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[LOGO] BEA
ADVISOR &
INSTITUTIONAL FUNDS
BEA SELECT ECONOMIC VALUE EQUITY FUND
PROSPECTUS JULY 13, 1998
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TABLE OF CONTENTS
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PAGE
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Annual Fund Operating Expenses............................................ 2
Investment Objective and Policies......................................... 3
Investment Limitations.................................................... 7
Risk Factors.............................................................. 7
Management................................................................ 9
Expenses.................................................................. 12
How to Purchase Shares.................................................... 12
How to Redeem and Exchange Shares......................................... 16
Net Asset Value........................................................... 18
Dividends and Distributions............................................... 18
Taxes..................................................................... 18
Multi-Class Structure..................................................... 20
Description of Shares..................................................... 20
Other Information......................................................... 21
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BEA ADVISOR AND INSTITUTIONAL FUNDS
THE BEA ADVISOR AND INSTITUTIONAL FUNDS CONSIST OF TWENTY CLASSES OF COMMON
STOCK OF THE RBB FUND, INC. (THE "COMPANY"), AN OPEN-END MANAGEMENT INVESTMENT
COMPANY. THE BEA SELECT ECONOMIC VALUE EQUITY FUND (THE "FUND") 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 FUND DESCRIBED IN THIS
PROSPECTUS.
The BEA Select Economic Value Equity Fund's investment objective is to seek
long term appreciation of capital. The Fund will attempt to achieve its
investment objective by investing primarily in U.S. equity securities that BEA
Associates, the Fund's investment adviser ("BEA" or the "Adviser"), believes are
undervalued.
There can be no assurance that the Fund's investment objective will be
achieved. Investment in the Fund involves certain risks. See "Risk Factors."
BEA Associates is a diversified 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 July 13, 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 Fund 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 Fund 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 JULY 13, 1998
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ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)(1)
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BEA BEA
SELECT ECONOMIC SELECT ECONOMIC
VALUE EQUITY FUND VALUE EQUITY FUND
(INSTITUTIONAL CLASS) (ADVISOR CLASS)
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Management Fees (after waivers)(2)................ 0.52% 0.52%
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12b-1 Fees........................................ N/A 0.25%
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Other Expenses (after waivers)(2)................. 0.48% 0.48%
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Total Fund Operating Expenses (after
waivers)(2)...................................... 1.00% 1.25%
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(1) The annual operating expenses for the Fund are based on expenses expected to
be incurred by the Fund (after expected fee waivers and reimbursements).
(2) Before expense waivers and expense reimbursements, Management Fees would be
.75% and .75%, respectively, for the Institutional and Advisor Classes of
the Fund. Other Expenses would be .48% and .48%, respectively, for the
Institutional and Advisor Classes of the Fund, and Total Fund Operating
Expenses would be 1.23% and 1.21%, respectively, for the Institutional and
Advisor Classes of the Fund.
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EXAMPLE
An investor would pay the following expenses on a $1,000 investment in the Fund,
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 Select Economic Value Equity Fund
(Institutional Class)............................ $ 10 $ 32
BEA Select Economic Value Equity Fund (Advisor
Class)........................................... $ 13 $ 40
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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.
This fee table is designed to assist an investor in understanding the various
costs and expenses that an investor in the Fund 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 expenses in the fee table are based upon fees and costs expected to be
incurred by the Fund during the fiscal period ending August 31, 1998. The fee
table reflects expected 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 the
Fund, such assumption of additional expenses will have the effect of lowering
the Fund's overall expense ratio and increasing its return to investors.
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THE COMPANY
The Company is an open-end management investment company that currently operates
or proposes to operate twenty-seven separate investment portfolios. The Fund is
non-diversified. The Company was incorporated in Maryland on February 29, 1988.
The Advisor Class of the Fund is designed primarily for individual investors and
is available through financial intermediaries, including broker-dealers,
investment advisers, financial planners, banks and insurance companies.
Investment professionals such as those listed above may purchase Advisor Shares
for discretionary or non-discretionary accounts maintained by individuals.
The Institutional Class of the Fund is designed primarily for investors seeking
investment of funds held in an institutional, fiduciary, advisory, agency,
custodial or other similar capacity, which may include the investment of funds
held or managed by broker-dealers, investment counselors, insurance companies,
employee benefit plans, colleges, churches, charities, corporations and other
institutions. Institutional Shares are currently available for purchase by
investors who have entered into an investment management agreement with BEA or
its affiliates. In addition, Institutional Shares may be purchased directly by
certain individuals described in "How to Purchase Shares." Institutional
investors such as those listed above may purchase Institutional Shares for
discretionary or non-discretionary accounts maintained by individuals.
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Select Economic Value Equity Fund may not be
changed without the affirmative vote of a majority of the Fund's outstanding
shares (as defined in the Investment Company Act of 1940, as amended (the "1940
Act")). There can be no assurance that the Fund will achieve its investment
objective. Because of its different investment emphasis, the Fund should be
considered as a specialized investment portfolio and not as a balanced
investment program by itself. The Statement of Additional Information contains a
more detailed description of the various investments and investment techniques
used by the Fund.
The Fund's investment objective is to seek long term appreciation of capital.
The Fund will attempt to achieve its investment objective by investing primarily
in U.S. equity securities that the Adviser believes are undervalued. The Adviser
will apply its Select Economic Value Equity analysis in assembling and managing
the Fund's portfolio. In the selection of industry sectors to emphasize, the
Adviser searches for sectors with favorable economic profit trends. Within this
framework, the Adviser will select specific securities by emphasizing, in
addition to traditional analyses such as price/earnings ratios, the economic
profit of a company measured by its cash flow relative to its capital assets.
The Fund normally will not emphasize dividend income in choosing securities,
unless BEA believes the income will contribute to the securities' appreciation
potential.
