of the Funds pursuant to
Administration and Accounting Services Agreements, dated June 24, 1998 (the
"PFPC Administration and Accounting Services Agreements"). PFPC has agreed to
furnish statistical and research data, clerical, accounting and bookkeeping
services and certain other services with respect to the Advisor Shares of the
Funds.
The PFPC Administration and Accounting Services Agreements provide
that PFPC shall not be liable for any loss suffered by the Company or the Funds
in connection with the performance of services under the PFPC Administration and
Accounting Services Agreements, except a loss resulting from willful
misfeasance, gross negligence, or reckless disregard of its duties and
obligations under the PFPC Administration and Accounting Services Agreements.
In consideration for providing services pursuant to the PFPC Administration and
Accounting Services Agreements, PFPC receives a fee calculated at an annual rate
of .125% of average daily net assets of the Advisor Class of each Fund, with a
minimum annual fee of $75,000.
BEA serves as co-administrator to the Advisor Class of the Funds
pursuant to Co-Administration Agreements dated June 24, 1998 (the "BEA
Co-Administration Agreements"). BEA has agreed to provide shareholder liaison
services to the Advisor Class of the Funds including responding to shareholder
inquiries and providing information on shareholder accounts. The BEA
Co-Administration Agreements provide that BEA shall not be liable for any error
of judgment or mistake of law or any loss suffered by the Company or the Funds
in connection with the performance of the agreement, except a loss resulting
from willful misfeasance, bad faith or negligence, or reckless disregard of its
duties and obligations thereunder. In consideration for providing services
pursuant to the BEA Co-Administration Agreements, BEA receives a fee calculated
at an annual rate of .05% of average daily net assets of the Advisor Class of
the Funds for assets up to $125 million and .10% thereafter.
ADMINISTRATION AND ACCOUNTING SERVICES AND ADMINISTRATIVE SERVICES
AGREEMENTS -- INSTITUTIONAL CLASS. PFPC serves as the administrator to the BEA
Institutional Funds pursuant to Administration and Accounting Services
Agreements (the "Administration and Accounting Services Agreements") dated
June24, 1998. PFPC has agreed to furnish statistical and research data,
clerical, accounting, and bookkeeping services and certain other services with
-20-
<PAGE>
respect to the Institutional Shares of the Funds. PFPC has also agreed to
prepare and file various reports with the appropriate regulatory agencies, and
prepare materials required by the SEC or any state securities commission having
jurisdiction over the Funds.
The Administration and Accounting Services Agreements provide that
PFPC shall not be liable for any loss suffered by the Company in connection with
the performance of services under the Administration and Accounting Services
Agreements, except a loss resulting from willful misfeasance, gross negligence
or reckless disregard of its duties and obligations under the Administrative and
Accounting Services Agreement. In consideration for the services provided under
the Administration and Accounting Services Agreements, PFPC receives a fee
calculated at an annual rate of .125% of the average daily net assets of the
Institutional Class of each Fund.
Provident Distributors, Inc. ("PDI") provides certain administrative
services to the Institutional Class of each of the Funds that are not provided
by PFPC, pursuant to an Agreement dated May 29 , 1998 (the "Administrative
Services Agreement"). Such services are provided subject to the supervision and
direction of the Board of Directors of the Company.
The Administrative Services Agreement provides that PDI shall not be
liable for any error of judgment or mistake of law or any loss suffered by the
Funds in connection with the performance of services under the Agreement, except
a loss resulting from willful misfeasance, gross negligence or reckless
disregard of its duties and obligations thereunder.
As compensation for its services to the Institutional Class of the
Funds under the Administrative Services Agreement, PDI receives a monthly fee
for the previous month calculated at the rate of .15% of the average daily net
assets of the Institutional Class of each of the Funds.
DISTRIBUTION AND SHAREHOLDER SERVICING -- ADVISOR CLASS
The Funds have each entered into Distribution Agreements with
Provident Distributors, Inc. ("PDI") pursuant to their Distribution Plans (the
"12b-1 Plans") under Rule 12b-1 of the 1940 Act. In consideration for Services
(as defined below), the Distribution Agreements provide that the Funds will each
pay PDI a fee calculated at an annual rate of .25% of the respective average
daily net assets of the Advisor Shares of the Funds. Services performed by PDI
include (a) the sale of the Advisor Shares, as set forth in the 12b-1 Plans
("Selling Services"), (b) ongoing servicing and/or maintenance of the accounts
of shareholders of the Advisor Class of the Funds, as set forth in the 12b-1
Plans ("Shareholder Services"), and (c) sub-transfer agency services,
subaccounting services or administrative services, as set forth in the 12b-1
Plans ("Administrative Services" and collectively with Selling Services and
Administrative Services, "Services") including, without limitation, (i) payments
reflecting an allocation of overhead and other office expenses of PDI related to
providing Services; (ii) payments made to, and reimbursement of expenses of,
persons who provide support services in connection with the distribution of the
Advisor Shares including, but not limited to, office space and equipment,
telephone facilities, answering routine inquiries regarding the Funds, and
-21-
<PAGE>
providing any other shareholder Services; (iii) payments made to compensate
selected dealers or other authorized persons for providing any Services; (iv)
costs relating to the formulation and implementation of marketing and
promotional activities, including, but not limited to, direct mail promotions
and television, radio, newspaper, magazine and other mass media advertising, and
related travel and entertainment expenses; (v) costs of printing and
distributing prospectuses, statements of additional information and reports of
the Funds to prospective shareholders of the Funds; and (vi) costs involved in
obtaining whatever information, analyses and reports with respect to marketing
and promotional activities that PDI may, from time to time, deem advisable.
Mr. Reichman, a Director of the Fund, has an indirect financial
interest in the operation of the Plan by virtue of his positions with
Counsellors Securities, a registered broker-dealer. Mr. Sablowsky, a Director
of the Fund, has an indirect interest in the operation of the Plans by virtue of
his position with Fahnestock Co., Inc.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, BEA
Associates is responsible for the execution of portfolio transactions and the
allocation of brokerage transactions for the Funds. In executing portfolio
transactions, BEA Associates seeks to obtain the best net results for a Fund,
taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of the order, difficulty of
execution and operational facilities of the firm involved. While BEA Associates
generally seeks reasonably competitive commission rates, payment of the lowest
commission or spread is not necessarily consistent with obtaining the best
results in particular transactions.
Portfolio transactions for the Funds shall be effected on domestic
securities exchanges. In transactions for securities not actively traded on a
securities exchange, a Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting
as principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options. The Funds have no obligation
to deal with any broker in the execution of transactions in portfolio
securities. The Funds may use affiliates of Credit Suisse Group, BEA's parent
company, in connection with the purchase or sale of securities in accordance
with rules or exemptive orders adopted by the Securities and Exchange Commission
(the "SEC") when BEA believes that the charge for the transaction does not
exceed usual and customary levels.
In the case of over-the-counter issues, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup,
and the Fund will normally deal with the principal market makers unless it can
obtain better terms elsewhere.
-22-
<PAGE>
No Fund has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. BEA Associates may, consistent with
the interests of a Fund and subject to the approval of the Board of Directors,
select brokers on the basis of the research, statistical and pricing services
they provide to a Fund and other clients of BEA Associates. Information and
research received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by BEA Associates under its respective
contracts. A commission paid to such brokers may be higher than that which
another qualified broker would have charged for effecting the same transaction,
provided that BEA Associates, as applicable, determines in good faith that such
commission is reasonable in terms either of the transaction or the overall
responsibility of BEA Associates to a Fund and its other clients and that the
total commissions paid by a Fund will be reasonable in relation to the benefits
to a Fund over the long-term.
Corporate debt and U.S. Government securities are generally traded on
the over-the-counter market on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Funds will
primarily engage in transactions with these dealers or deal directly with the
issuer unless a better price or execution could be obtained by using a broker.
Prices paid to a dealer in debt securities will generally include a "spread,"
which is the difference between the prices at which the dealer is willing to
purchase and sell the specific security at the time, and includes the dealer's
normal profit.
BEA Associates may seek to obtain an undertaking from issuers of
commercial paper or dealers selling commercial paper to consider the repurchase
of such securities from a Fund prior to their maturity at their original cost
plus interest (sometimes adjusted to reflect the actual maturity of the
securities), if it believes that a Fund's anticipated need for liquidity makes
such action desirable. Any such repurchase prior to maturity reduces the
possibility that a Fund would incur a capital loss in liquidating commercial
paper (for which there is no established market), especially if interest rates
have risen since acquisition of the particular commercial paper.
Investment decisions for each Fund and for other investment accounts
managed by BEA Associates are made independently of each other in light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as
to amount according to a formula deemed equitable to each such account. While
in some cases this practice could have a detrimental effect upon the price or
value of the security as far as a Fund is concerned, in other cases it is
believed to be beneficial to a Fund. A Fund will not purchase securities during
the existence of any underwriting or selling group relating to such security of
which BEA Associates or any affiliated person (as defined in the 1940 Act)
thereof is a member except pursuant to procedures adopted by the Company's Board
of Directors pursuant to Rule 10f-3 under the 1940 Act.
In no instance will portfolio securities be purchased from or sold to
the Distributor or BEA Associates or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law.
-23-
<PAGE>
The Funds have the benefit of an exemptive order issued by the SEC
under the 1940 Act authorizing the Funds and other investment companies advised
by BEA to acquire jointly securities issued in private placements, subject to
the terms and conditions of the order.
PURCHASE AND REDEMPTION INFORMATION
The Company reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption of a Fund's shares by
making payment in whole or in part in securities chosen by the Company and
valued in the same way as they would be valued for purposes of computing a
Fund's net asset value. If payment is made in securities, a shareholder may
incur transaction costs in converting these securities into cash. Investors may
also be required to bear certain transaction costs associated with redemptions
in kind. The Company has elected, however, to be governed by Rule 18f-1 under
the 1940 Act so that a Fund is obligated to redeem its shares solely in cash up
to the lesser of $250,000 or 1% of its net asset value during any 90-day period
for any one shareholder of a Fund.
Under the 1940 Act, a Fund may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange, Inc. (the "NYSE") is closed (other than customary weekend
and holiday closings), or during which trading on said Exchange is restricted,
or during which (as determined by the SEC by rule or regulation) an emergency
exists as a result of which disposal or valuation of Fund securities is not
reasonably practicable, or for such other periods as the SEC may permit. (A Fund
may also suspend or postpone the recordation of the transfer of its shares upon
the occurrence of any of the foregoing conditions.)
VALUATION OF SHARES
The net asset values per share of each class of the Funds are
calculated separately from each other class as of the close of regular trading
of the NYSE on each Business Day. The net asset value per share, the value of
an individual share in a Fund, is computed by adding the value of the
proportionate interest of each class of a Fund in the Fund's securities, cash
and other assets, subtracting the actual and accrued liabilities of the class
and dividing the result by the number of outstanding shares of such class.