Under normal market conditions, the Fund will invest at least 65% of the value
of its total assets in U.S. equity securities. Equity securities include common
stocks, preferred stocks, convertible securities, and other securities, such as
rights and warrants, which derive their values from common stocks. For defensive
purposes, the Fund may invest in fixed income securities and in money market
instruments.
The Fund may invest without limit in foreign securities, principally through the
purchase of
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dollar-denominated American Depository Receipts ("ADRs") of foreign issuers, and
engage in foreign currency transactions. See below, and "Risk Factors -- Foreign
Securities" and "-- Foreign Currency Transactions." The Fund may also purchase
lower-rated debt securities. See "Risk Factors -- Lower-Rated Securities."
AMERICAN DEPOSITORY RECEIPTS. The 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 Fund's
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."
FOREIGN CURRENCY TRANSACTIONS. BEA may seek to hedge against a decline in
value of a Fund's non-dollar denominated portfolio securities resulting from
currency devaluations or fluctuations and enter into contracts to purchase and
sell forward foreign currency exchange contracts to seek to enhance total
return. Unless the BEA Select Economic Value Equity Fund engages in currency
hedging transactions, it will be subject to the risk of changes in relation to
the U.S. dollar of the value of the foreign currencies in which its assets are
denominated. The Fund may also seek to protect, during the period prior to its
remittance, the value of the amount of interest, dividends and net realized
capital gains received or to be received in a local currency that it intends to
remit out of a foreign country by investing in high-quality short-term U.S.
dollar-denominated debt securities of such country and/or participating in the
forward currency market for the purchase of U.S. dollars in the country. There
can be no guarantee that suitable U.S. dollar-denominated investments will be
available at the time BEA wishes to use them to hedge amounts to be remitted.
A forward foreign currency exchange contract is a negotiated agreement to
exchange currency at a future time at a rate or rates that may be higher or
lower than those available on a "spot" (or cash) basis. The Fund may enter into
these contracts for purposes of increasing exposure to a foreign currency or to
shift exposure to foreign currency fluctuations from one country to another. To
the extent that such contracts are entered into to enhance total return, they
are considered speculative. If the 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. The Fund will not invest more than 50% of their
respective total assets in such contracts for the purpose of enhancing total
return. There is no limit on the amount of assets that the Fund may invest in
such transactions for hedging purposes.
Currency exchange rates may fluctuate significantly over short periods of time.
They generally are determined by the forces of supply and demand in the foreign
exchange markets and the relative merits of investments in different countries,
actual or perceived changes in interest rates and other complex factors as seen
from an international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the United States or abroad.
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The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in currencies
occurs on an exchange. Since a forward currency contract is not guaranteed by an
exchange or clearinghouse, a default on the contract would deprive the Fund of
unrealized profits or force the Fund to cover its commitments for purchase or
resale, if any, at the current market price. The Fund will incur costs in
connection with conversions between various currencies. The Fund may hold
foreign currency received in connection with investments in foreign securities
when, in the judgment of BEA, it would be beneficial to convert such currency
into U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. See "Risk Factors" for a discussion of the risks of foreign
forward currency exchange contracts.
MORTGAGE-RELATED PASS-THROUGHS AND DERIVATIVES. The Fund may invest in
mortgage-related securities. Purchasable mortgage-related securities are
represented by pools of mortgage loans assembled for sale to investors by
various governmental agencies such as the Government National Mortgage
Association and government-related organizations such as the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation, as well as
by private issuers such as commercial investment banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because in periods of declining interest rates mortgages
underlying securities are prone to prepayment. For this and other reasons, a
mortgage-related security's stated maturity may be shortened by an unscheduled
prepayment on underlying mortgages and, therefore, it is not possible to predict
accurately the security's return to the Fund.
Mortgage-related securities acquired by the Fund may include collateralized
mortgage obligations ("CMOs") issued by FNMA, FHLMC or other U.S. Government
agencies or instrumentalities, as well as by private issuers. These securities
may be considered mortgage derivatives. CMOs provide an investor with a
specified interest in the cash flow of a pool of underlying mortgages or other
mortgage-related securities.
ASSET-BACKED SECURITIES. The Fund may purchase asset-backed securities,
which represent a participation in, or are secured by and payable from, a stream
of payments generated by particular assets, most often a pool of assets similar
to one another. Assets generating such payments will consist of such instruments
as motor vehicle installment purchase obligations, credit card receivables and
home equity loans.
Asset-backed securities may involve certain risks arising primarily from the
nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). For example, credit card
receivables are generally unsecured and may require the repossession of personal
property upon the default of the debtor which may be difficult or impracticable
in some cases. Asset-backed securities are considered an industry for industry
concentration purposes, and the Fund will therefore not purchase any
asset-backed securities which would cause 25% or more of its total assets at the
time of purchase to be invested in asset-backed securities.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
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redeemed, converted or exchanged. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. The Fund may invest in
convertible securities without regard to their credit ratings. See "Risk Factors
- -- Lower Rated Securities" below.
TEMPORARY INVESTMENTS. For defensive purposes or during temporary periods
in which BEA believes changes in economic, financial or political conditions
make it advisable, the 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 Fund may hold cash or cash equivalents pending
investment.
BORROWING. The 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 or dollar roll transactions 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. The Fund may also lend its portfolio
securities with an aggregate value of up to 33 1/3 of its total assets
(including the value of the collateral for the loans) 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 Fund's investment adviser to be of good standing and
only when, in the adviser's judgment, the income to be earned from the loans
justifies the attendant risks. Any loans of the Fund's securities will be fully
collateralized and marked to market daily.
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. The Fund may invest in Rule 144A securities that
BEA has determined are liquid pursuant to guidelines established by the
Company's Board of Directors.
INVESTMENT COMPANIES. The Fund may invest in securities issued by other
investment companies to the extent permitted by the 1940 Act. As a shareholder
of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that the Fund bears directly in connection with its own
operations.
PORTFOLIO TURNOVER. BEA will effect portfolio transactions in the Fund
without regard to holding periods if, in its judgment, such transactions are
advisable in light of general market, economic or financial conditions.
Portfolio turnover may vary greatly from year to year as well as within a
particular year. High portfolio
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turnover rates (100% or more) will generally result in higher transaction costs
to the Fund and may result in the realization of short-term capital gains that
are taxable to shareholders as ordinary income. However, it is impossible to
predict portfolio turnover rates. 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."
The Statement of Additional Information contains additional investment policies
and strategies of the Fund.
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INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations, which
may not be changed with respect to the Fund without shareholder approval. A
complete list of the Fund's fundamental investment limitations is set forth in
the Statement of Additional Information under "Investment Limitations."
The Fund may not:
Borrow money or issue senior securities, except that the 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. The 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 the Fund.
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RISK FACTORS
FOREIGN SECURITIES. Investing in the securities of non-U.S. issuers
involves opportunities and risks that are different from investing in the
securities of U.S. issuers. The risks associated with investing in securities of
non-U.S. issuers are generally heightened for investments in securities of
issuers in emerging markets.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Fund may hold from time to time various
foreign currencies pending their investment in foreign securities or their
conversion into U.S. dollars, the value of the Fund's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in exchange rates.
In addition, investors should realize that the value of the Fund's investments
may be adversely affected by changes in political or social conditions,
diplomatic relations, confiscatory taxation, expropriation, limitation on the
removal of funds or assets, or imposition of (or change in) exchange control
regulations in those foreign nations. In addition, changes in government
administrations or economic or monetary policies in the U.S. or abroad could
result in appreciation or depreciation of portfolio securities and could
favorably or adversely affect the Fund's operations. Furthermore, the economies
of individual foreign nations may
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differ from that of the United States, whether favorably or unfavorably, in
areas such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. Any
foreign investments made by the Fund must be made in compliance with U.S. and
foreign currency restrictions and tax laws restricting the amounts and types of
foreign investments.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. The Fund's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities in U.S. companies. Expenses relating to
foreign investments are higher than those relating to domestic securities. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.
FOREIGN CURRENCY TRANSACTIONS. The over-the-counter market in forward
foreign currency exchange contracts offers less protection against defaults by
the other party to such instruments than is available for currency instruments
traded on an exchange. Such contracts are subject to the risk that the
counterparty to the contract will default on its obligations. Since these
contracts are not guaranteed by an exchange or clearinghouse, a default on the
contract would deprive the Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. The Fund will not enter into
forward foreign currency exchange contracts unless the credit quality of the
unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by BEA.
LOWER-RATED SECURITIES. The widespread expansion of government, consumer
and corporate debt within the economy has made the corporate sector, especially
cyclically sensitive industries, more vulnerable to economic downturns or
increased interest rates. Because lower-rated debt securities involve issuers
with weaker credit fundamentals (such as debt-to-equity ratios, interest charge
coverage, earnings history and the like), an economic downturn, or increases in
interest rates, could severely disrupt the market for lower-rated debt
securities and adversely affect the value of outstanding debt securities and the
ability of the issuers to repay principal and interest.
Lower-rated debt securities (commonly known as "junk bonds") possess speculative
characteristics and are subject to greater market fluctuations and risk of lost
income and principal than higher-rated debt securities for a variety of reasons.
The markets for and prices of lower-rated debt securities have been found to be
less sensitive to interest rate changes than higher-rated investments, but more
sensitive to adverse economic changes or individual corporate developments.
Also, during an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely affect their ability to service their principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. If the issuer of a debt security owned by the Fund defaulted, the
Fund could incur additional expenses in seeking recovery with no guaranty of
recovery. In addition, periods of economic uncertainty and changes can be
expected to result in increased volatility of market prices of lower-rated debt
securities and the Fund's net asset value. Lower-rated debt securities also
present risks based on payment expectations. For example, lower-rated debt
securities may contain redemption or call provisions. If an issuer exercises
these provisions in a declining interest rate market, the Fund would have to
replace
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the security with a lower yielding security, resulting in a decreased return for
investors. Conversely, a lower-rated debt security's value will decrease in a
rising interest rate market, as will the value of the Fund's assets. If the Fund
experiences unexpected net redemptions, this may force it to sell its
lower-rated debt securities, without regard to their investment merits, thereby
decreasing the asset base upon which the Fund's expenses can be spread and
possibly reducing the Fund's rate of return.
In addition, to the extent that there is no established retail secondary market,
there may be thin trading of lower-rated debt securities, which may have an
impact on BEA's ability to both value accurately lower-rated debt securities and
the Fund's assets, and to dispose of the debt securities. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the value and liquidity of lower-rated debt securities, especially in a thinly
traded market.
FIXED INCOME SECURITIES. The value of the securities held by the Fund, and
thus the net asset value of the shares of the 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. The Fund is not restricted to any maximum or minimum time to
maturity in purchasing portfolio securities, and the average maturity of the
Fund's assets will vary based upon BEA's assessment of economic and market
conditions.
GENERAL. Investment methods described in this prospectus are among those
which the Fund has 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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MANAGEMENT
BOARD OF DIRECTORS
The business and affairs of the Company and of the Fund is managed under the
direction of the Company's Board of Directors.
INVESTMENT ADVISER
BEA serves as the Investment Adviser for the Fund pursuant to an investment
advisory agreement (the "Advisory Agreement"). 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 One
Citicorp Center, 153 East 53rd Street, New York, New York 10022.