"Business Day" means each weekday when the NYSE is open. Currently, the NYSE is
closed on New Year's Day, Dr. Martin Luther King Jr., Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day and the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday. Although the Fund does not invest
directly in foreign securities, it invests in American Depository Receipts, the
value of which depends on the underlying foreign security. Securities which are
listed on stock exchanges, whether U.S. or foreign are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day, at
the mean of the bid and asked prices available prior to the valuation. Fund
securities primarily traded in foreign markets may be traded in such markets on
days which are
-24-
<PAGE>
not Business Days. Because net asset value per share of each Fund is determined
only on Business Days, the net asset value of shares of a Fund may be
significantly affected on days when an investor does not have access to the
Fund. If on any Business Day, a foreign securities exchange or foreign market
is closed, the securities traded on such exchange or in such market will be
valued at the last sale price reported on the previous business day of such
foreign exchange or market. In cases where securities are traded on more than
one exchange, the securities are generally valued on the exchange designated by
the Board of Directors or its delegates as the primary market. Securities
traded in the over-the-counter market and listed on the National Association of
Securities Dealers Automatic Quotation System ("NASDAQ") are valued at the last
trade price listed on the NASDAQ at the close of regular trading (generally 4:00
p.m. Eastern Time); securities listed on NASDAQ for which there were no sales on
that day and other over-the-counter securities are valued at the mean of the bid
and asked prices available prior to valuation. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Company's Board of Directors. The
amortized cost method of valuation may also be used with respect to debt
obligations with sixty days or less remaining to maturity. Any assets which are
denominated in a foreign currency are converted into U.S. dollars at the
prevailing market rates for purposes of calculating net asset value.
Foreign currency exchange rates are generally determined prior to the
close of the NYSE. Occasionally, events affecting the value of foreign
securities and such exchange rates occur between the time at which they are
determined and the close of the NYSE, which events will not be reflected in a
computation of the Fund's net asset value. If events materially affecting the
value of such securities or assets or currency exchange rates occurred during
such time period, the securities or assets would be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
The foreign currency exchange transactions of a Fund conducted on a spot basis
will be valued at the spot rate for purchasing or selling currency prevailing on
the foreign exchange market. Under normal market conditions this rate differs
from the prevailing exchange rate by an amount generally less than one-tenth of
one percent due to the costs of converting from one currency to another.
In determining the approximate market value of portfolio investments,
the Company may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried on the Company's books at their face value. Other assets, if any, are
valued at fair value as determined in good faith by the Company's Board of
Directors.
PERFORMANCE INFORMATION
TOTAL RETURN. Each Fund that advertises its "average annual total
return" computes such return separately for each class of shares by determining
the average annual
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compounded rate of return during specified periods that equates the initial
amount invested to the ending redeemable value of such investment according to
the following formula:
ERV l/n
T = [(-----) - 1]
P
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the l, 5 or 10 year (or other) periods at the end of
the applicable period (or a fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
Each Fund that advertises its "aggregate total return" computes such
returns separately for each class of shares by determining the aggregate
compounded rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - l]
P
The calculations are made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
The Funds may also from time to time include in such advertising an
aggregate total return figure or a total return figure that is not calculated
according to the formula set forth above in order to compare more accurately a
Fund's performance with other measures of investment return. For example, in
comparing a Fund's total return with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of the Salomon Smith Barney 1-Month
Treasury Bill Index,-TM- Standard & Poor's 500 Stock Index or the Dow Jones
Industrial Average, as appropriate, a Fund may calculate its aggregate and/or
average annual total return for the specified periods of time by assuming the
investment of $10,000 in Fund shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment
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date. The Funds do not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Funds will, however,
disclose the maximum sales charge and will also disclose that the performance
data do not reflect sales charges and that inclusion of sales charges would
reduce the performance quoted. Such alternative total return information will
be given no greater prominence in such advertising than the information
prescribed under SEC rules, and all advertisements containing performance data
will include a legend disclosing that such performance data represent past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
TAXES
GENERAL TAX CONSEQUENCES TO THE COMPANY AND ITS SHAREHOLDERS. The
following is only a summary of certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the
Company's Prospectus. No attempt is made to present a detailed explanation of
the tax treatment of the Funds or their shareholders, and the discussion in this
Statement of Additional Information and in the Prospectus is not intended as a
substitute for careful tax planning. Investors are urged to consult their tax
advisers with specific reference to their own tax situation.
Each Fund has elected to be taxed as a regulated investment company
under Part I of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, each Fund is exempt from
federal income tax on its net investment income and realized capital gains which
it distributes to shareholders, provided that it (a) distributes an amount equal
to the sum of (i) at least 90% of its investment company taxable income (net
taxable investment income and the excess of net short-term capital gain over net
long-term capital loss, if any, for the year) and (ii) at least 90% of its net
tax-exempt interest income, if any, for the year (the "Distribution
Requirement"), and (b) satisfies certain other requirements of the Code that are
described below. Distributions of investment company taxable income and net
tax-exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement. The Distribution Requirement for any year
may be waived if a regulated investment company establishes to the satisfaction
of the Internal Revenue Service that it is unable to satisfy the Distribution
Requirement by reason of distributions previously made for the purpose of
avoiding liability for federal excise tax (discussed below).
In addition to satisfaction of the Distribution Requirement, each Fund
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies, or from other income
derived with respect to its business of investing in such stock, securities, or
currencies (the "Income Requirement").
Future Treasury regulations may provide that currency gains that are
not "directly related" to a Fund's principal business of investing in stock or
securities (or in options or futures
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with respect to stock or securities) will not satisfy the Income Requirement.
Income derived by a regulated investment company from a partnership or trust
(including a foreign entity that is classified as a partnership or trust for
U.S. federal income tax purposes) will satisfy the Income Requirement only to
the extent such income is attributable to items of income of the partnership or
trust that would satisfy the Income Requirement if they were realized by a
regulated investment company in the same manner as realized by the partnership
or trust.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of each Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer), and no more than 25% of
the value of each Fund's total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Fund
controls and which are engaged in the same or similar trades or businesses (the
"Asset Diversification Requirement").