BEA is a diversified 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 portfolios of
twelve other registered investment companies.
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BEA will select investments for the Fund and will place purchase and sale orders
on behalf of the Fund. The Fund 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 Select Economic Value Equity Fund
is the responsibility of the BEA Select Economic Value Equity Management Team.
The Team consists of the following investment professionals: William Priest,
Jr., Chief Executive Officer and Executive Director of BEA, John Hurford,
Executive Director, James Abate, Senior Vice President, Susan Everly, Vice
President and James Mecca, Vice President. Messrs. Priest and Hurford have, on
an individual basis, been engaged as investment professionals with BEA for more
than twenty-five years. Mr. Abate joined BEA in 1995. Previously, he was a
Managing Director for Vert Independent Capital Research for two years. Prior to
joining Vert Independent Capital Research, Mr. Abate was a Manager in Price
Waterhouse's Valuation/Corporate Finance Group for 6 years. Ms. Everly joined
BEA in 1998. Previously, she was a securities analyst at Goldman Sachs for two
years. Prior to joining Goldman Sachs, she was a student at Harvard Business
School for 2 years. Prior to 1994, she was an analyst at CS First Boston for 4
years. Mr. Mecca joined BEA in 1998. Previously, he was a securities analyst at
Goldman, Sachs & Co. for 2 years. Prior to joining Goldman Sachs, he was at
Bankers Trust where he was an Emerging Markets Equity Trader for 3 years.
For the advisory services provided and expenses assumed by it, BEA is entitled
to receive a fee from the Fund, computed at an annual rate of .75% of the Fund's
average net assets, computed daily and payable quarterly. BEA may, at its
discretion, from time to time agree to waive voluntarily all or any portion of
its advisory fee
for the Fund.
BEA may assume additional expenses of the 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 will have the effect of increasing
the Fund's expense ratio and of decreasing return to investors.
The Advisory Agreement provides 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 Agreement relates 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 Agreement.
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 Fund. As
co-administrator, PFPC will provide various services to the Advisor Class of the
Fund, including determining the net asset value of the Advisor Shares of the
Fund, providing all accounting services for the Advisor Class and generally
assisting in all aspects of the operations of the Advisor Class of the Fund. As
compensation for administrative services, the Fund will pay PFPC a fee
calculated at the annual rate of .125% of the average daily net assets of the
Advisor Class of the Fund. PFPC has its principal offices at 400 Bellevue
Parkway, Wilmington, Delaware 19809.
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The Company employs BEA as co-administrator. As co-administrator, BEA generally
assists the Advisor Class of the Fund in all aspects of its 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 the 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 Fund. As
administrator, PFPC will provide various services to the Institutional Class of
the Fund, including determining the net asset value of the Institutional Shares
of the Fund, providing all accounting services for the Institutional Class and
generally assisting in all aspects of the operations of the Institutional Class
of the Fund. As compensation for its administrative services, the Fund will pay
PFPC a fee calculated at the annual rate of .125% of the average daily net
assets of the Institutional Class of the Fund.
ADMINISTRATIVE SERVICES AGENT --
INSTITUTIONAL CLASS
Provident Distributors, Inc. ("PDI") provides certain administrative services to
the Institutional Class of the Fund that are not provided by PFPC, subject to
the supervision and direction of the Board of Directors of the Fund. As
compensation for such administrative services, the Fund 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 the Fund. PDI's principal
business address is Four Falls Corporate Center, Conshohocken, Pennsylvania
19428-2961.
Pursuant to an agreement between PDI and Counsellors Funds Service, Inc.
("Counsellors"), dated as of May 29, 1998, PDI has delegated substantially all
of its administrative services agent functions to Counsellors.
DISTRIBUTOR
Provident Distributors, Inc. ("PDI"), serves as the Company's distributor. PDI's
principal business address is Four Falls Corporate Center, Conshohocken,
Pennsylvania 19428-2961. 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 Fund, (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 Fund, 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 Fund.
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 the 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
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campaigns and/or shareholder services and programs regarding the Fund. 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 Fund. 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
Brown Brothers Harriman & Co. serves as Custodian for the Fund. The 1940 Act and
the rules and regulations adopted thereunder permit the Fund to maintain its
securities and cash in the custody of certain eligible banks and securities
depositories. In compliance with such rules and regulations, the 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 the 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 Fund 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
other classes of other expenses (excluding advisory and custodial fees) if those
expenses are actually incurred in a different amount by that class or if they
receive different services.
The estimated expenses for each class of the Fund are set forth in the table
entitled "Annual Fund Operating Expenses," above.
- ----------------------------------------------
HOW TO PURCHASE SHARES
Shares representing interests in the Fund are offered continuously for sale by
the Distributor.
The Fund offers 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 the 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
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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 the
Fund's net asset value, see "Net Asset Value" below.
ADVISOR CLASS
Advisor Shares of the Fund may be purchased without imposition of a sales charge
through the BEA Advisor Funds. Shares of the 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 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 the 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 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" accompanied by a breakdown of
amounts to be invested in the Fund. If a check used for purchase does not clear,
the Fund will cancel the purchase and the investor may be liable for losses or
fees incurred. For a description of the manner of calculating the 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 in
proper form 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
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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 the Fund are sold without a sales charge. The minimum initial
investment in the 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 Fund reserves 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. The
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 the Fund are not
normally issued.
PURCHASE THROUGH INTERMEDIARIES
The Fund understands that some broker-dealers (other than PDI), financial
institutions, securities dealers and other industry professionals ("Service
Agents") impose certain conditions on their clients that invest in the Fund,
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 Fund, 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 Fund. 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 the 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 Fund in
accordance with their agreements with clients or customers. Service Agents, or,
if applicable, their designees that have entered into agreements with the 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.
The 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 in good order. Orders received by the Fund in proper form
will be priced at the Fund's net
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<PAGE>
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 Fund
maintained by such Service Agent or recordkeepers. A portion of the Service Fee
may be borne by the Fund 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 of the Fund 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 of the Fund 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 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, Institutional Class Shares of the Fund 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
Institutional Shares of the Fund 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 the Fund must be at least $100,000. The Fund reserves the right
to suspend the offering of Shares for a period of time or to reject any purchase
order.
Shares of the Fund may be purchased by officers and employees of BEA or its
affiliates and any BEA pension or profit-sharing plan,
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<PAGE>
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 Fund in exchange for portfolio securities that are eligible for
investment by the Fund. Such portfolio securities must (a) meet the investment
objectives and policies of the Fund, (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 the 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 the 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 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
Fund 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 BEA Institutional 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 the Fund of a shareholder
at any time the net asset value of the account in the Fund falls below $500 as
the result of a
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<PAGE>
redemption request. Shareholders will be notified in writing that the value of
their account in the 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 the 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 the 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 the
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 the 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 the 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 Fund 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 Fund being acquired may legally be sold. When a shareholder
effects an exchange of Shares, the 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 Fund, 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. Such procedures may include, among others,
providing written confirmation of telephone transactions, tape recording
telephone instructions, requiring that redemption proceeds be sent only
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<PAGE>
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 Fund are determined as of the close
of regular trading on the NYSE on each Business Day. The net asset values of
each class of the Fund are calculated by adding the value of the proportionate
interest of each class in the 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 the 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 the Fund to its shareholders annually. The Company will distribute
all net investment income, if any, for both the Advisor and Institutional
Classes of the Fund at least annually. All distributions will be reinvested in
the form of additional full and fractional shares of the 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
The following discussion is only a brief summary of some of the important tax
considerations generally affecting the Fund and its shareholders and is not
intended as a substitute for careful tax planning. Accordingly, investors in the
Fund should consult their tax advisers with specific reference to their own tax
situation.
The 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 the 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 or
that are designated as exempt interest dividends) 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), if any, of the Fund will be taxed to
shareholders as long-term capital gain, 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%, and the
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long-term capital gain rate is 28% (for the sale of capital assets held more
than 12 months but not more than 18 months) or 20% (for the rate of capital
assets held more than 18 months). For corporations, however, the rates for both
ordinary income and capital gains are the same.
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
the Fund, accelerate the recognition of income by the Fund and defer the 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 Fund. In addition, certain investments (such as zero coupon securities
and shares of so-called "passive foreign investment companies" or "PFICS") may
cause the Fund to recognize income without the receipt of cash. Each of these
circumstances, whether separately or in combination, may limit the Fund's
ability to pay sufficient dividends and to make sufficient distributions to
satisfy the Subchapter M and excise tax distributions requirements.
The Company will send written notices to shareholders annually regarding the tax
status of distributions made by the 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. The 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 the 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 a 31%
"backup" withholding tax on reportable dividends, capital gains distributions
and redemption payments.
Shareholders who are nonresident alien individuals, foreign trusts or estates,
foreign corporations or foreign partnerships will be subject to different U.S.
federal income tax treatment.
FOREIGN INCOME TAXES
Investment income received by the Fund 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 Fund 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 the
Fund's assets to be invested in various countries is not known.
If more than 50% of the value of the Fund's total assets at the close of each
taxable year consists of the stock or securities of foreign corporations (which
is generally not expected to be the case, however), the Fund will be eligible to
elect to "pass through" to the Company's shareholders the amount of foreign
income taxes paid by the 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 respective pro-rata shares of
the
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foreign income taxes paid by the 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
the Fund for the purpose of the foreign tax credit limitation rules of the Code,
shareholders will be required to treat allocable portions of the 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, which are offered directly to institutional investors and financial
intermediaries pursuant to separate prospectuses. Shares of the Fund represent
equal pro rata interests in the Fund 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 13.93 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 INCORPORATED HEREIN
RELATE PRIMARILY TO THE BEA ADVISOR AND INSTITUTIONAL CLASSES REPRESENTING
INTERESTS IN THE BEA SELECT ECONOMIC VALUE EQUITY FUND AND DESCRIBES ONLY THE
INVESTMENT OBJECTIVE AND POLICIES, OPERATIONS, CONTRACTS AND OTHER MATTERS
RELATING TO THIS FUND.
Each share that represents an interest in the Fund has an equal proportionate
interest in the assets belonging to the Fund with each other share that
represents an interest in the 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 the Fund 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
20
<PAGE>
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 July 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 the 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, the Fund 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 the 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. This standard
calculation is required by the SEC to provide consistency and comparability in
investment company advertising. The Fund 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 the Fund's performance with other measures of investment return. For
example, the 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, 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 the 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 the 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.
21
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE FUND'S 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
Select Economic Value 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 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
One Citicorp Center
153 East 53rd Street
New York, NY 10022
DISTRIBUTOR
Provident Distributors, Inc.
Four Falls Corporate Center
Conshohocken, PA 19428-2961
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
One Citicorp Center
153 East 53rd Street
New York, NY 10022
ADMINISTRATIVE SERVICES AGENT (INSTITUTIONAL CLASS)
Provident Distributors, Inc.