The Internal Revenue Service has taken the position, in informal
rulings issued to other taxpayers, that the issuer of a repurchase agreement is
the bank or dealer from which securities are purchased. A Fund will not enter
into repurchase agreements with any one bank or dealer if entering into such
agreements would, under the informal position expressed by the Internal Revenue
Service, cause it to fail to satisfy the Asset Diversification Requirement.
Distributions of investment company taxable income will be taxable
(subject to the possible allowance of the dividend received deduction described
below) to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in shares. Shareholders
receiving any distribution from the Company in the form of additional shares
will be treated as receiving a taxable distribution in an amount equal to the
fair market value of the shares received, determined as of the reinvestment
date.
Each Fund intends to distribute to shareholders its excess of net
long-term capital gain over net short-term capital loss ("net capital gain"), if
any, for each taxable year. Such gain is distributed as a capital gain dividend
and is taxable to shareholders as long-term capital gain (20% or 28%, as
applicable), regardless of the length of time the shareholder has held his
shares, whether such gain was recognized by the Fund prior to the date on which
a shareholder acquired shares of the Fund and whether the distribution was paid
in cash or reinvested in shares. The aggregate amount of distributions
designated by any Fund as capital gain dividends may not exceed the net capital
gain of such Fund for any taxable year, determined by excluding any net
long-term capital loss attributable to transactions occurring after October 31
of such year and by treating any such loss as if it arose on the first day of
the following taxable year. Such distributions will be designated as capital
gain dividends in a written notice mailed by the Company to shareholders not
later than 60 days after the close of each Fund's respective taxable year.
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In the case of corporate shareholders, distributions (other than
capital gain dividends) of a Fund for any taxable year will qualify for the 70%
dividends received deduction, only to the extent of the gross amount of
"qualifying dividends" received by such Fund for the year. Generally, a
dividend will be treated as a "qualifying dividend" only if it has been received
from a domestic corporation. However, if a Fund owns at least 10 percent of the
stock (by vote and value) of certain foreign corporations with U.S. source
income, then a portion of the dividends paid by such foreign corporations may
constitute "qualifying dividends." A dividend received by a taxpayer will not
be treated as a "qualifying dividend" if (1) it has been received with respect
to any share of stock that the taxpayer has held for 45 days (90 days in the
case of certain preferred stock) or less (excluding any day more than 45 days
(or 90 days in the case of certain preferred stock) after the date on which the
stock becomes ex-dividend), or (2) to the extent that the taxpayer is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property. The Company
will designate the portion, if any, of the distribution made by a Fund that
qualifies for the dividends received deduction in a written notice mailed by the
Company to shareholders not later than 60 days after the close of the Fund's
taxable year.
Investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent any capital gain dividends have been paid
with respect to such shares.
Corporate taxpayers may be liable for alternative minimum tax, which
is imposed at the rate of 20% of "alternative minimum taxable income" (less, in
the case of corporate shareholders with "alternative minimum taxable income" of
less than $310,000, the applicable "exemption amount"), in lieu of the regular
corporate income tax. "Alternative minimum taxable income," is equal to
"taxable income", (as determined for corporate income regular tax purposes) with
certain adjustments. Although corporate taxpayers in determining "alternative
minimum taxable income" are allowed to exclude exempt interest dividends (other
than exempt interest dividends derived from certain private activity bonds ("AMT
Preference Dividends"), as explained in the Prospectus) and to utilize the 70%
dividends received deduction at the first level of computation, the Code
requires (as a second computational step) that "alternative minimum taxable
income" be increased by 75% of the excess of "adjusted current earnings" over
other "alternative minimum taxable income."
Corporate shareholders will have to take into account (1) all exempt
interest dividends, if any, and (2) the full amount of all dividends from a Fund
that are treated as "qualifying dividends" for purposes of the dividends
received deduction in determining their "adjusted current earnings." As much as
75% of any exempt interest dividend and 82.5% of any "qualifying dividend"
received by a corporate shareholder could, as a consequence, be subject to
alternative minimum tax. Exempt interest dividends received by such a corporate
shareholder may accordingly be subject to alternative minimum tax at an
effective rate of 15%.
"Constructive sale" provisions apply to activities by a Fund which
lock in gain on an "appreciated financial position." Generally, a "position" is
defined to include stock, a debt instrument, or partnership interest, or an
interest in any of the foregoing, including through a
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short sale, a swap contract, or a future or forward contract. The entry into a
short sale, a swap contract or a future or forward contract relating to an
appreciated direct position in any stock or debt instrument, or the acquisition
of stock or debt instrument at a time when the Fund occupies an offsetting
(short) appreciated position in the stock or debt instrument, is treated as a
"constructive sale" that gives rise to the immediate recognition of gain (but
not loss). The application of these rules may cause a Fund to recognize taxable
income from these offsetting transactions in excess of the cash generated by
such activities.
If for any taxable year any Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions will be taxable as ordinary dividends to the extent of such Fund's
current and accumulated earnings and profits. Such distributions will be
eligible for the dividends received deduction in the case of corporate
shareholders. Investors should be aware that any loss realized on a sale of
shares of a Fund will be disallowed to the extent an investor repurchases shares
of the same Fund within a period of 61 days (beginning 30 days before and ending
30 days after the day of disposition of the shares). Dividends paid by a Fund
in the form of shares within the 61-day period would be treated as a purchase
for this purpose.
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that do not distribute with respect to each calendar year
an amount equal to 98% of their ordinary income for the calendar year plus 98%
of their capital gain net income for the one-year period ending on October 31 of
such calendar year. The balance of such income must be distributed during the
next calendar year. For the foregoing purposes, a company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year. Because each Fund intends to distribute all of
its taxable income currently, no Fund anticipates incurring any liability for
this excise tax. However, investors should note that a Fund may in certain
circumstances be required to liquidate investments in order to make sufficient
distributions to avoid excise tax liability.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of dividends paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for prior
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the Company that he is not subject to backup
withholding or that he is an "exempt recipient."
Transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character (i.e., ordinary or capital) of gains or losses
realized by a Fund, accelerate the recognition of income by a Fund and defer a
Fund's losses. Exchange control regulations may restrict repatriations of
investment income and capital or of the proceeds of sales of securities by
investors such as the Funds. In addition, certain investments (such as zero
coupon securities and shares of so-called "passive foreign investment companies"
or "PFICs") may cause a Fund to recognize income without the
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receipt of cash. Each of these circumstances, whether separately or in
combination, may limit a Fund's ability to pay sufficient dividends and to make
sufficient distributions to satisfy the Subchapter M and excise tax
distributions requirements.
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each Fund
may be subject to the tax laws of such states or localities.
Certain states exempt from state income taxation dividends paid by a
regulated investment company that are derived from interest on U.S. Government
obligations. Each Fund will accordingly inform its shareholders annually of the
percentage, if any, of its ordinary dividends that is derived from interest on
U.S. Government obligations. Shareholders should consult with their tax
advisers as to the availability and extent of any applicable state income tax
exemption.
SPECIAL TAX CONSIDERATIONS. The following discussion relates to the
particular federal income tax consequences of the investment policies of the
Funds. The ability of the Funds to engage in options, short sale and futures
activities will be somewhat limited by the requirements for their continued
qualification as regulated investment companies under the Code, in particular
the Distribution Requirement and the Asset Diversification Requirement.
STRADDLES. The options transactions that the Funds enter into may
result in "straddles" for federal income tax purposes. The straddle rules of
the Code may affect the character of gains and losses realized by the Funds. In
addition, losses realized by the Funds on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken into account
in calculating the investment company taxable income and net capital gain of the
Funds for the taxable year in which such losses are realized. Losses realized
prior to October 31 of any year may be similarly deferred under the straddle
rules in determining the "required distribution" that the Funds must make in
order to avoid federal excise tax. Furthermore, in determining their investment
company taxable income and ordinary income, the Funds may be required to
capitalize, rather than deduct currently, any interest expense on indebtedness
incurred or continued to purchase or carry any positions that are part of a
straddle. The tax consequences to the Funds of holding straddle positions may
be further affected by various elections provided under the Code and Treasury
regulations, but at the present time the Funds are uncertain which (if any) of
these elections they will make.
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Because only a few regulations implementing the straddle rules have
been promulgated by the U.S. Treasury, the tax consequences to the Funds of
engaging in options transactions are not entirely clear. Nevertheless, it is
evident that application of the straddle rules may substantially increase or
decrease the amount which must be distributed to shareholders in satisfaction of
the Distribution Requirement (or to avoid federal excise tax liability) for any
taxable year in comparison to a fund that did not engage in options
transactions.
OPTIONS AND SECTION 1256 CONTRACTS. The writer of a covered put or
call option generally does not recognize income upon receipt of the option
premium. If the option expires unexercised or is closed on an exchange, the
writer generally recognizes short-term capital gain. If the option is
exercised, the premium is included in the consideration received by the writer
in determining the capital gain or loss recognized in the resultant sale.
However, certain options transactions that the Funds enter into, as well as
futures transactions and transactions in forward foreign currency contracts that
are traded in the interbank market entered into by the Funds, will be subject to
special tax treatment as "Section 1256 contracts." Section 1256 contracts are
treated as if they are sold for their fair market value on the last business day
of the taxable year (i.e., marked-to-market), regardless of whether a taxpayer's
obligations (or rights) under such contracts have terminated (by delivery,
exercise, entering into a closing transaction or otherwise) as of such date.
Any gain or loss recognized as a consequence of the year-end marking-to-market
of Section 1256 contracts is combined (after application of the straddle rules
that are described above) with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. The net amount of such gain or loss for the entire taxable year is
generally treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, except in the case of marked-to-market forward foreign
currency contracts for which such gain or loss is treated as ordinary income or
loss. Such short-term capital gain (and, in the case of marked-to-market
forward foreign currency contracts, such ordinary income) would be included in
determining the investment company taxable income of the relevant Fund for
purposes of the Distribution Requirement, even if it were wholly attributable to
the year-end marking-to-market of Section 1256 contracts that the relevant Fund
continued to hold. Investors should also note that Section 1256 contracts will
be treated as having been sold on October 31 in calculating the "required
distribution" that a Fund must make to avoid federal excise tax liability.
Each of the Funds may elect not to have the year-end mark-to-market
rule apply to Section 1256 contracts that are part of a "mixed straddle" with
other investments of such Fund that are not Section 1256 contracts (the "Mixed
Straddle Election").
FOREIGN CURRENCY TRANSACTIONS. In general, gains from "foreign
currencies" and from foreign currency options, foreign currency futures and
forward foreign exchange contracts relating to investments in stock, securities
or foreign currencies will be qualifying income for purposes of determining
whether the Fund qualifies as a RIC. It is currently unclear, however, who will
be treated as the issuer of a foreign currency instrument or how foreign
currency options, futures or forward foreign currency contracts will be valued
for purposes of the Asset Diversification Requirement. A Fund may request a
private letter ruling from the Internal Revenue Service for guidance on some or
all of these issues.
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Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional currency
(I.E., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options will be treated as ordinary income or loss. In
certain circumstances where the transaction is not undertaken as part of a
straddle, a Fund may elect capital gain or loss treatment for such transactions.
Alternatively, a Fund may elect ordinary income or loss treatment for
transactions in futures contracts and options on foreign currency that would
otherwise produce capital gain or loss. In general, gains or losses from a
foreign currency transaction subject to Code Section 988 will increase or
decrease the amount of the Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. Additionally, if losses
from a foreign currency transaction subject to Code Section 988 exceed other
investment company taxable income during a taxable year, a Fund will not be able
to make any ordinary dividend distributions, and any distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing each shareholder's
basis in his Shares.
PASSIVE FOREIGN INVESTMENT COMPANIES. If a Fund acquires shares in
certain foreign investment entities, called "passive foreign investment
companies" ("PFIC"), such Fund may be subject to "deferred" federal income tax
on a portion of any "excess distribution" received with respect to such shares
or on a portion of any gain recognized upon a disposition of such shares,
notwithstanding the distribution of such income to the shareholders of such
Fund. Additional charges in the nature of interest may also be imposed on a
Fund in respect of such deferred taxes. However, in lieu of sustaining the
foregoing tax consequences, a Fund may elect to have its investment in any PFIC
taxed as an investment in a "qualified electing fund" ("QEF"). A Fund making a
QEF election would be required to include in its income each year a ratable
portion, whether or not distributed, of the ordinary earnings and net capital
gain of the QEF. Any such QEF inclusions would have to be taken into account by
a Fund for purposes of satisfying the Distribution Requirement and the excise
tax distribution requirement.
The Code permits a Fund to elect (in lieu of paying deferred tax or
making a QEF election) to mark-to-market annually any PFIC shares that it owns
and to include any gains (but not losses) that it is deemed to realize as
ordinary income. A Fund generally is not subject to deferred federal income tax
on any gains that it is deemed to realize as a consequence of making a
mark-to-market election, but such gains are taken into account by the Fund for
purposes of satisfying the Distribution Requirement and the excise tax
distribution requirement.
ASSET DIVERSIFICATION REQUIREMENT. For purposes of the Asset
Diversification Requirement, the issuer of a call option on a security
(including an option written on an exchange) will be deemed to be the issuer of
the underlying security. The Internal Revenue Service has informally ruled,
however, that a call option that is written by a fund need not be counted for
purposes of the Asset Diversification Requirement where the fund holds the
underlying security. However, the Internal Revenue Service has also informally
ruled that a put option written by a fund must be treated as a separate asset
and its value measured by "the value
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of the underlying security" for purposes of the Asset Diversification
Requirement, regardless (apparently) of whether it is "covered" under the rules
of the exchange. The Internal Revenue Service has not explained whether in
valuing a written put option in this manner a fund should use the current value
of the underlying security (its prospective future investment); the cash
consideration that must be paid by the fund if the put option is exercised (its
liability); or some other measure that would take into account the fund's
unrealized profit or loss in writing the option. Under the Code, a fund may not
rely on informal rulings of the Internal Revenue Service issued to other
taxpayers. Consequently, a Fund may find it necessary to seek a ruling from the
Internal Revenue Service on this issue or to curtail its writing of options in
order to stay within the limits of the Asset Diversification Requirement.
ADDITIONAL INFORMATION CONCERNING THE COMPANY SHARES
The Company has authorized capital of thirty billion shares of Common
Stock, $.001 par value per share, of which 14.928 billion shares are currently
classified as follows: 100 million shares are classified as Class A Common
Stock, 100 million shares are classified as Class B Common Stock, 100 million
shares are classified as Class C Common Stock, 100 million shares are classified
as Class D Common Stock, 500 million shares are classified as Class E Common
Stock (Money), 500 million shares are classified as Class F Common Stock
(Municipal Money), 500 million shares are classified as Class G Common Stock
(Money), 500 million shares are classified as Class H Common Stock (Municipal
Money), 1 billion shares are classified as Class I Common Stock (Money), 500
million shares are classified as Class J Common Stock (Municipal Money), 500
million shares are classified as Class K Common Stock (Government Money), 1,500
million shares are classified as Class L Common Stock (Money), 500 million
shares are classified as Class M Common Stock (Municipal Money), 500 million
shares are classified as Class N Common Stock (Government Money), 500 million
shares are classified as Class O Common Stock (N.Y. Money), 100 million shares
are classified as Class P Common Stock (Government), 100 million shares are
classified as Class Q Common Stock, 500 million shares are classified as Class R
Common Stock (Municipal Money), 500 million shares are classified as Class S
Common Stock (Government Money), 500 million shares are classified as Class T
Common Stock (International), 500 million shares are classified as Class U
Common Stock (High Yield), 500 million shares are classified as Class V Common
Stock (Emerging), 100 million shares are classified as Class W Common Stock, 50
million shares are classified as Class X Common Stock (U.S. Core Equity), 50
million shares are classified as Class Y Common Stock (U.S. Core Fixed Income),
50 million shares are classified as Class Z Common Stock (Strategic Global Fixed
Income), 50 million shares are classified as Class AA Common Stock (Municipal
Bond), 50 million shares are classified as Class BB Common Stock (BEA Balanced),
50 million shares are classified as Class CC Common Stock (Short Duration), 100
million shares are classified as Class DD Common Stock, 100 million shares are
classified as Class EE Common Stock, 50 million shares are classified as Class
FF Common Stock (n/i Numeric Investors Micro Cap), 50 million shares are
classified as Class GG Common Stock (n/i Numeric Investors Growth), 50 million
shares are classified as Class HH Common Stock (n/i Numeric Investors Growth &
Value), 100 million shares are classified as Class II Common Stock (BEA Investor
International), 100 million shares are classified as Class JJ Common Stock (BEA
Investor
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Emerging), 100 million shares are classified as Class KK Common Stock (BEA
Investor High Yield), 100 million shares are classified as Class LL Common Stock
(BEA Investor Global Telecom), 100 million shares are classified as Class MM
Common Stock (BEA Advisor International), 100 million shares are classified as
Class NN Common Stock (BEA Advisor Emerging), 100 million shares are classified
as Class OO Common Stock (BEA Advisor High Yield), 100 million shares are
classified as Class PP Common Stock (BEA Advisor Global Telecom), 100 million
shares are classified as Class QQ Common Stock (Boston Partners Institutional
Large Cap), 100 million shares are classified as Class RR Common Stock (Boston
Partners Investor Large Cap), 100 million shares are classified as Class SS
Common Stock (Boston Partners Advisor Large Cap), 100 million shares are
classified as Class TT Common Stock (Boston Partners Investor Mid Cap), 100
million shares are classified as Class UU Common Stock (Boston Partners
Institutional Mid Cap), 100 million shares are classified as Class VV Common
Stock (Boston Partners Institutional Bond), 100 million shares are classified as
Class WW Common Stock (Boston Partners Investor Bond), 50 million are classified
as Class XX Common Stock (n/i Numeric Investors Larger Cap Value), 100 million
shares are classified as Class YY Common Stock (Schneider Capital Management
Value Fund), 100 million shares are classified as Class ZZ Common Stock (BEA
Institutional Long-Short Market Neutral Fund), 100 million shares are classified
as Class AAA Common Stock (BEA Advisor Long-Short Market Neutral Fund), 100
million shares are classified as Class BBB Common Stock (BEA Institutional
Long-Short Equity Fund), 100 million shares are classified as Class CCC Common
Stock (BEA Advisor Long-Short Equity Fund), 700 million shares are classified as
Class Janney Money Common Stock (Money), 200 million shares are classified as
Class Janney Municipal Money Common Stock (Municipal Money), 500 million shares
are classified as Class Janney Government Obligations Money Common Stock
(Government Money), 100 million shares are classified as Class Janney N.Y.