Four Falls Corporate Center
Conshohocken, PA 19428-2961
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
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
SELECT ECONOMIC VALUE EQUITY FUND
(INVESTMENT PORTFOLIO 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 one investment portfolio (the "Fund") of The RBB Fund,
Inc. (the "Company"): the BEA Select Economic Value Equity Fund. 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 Fund, dated
July 13, 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 July 13, 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 3
Investment Policies. . . . . . . . . . . . . . . . . . . . 1 3
Investment Limitations . . . . . . . . . . . . . . . . . . 22 7
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 25 7
Directors and Officers . . . . . . . . . . . . . . . . . . 28 N/A
Investment Advisory and Servicing
Arrangements . . . . . . . . . . . . . . . . . . . . . . 32 9
Portfolio Transactions . . . . . . . . . . . . . . . . . . 37 10
Purchase and Redemption Information. . . . . . . . . . . . 40 12
Valuation of Shares. . . . . . . . . . . . . . . . . . . . 40 18
Performance Information. . . . . . . . . . . . . . . . . . 42 N/A
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 43 18
Additional Information Concerning the
Company Shares . . . . . . . . . . . . . . . . . . . . . 52 N/A
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . 55 21
Financial Statements . . . . . . . . . . . . . . . . . . . N/A 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-seven
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.
INVESTMENT POLICIES
The following supplements the information contained in the Prospectus
concerning the investment objective and policies of, and techniques used by the
Fund.
NON-DIVERSIFIED STATUS. The Fund is classified as non-diversified
within the meaning of the Investment Company Act of 1940 (the "1940 Act"), which
means that the Fund is not limited by such Act in the proportion of its assets
that it may invest in securities of a single issuer. The 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, the 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 the
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 the Fund's total assets will be invested in the
securities of a single issuer and the Fund will not own more than 10% of the
outstanding voting securities of a single issuer. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, the
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 the 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
<PAGE>
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. The Fund may agree to purchase securities from
a bank or recognized securities dealer and simultaneously commit to resell the
securities to the 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"). The 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 the Fund to possible loss
because of adverse market action, expenses and/or delays in the connection with
the disposition of the underlying obligations. The financial institutions with
which the 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. The 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 the 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 AND DOLLAR ROLLS. The Fund may also
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 the Fund pursuant to the Fund's agreement
-2-
<PAGE>
to repurchase them at a mutually agreed upon date, price and rate of interest.
At the time the 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). The 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 the 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 the Fund's
obligation to repurchase the securities, and the 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 Fund also may enter into "dollar rolls," in which it sells
fixed income securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Fund would
forgo principal and interest paid on such securities. The Fund would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale. The Fund does not presently intend to invest more
than 5% of net assets in reverse repurchase agreements or dollar rolls.
WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND FORWARD
COMMITMENTS. The Fund may purchase securities on a when-issued basis or on a
forward commitment basis, and it may purchase or sell securities for delayed
delivery. These transactions occur when securities are purchased or sold by the
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. Although the Fund has not established a limit on the
percentage of its assets that may be committed in connection with such
transactions, it will maintain a segregated account with its custodian of cash
or liquid securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the amount of its commitment in connection with such
purchase transactions. The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account
-3-
<PAGE>
on any day in which assets fall below the amount of its commitment. The Fund's
liquidity and ability to manage its assets might be affected when it sets aside
cash or portfolio securities to cover such commitments. When the Fund engages
in when-issued transactions, it relies on the seller to consummate the trade.
Failure of the seller to do so may result in the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
When-issued and forward commitment transactions involve the risk that the price
or yield obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place. The Fund
currently anticipates that when-issued securities will not exceed 25% of its net
assets. The Fund does not intend to engage in when-issued purchases and forward
commitments for speculative purposes but only in furtherance of its investment
objectives.
STAND-BY COMMITMENT AGREEMENTS. The Fund may from time to time enter
into stand-by commitment agreements. Such agreements commit the Fund, for a
stated period of time, to purchase a stated amount of a fixed income securities
which may be issued and sold to the Fund at the option of the issuer. The price
and coupon of the security is fixed at the time of the commitment. At the time
of entering into the agreement, the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued. The Fund will enter into such
agreements only for the purpose of investing in the security underlying the
commitment at a yield and price that is considered advantageous to the Fund.
The Fund will not enter into a stand-by commitment with a remaining term in
excess of 45 days and it will limit its investment in such commitments so that
the aggregate purchase price of the securities subject to such commitments,
together with the value of portfolio securities subject to legal restrictions on
resale, will not exceed 10% of its assets taken at the time of acquisition of
such commitment or security. The Fund will at all times maintain a segregated
account with its custodian of cash or liquid securities denominated in U.S.
dollars or non-U.S. currencies in an aggregate amount equal to the purchase
price of the securities underlying the commitment. 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 assets fall below the amount of the
purchase price. The Fund's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio securities to cover such
commitments.
There can be no assurance that the securities subject to a stand-by
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Because the issuance
of the security
-4-
<PAGE>
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a stand-by commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will be adjusted by the amount of the commitment fee. In the event the security
is not issued, the commitment fee will be recorded as income on the expiration
date of the stand-by commitment. The Fund does not presently intend to invest
more than 5% of net assets in stand-by commitment agreements.
ILLIQUID SECURITIES. The 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, 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, the 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 the 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 the 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
-5-
<PAGE>
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 Fund 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 the
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.
SECURITIES OF UNSEASONED ISSUERS. The 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 the 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, the Fund may lend its portfolio securities with an aggregate value
of up to 33 1/3% of its total assets (including the value of the collateral for
the loans) to broker/dealers and other institutional investors. The 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 the Fund's custodian, collateral either in cash or
money market instruments, in an amount at least equal to 102% of the market
value of the
-6-
<PAGE>
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 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 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 Fund to possible loss because of
adverse market action, expenses and/or delays in connection with the disposition
of the underlying securities.
BORROWING. The 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 the Fund's total assets. Although the principal of such borrowings
will be fixed, the Fund's assets may change in value during the time the
borrowing is outstanding. The 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
the 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).
FOREIGN DEBT SECURITIES. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those countries
and the effect of gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on investment in foreign
fixed-income securities. The relative performance of various countries'
-7-
<PAGE>
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which the Fund may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
BRADY BONDS. The Fund may invest in so-called "Brady Bonds," which
are securities created through the exchange of existing commercial bank loans to
Latin American public and private entities for new bonds in connection with debt
restructurings under a debt restructuring plan announced by former U.S.
Secretary of the Treasury Nicholas F. Brady (the "Brady Plan.") Brady Bonds may
be collateralized or uncollateralized, are issued in various currencies
(primarily the U.S. dollar) and are currently actively traded in the
over-the-counter secondary market for Latin American debt instruments.
Dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate
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bonds, is equal to at least one year of rolling interest payments or, in the
case of floating rate bonds, initially is equal to at least one year's rolling
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter.
All Mexican Brady Bonds issued to date, except New Money Bonds, have
principal repayments at final maturity fully collateralized by U.S. Treasury
zero coupon bonds (or comparable collateral in other currencies) and interest
coupon payments collateralized on an 18-month rolling-forward basis by funds
held in escrow by an agent for the bondholders. Approximately half of the
Venezuelan Brady Bonds issued to date have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral in other currencies), while slightly more than half have interest
coupon payments collateralized on a 14-month rolling-forward basis by securities
held by the Federal Reserve Bank of New York as collateral agent.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Fund may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between a
foreign government and one or more financial institutions ("Lenders"). The
majority of the Fund's investments in Loans in Latin America are expected to be
in the form of participations in Loans ("Participations") and assignments of
portions of Loans from third parties ("Assignments"). Participations typically
will result in the Fund having a contractual relationship only with the Lender,
not with the borrower. The Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Fund will acquire Participations only if the
Lender
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interpositioned between the Fund and the borrower is determined by BEA to be
creditworthy. The Fund currently anticipates that it will not invest more than
5% of its net assets in Loan Participations and Assignments.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable nonconvertible securities. While no securities
investment is completely without risk, investments in convertible securities
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed-income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock since they have fixed-income characteristics and
(3) provide the potential for capital appreciation if the market price of the
underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible security's investment value. The conversion value of
a convertible security is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible
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security is governed principally by its investment value. Generally the
conversion value decreases as the convertible security approaches maturity. To
the extent the market price of the underlying common stock approaches or exceeds
the conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. A convertible security generally will sell
at a premium over its conversion value by the extent to which investors place
value on the right to acquire the underlying common stock while holding a
fixed-income security.
The Fund has no current intention of converting any convertible
securities they may own into equity securities or holding them as equity
securities upon conversion, although they may do so for temporary purposes. A
convertible security might be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party. The Fund will invest in
convertible securities without regard to their credit rating. See "Risk Factors
- -- Lower Rated Securities" in the prospectus.
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities, such as those issued by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA"), the Federal Home
Loan Mortgage Corporation ("FHLMC") or certain foreign issuers, as well as by
private issuers such as commercial investment banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property. The
mortgages backing these securities include, among other mortgage instruments,
conventional 30-year fixed rate mortgages, 15-year fixed rate mortgages,
graduated payment mortgages and adjustable rate mortgages. The government or
the issuing agency typically guarantees the payment of interest and principal of
these securities. However, the guarantees do not extend to the securities'
yield or value, which are likely to vary inversely with fluctuations in interest
rates, nor do the guarantees extend to the yield or value of the Fund's shares.
These securities generally are "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with
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the maturities of the underlying mortgage loans. A pool's term may be shortened
by unscheduled or early payments of principal on the underlying mortgages. The
occurrence of mortgage prepayments is affected by various factors, including the
level of interest rates, general economic conditions, the location, scheduled
maturity and age of the mortgage and other social and demographic conditions.
Because prepayment rates of individual pools vary widely, it is not possible to
predict accurately the average life of a particular pool. For pools of fixed
rate 30-year mortgages, a common industry practice in the U.S. has been to
assume that prepayments will result in a 12-year average life. At present,
pools, particularly those with loans with other maturities or different
characteristics, are priced on an assumption of average life determined for each
pool.
Although certain mortgage-related securities are guaranteed by a third
party or are otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. If the Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from increases in
interest rates or prepayment of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because in periods of declining interest rates mortgages
underlying securities are prone to prepayment. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities. Conversely, in periods
of rising rates the rate of prepayment tends to decrease, thereby lengthening
the actual average life of the pool. However, these effects may not be present,
or may differ in degree, if the mortgage loans in the pools have adjustable
interest rates or other special payment terms, such as a prepayment charge.
Actual prepayment experience may cause the yield of mortgage-backed securities
to differ from the assumed average life yield. Reinvestment of prepayments may
occur at higher or lower interest rates than the original investment, thus
affecting the Fund's yield. For this and other reasons, a mortgage-related
security's stated maturity may be shortened by an unscheduled prepayment on
underlying mortgages and, therefore, it is not possible to predict accurately
the security's return to the Fund. Mortgage-related securities provide regular
payments consisting of interest and principal. No assurance can be given as to
the return the Fund will receive when these amounts are reinvested.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to
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certificate holders and to any guarantor, such as GNMA, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage payments from
the servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may also purchase
collateralized mortgage obligations ("CMOs") issued by a U.S. Government
instrumentality which are backed by a portfolio of mortgages or mortgage-backed
securities. The issuer's obligations to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed securities.
Generally, CMOs are partitioned into several classes with a ranked priority by
which the classes of obligations are redeemed. These securities may be
considered mortgage derivatives. The Fund may only invest in CMOs issued by
FMLMC, FNMA or other agencies of the U.S. Government or instrumentalities
established or sponsored by the U.S. Government.