Municipal Money Common Stock (N.Y. Money), 1 million shares are classified as
Class Beta 1 Common Stock (Money), 1 million shares are classified as Class Beta
2 Common Stock (Municipal Money), 1 million shares are classified as Class Beta
3 Common Stock (Government Money), 1 million shares are classified as Class Beta
4 Common Stock (N.Y. Money), 1 million shares are classified as Gamma 1 Common
Stock (Money), 1 million shares are classified as Gamma 2 Common Stock
(Municipal Money), 1 million shares are classified as Gamma 3 Common Stock
(Government Money), 1 million shares are classified as Gamma 4 Common Stock
(N.Y. Money), 1 million shares are classified as Delta 1 Common Stock (Money), 1
million shares are classified as Delta 2 Common Stock (Municipal Money), 1
million shares are classified as Delta 3 Common Stock (Government Money), 1
million shares are classified as Delta 4 Common Stock (N.Y. Money), 1 million
shares are classified as Epsilon 1 Common Stock (Money), 1 million shares are
classified as Epsilon 2 Common Stock (Municipal Money), 1 million shares are
classified as Epsilon 3 Common Stock (Government Money), 1 million shares are
classified as Epsilon 4 Common Stock (N.Y. Money), 1 million shares are
classified as Zeta 1 Common Stock (Money), 1 million shares are classified as
Zeta 2 Common Stock (Municipal Money), 1 million shares are classified as Zeta 3
Common Stock (Government Money), 1 million shares are classified as Zeta 4
Common Stock (N.Y. Money), 1 million shares are classified as Eta 1 Common Stock
(Money), 1 million shares are classified as Eta 2 Common Stock (Municipal
Money), 1 million shares are classified as Eta 3 Common Stock (Government
Money), 1 million shares are classified as Eta 4 Common Stock (N.Y. Money), 1
million shares are classified as Theta 1 Common Stock (Money), 1 million shares
are classified
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<PAGE>
as Theta 2 Common Stock (Municipal Money), 1 million shares are classified as
Theta 3 Common Stock (Government Money), and 1 million shares are classified
as Theta 4 Common Stock (N.Y. Money). Shares of the Class T, U, V, X, Y, Z,
AA, BB and CC Common Stock constituted the BEA Institutional classes. Under
the Company's charter, the Board of Directors has the power to classify or
reclassify any unissued shares of Common Stock from time to time.
The classes of Common Stock have been grouped into fifteen separate
"families:" the Cash Preservation Family, the Sansom Street Family, the Bedford
Family, the BEA Family, the Janney Montgomery Scott Money Family, the n/i
Numeric Investors Family, the Boston Partners Family, the Schneider Capital
Management Family, the Beta Family, the Gamma Family, the Delta Family, the
Epsilon Family, the Zeta Family, the Eta Family and the Theta Family. The Cash
Preservation Family represents interests in the Money Market and Municipal Money
Market Portfolios; the Sansom Street Family represents interests in the Money
Market, Municipal Money Market and Government Obligations Money Market
Portfolios; the Bedford Family represents interests in the Money Market,
Municipal Money Market, Government Obligations Money Market and New York
Municipal Money Market Portfolios; the BEA Family represents interests in twelve
non-money market funds; the Janney Montgomery Scott Family and the Beta, Gamma,
Delta, Epsilon, Zeta, Eta and Theta Families represent interests in the Money
Market, Municipal Money Market, Government Obligations Money Market and New York
Municipal Money Market Funds. The n/i Numeric Investors Family represents
interests in four non-money market funds. The Boston Partners Family represents
interests in three non-money market funds, and the Schneider Capital Management
Family represents interests in one non-money market fund.
The Company does not currently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Company's amended By-Laws provide that shareholders collectively owning at least
ten percent of the outstanding shares of all classes of Common Stock of the
Company have the right to call for a meeting of shareholders to consider the
removal of one or more directors. To the extent required by law, the Company
will assist in shareholder communication in such matters.
As stated in the Prospectus, holders of shares of each class of the
Company will vote in the aggregate and not by class on all matters, except where
otherwise required by law. Further, shareholders of the Company will vote in
the aggregate and not by portfolio except as otherwise required by law or when
the Board of Directors determines that the matter to be voted upon affects only
the interests of the shareholders of a particular portfolio. Rule 18f-2 under
the Investment Company Act provides that any matter required to be submitted by
the provisions of such Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the
Company shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each portfolio
affected by the matter. Rule 18f-2 further provides that a portfolio shall be
deemed to be affected by a matter unless it is clear that the interests of each
portfolio in the matter are identical or that the matter does not affect any
interest of the Fund. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to a portfolio only if approved by the holders of a
majority of
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<PAGE>
the outstanding voting securities of such portfolio. However, the Rule also
provides that the ratification of the selection of independent public
accountants and the election of directors are not subject to the separate voting
requirements and may be effectively acted upon by shareholders of an investment
company voting without regard to portfolio.
Notwithstanding any provision of Maryland law requiring a greater vote
of shares of the Company's common stock (or of any class voting as a class) in
connection with any corporate action, unless otherwise provided by law, (for
example by Rule 18f-2 discussed above) or by the Company's Articles of
Incorporation, the Company may take or authorize such action upon the favorable
vote of the holders of more than 50% of all of the outstanding shares of Common
Stock voting without regard to class (or portfolio).
MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath LLP, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107-3496, serves as counsel to the Company
and the non-interested directors.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Company's independent
accountants.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1".
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. this designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that 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."
A-3
<PAGE>
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation.
A-4
<PAGE>
Adverse business, financial or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment on the
obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or
A-5
<PAGE>
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
A-6
<PAGE>
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse circumstances and in economic conditions are more likely
to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
A-7
<PAGE>
"B" - Bonds are considered highly speculative. these ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
A-8
<PAGE>
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes 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" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
A-9
<PAGE>
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-10
<PAGE>
APPENDIX B
As stated in the Prospectus, the Funds may enter into certain futures
transactions. Such transactions are described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund could accomplish a similar result to that which it hopes to
achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and
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<PAGE>
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Funds may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
With regard to each Fund, the Adviser also anticipates engaging in
transactions, from time to time, in foreign stock index futures such as the
ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
II. INDEX FUTURES CONTRACTS
GENERAL. A stock or bond index assigns relative values to the stocks
or bonds included in the index, which fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indexes, such as Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes, such as the Standard & Poor's 100 or
indexes based on an industry or market indexes, such as Standard & Poor's 100 or
indexes based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the Commodity
Futures Trading Commission. Transactions on such exchanges are cleared through
a clearing corporation, which guarantees the performance of the parties to each
contract. With regard to each Fund, to the extent consistent with its
investment objective, the Adviser anticipates engaging in transactions, from
time to time, in foreign stock index futures such as the ALL-ORDS (Australia),
CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
A Fund might sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Fund might do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, a Fund
might purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
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In addition, a Fund might utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of the portfolio will decline prior to the time of
sale.
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars (or another currency). Foreign currency futures may be used by a Fund
to hedge against exposure to fluctuations in exchange rates between different
currencies arising from multinational transactions.
IV. MARGIN PAYMENTS
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
a Fund will be required to deposit with the broker or in a segregated account
with a custodian an amount of liquid assets known as initial margin, based on
the value of the contract. The nature of initial margin in futures transactions
is different from that of margin in security transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract assuming all contractual
obligations have been satisfied. Subsequent payments, called variation margin,
to and from the broker, will be made on a daily basis as the price of the
underlying instruments fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
Prior to expiration of the futures contract, the Adviser may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
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V. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by a
Fund. One risk arises because of the imperfect correlation between movements in
the price of the futures and movements in the price of any instruments which are
the subject of a hedge. The price of the futures may move more than or less
than the price of the instruments being hedged. If the price of the futures
moves less than the price of the instruments which are the subject of the hedge,
the hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the instruments
being hedged has moved in a favorable direction, this advantage will be
partially offset by the loss on the futures. If the price of the futures moves
more than the price of the hedged instruments, the Fund involved will experience
either a loss or gain on the futures which will not be completely offset by
movements in the price of the instruments which are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, a Fund
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of instruments being hedged if the volatility over a particular time
period of the prices of such instruments has been greater than the volatility
over such time period of the future, or if otherwise deemed to be appropriate by
the Adviser. Conversely, a Fund may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the instruments being
hedged is less than the volatility over such time period of the futures contract
being used, or if otherwise deemed to be appropriate by the Adviser. It is also
possible that, where a Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the value of instruments held
in the Fund may decline. If this occurred, the Fund would lose money on the
futures and also experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and any
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price
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distortion in the futures market, and because of the imperfect correlation
between the movements in the cash market and movements in the price of futures,
a correct forecast of general market trends or interest rate movements by the
adviser may still not result in a successful hedging transaction over a short
time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
The trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a particular Fund has hedged against the possibility of a decline in
the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. A Fund may have to
sell securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit,
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before any deduction for the transaction costs, if the account were then closed
out. A 15% decrease would result in a loss equal to 150% of the original margin
deposit, before any deduction for the transaction costs, if the contract were
closed out. Thus, a purchase or sale of a futures contract may result in losses
in excess of the amount invested in the contract.
VI. OPTIONS ON FUTURES CONTRACTS
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits. As an example,
in anticipation of a decline in interest rates, a Portfolio may purchase call
options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund intends to purchase. Similarly, if the value of the securities held by
a Fund is expected to decline as a result of an increase in interest rates, the
Fund might purchase put options or sell call options on futures contracts rather
than sell futures contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
securities or currencies, an option may or may not be less risky than ownership
of the futures contract or such securities or currencies. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar
to those risks relating to the sale of futures contracts.
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VII. OTHER MATTERS
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
The Funds intend to comply with the regulations of the Commodity
Futures Trading Commission exempting the Funds from registration as a "commodity
pool operator."
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