CMOs provide an investor with a specified interest in the cash flow of
a pool of underlying mortgages or other mortgage-related securities. Issuers of
CMOs frequently elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. Coupons can be fixed or variable. If variable, they can move with or in
the reverse direction of interest rates. The coupon changes could be a multiple
of the actual rate change and there may be limitations on what the coupon can
be. Cash flows of pools can also be divided into a principal only class and an
interest only class. In this case the principal only class will only receive
principal cash flows from the pool. All interest cash flows go to the interest
only class. The relative payment rights of the various CMO classes may be
structured in many ways, either sequentially or by other rules of priority.
Generally, payments of principal are applied to the CMO classes in the order of
their respective stated maturities, so that no principal payments will be made
on a CMO class until all other classes having an earlier stated maturity date
are paid in full. Sometimes, however, CMO classes are "parallel pay," i.e.
payments of principal are made to two or more classes concurrently. CMOs may
exhibit more or less price volatility and interest rate risk than other types of
mortgaged-related obligations.
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The CMO structure returns principal to investors sequentially, rather
than according to the pro rata method of a pass-through. In the traditional CMO
structure, all classes (called tranches) receive interest at a stated rate, but
only one class at a time receives principal. All principal payments received on
the underlying mortgages or securities are first paid to the "fastest pay"
tranche. After this tranche is retired, the next tranche in the sequence
becomes the exclusive recipient of principal payments. This sequential process
continues until the last tranche is retired. In the event of sufficient early
repayments on the underlying mortgages, the "fastest-pay" tranche generally will
be retired prior to its maturity. Thus the early retirement of a particular
tranche of a CMO held by the Fund would have the same effect as the prepayment
of mortgages underlying a mortgage-backed pass-through security as described
above.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. The Fund may also invest in
other types of asset-backed securities that may be available in the future.
Such assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation. The estimated life of an asset-backed security
varies with the prepayment experience with respect to the underlying debt
instruments. The rate of such prepayments, and hence the life of the
asset-backed security, will be primarily a function of current market rates,
although other economic and demographic factors will be involved. In certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitations described above. Asset-backed securities
are considered an industry for industry concentration purposes, and the Fund
will therefore not purchase any asset-backed securities which would cause 25% or
more of its net assets at the time of purchase to be invested in asset-backed
securities.
Asset-backed securities present certain risks that are not presented
by other securities in which the Fund may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In
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addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. Credit card receivables are generally unsecured, and the debtors
are entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due.
ZERO COUPON SECURITIES. The Fund may invest in "zero coupon" U.S.
Treasury, foreign government and U.S. and foreign corporate debt securities,
which are bills, notes and bonds that have been stripped of their unmatured
interest coupons and receipts or certificates representing interests in such
stripped debt obligations and coupons. The Fund currently anticipates that zero
coupon securities will not exceed 5% of its net assets. A zero coupon security
pays no interest to its holder prior to maturity. Accordingly, such securities
usually trade at a deep discount from their face or par value and will be
subject to greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities that make current
distributions of interest. The Fund anticipates that it will not normally hold
zero coupon securities to maturity. Federal tax law requires that a holder of a
zero coupon security accrue a portion of the discount at which the security was
purchased as income each year, even though the holder receives no interest
payment on the security during the year.
STRUCTURED NOTES. The Fund may invest in structured notes. The
distinguishing feature of a structured note is that the amount of interest
and/or principal payable on the notes is based on the performance of a benchmark
asset or market other than fixed-income securities or interest rates. Examples
of a benchmark include stock prices, currency exchange rates and physical
commodity prices. Investing in a structured note allows the Fund to gain
exposure to the benchmark market while fixing the maximum loss that the Fund may
experience in the event that the market does not perform as expected. The
performance tie can be a straight relationship or leveraged, although BEA
generally will not use leverage in its structured note strategies. Normally,
these bonds are issued by U.S. Government Agencies and investment banks arrange
the structuring. Depending on the terms of the note, the Fund may forego all or
part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in a structured note involves risks
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similar to those associated with a direct investment in the benchmark asset.
Structured notes will be treated as illiquid securities for investment
limitation purposes.
ADDITIONAL INVESTMENT CONSIDERATIONS AND RISKS--NON-INVESTMENT GRADE
FIXED INCOME SECURITIES. When and if available, fixed income securities may be
purchased by the Fund at a discount from face value. From time to time the Fund
may purchase securities in default with respect to the paying of principal
and/or interest at the time acquired if, in the opinion of BEA, such securities
have the potential for future capital appreciation.
Debt securities purchased by the Fund may bear fixed, fixed and
contingent or variable rates of interest and may involve equity features such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer; participations based on revenues, sales or profits,
or the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit). Conversion of certain debt
securities may reduce net income per share and net asset value per share. The
occurrence of any income dilution of previously outstanding shares of common
stock when debt securities are converted will depend upon whether the Fund can,
from the investments made with the proceeds of the debt securities, earn an
amount per share issuable upon conversion at least equal to the amount earned
with respect to shares of common stock outstanding prior to conversion. If debt
securities are converted at a time when the net asset value per share of common
stock is greater than the conversion price, the conversion will result in a
decrease or dilution in then current net asset value per share of common stock.
The value of the lower rated fixed income securities that the Fund
purchases may fluctuate more than the value of higher rated debt securities.
These lower rated fixed income securities generally tend to reflect short-term
corporate and market developments to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates. Changes in the value of securities subsequent to their
acquisition will not affect cash income or yields to maturity to the Fund but
will be reflected in the net asset value of the Fund's shares. The Fund
attempts to reduce risk through credit analysis and attention to current
developments and trends in both the economy and financial markets. There can be
no assurance that such attempts will be successful.
Lower-rated debt securities may include zero coupon securities or
pay-in-kind securities. A zero coupon security bears no interest but is issued
at a discount from its value at
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maturity. When held to maturity, its entire return equals the difference
between its issue price and its maturity value. Pay-in-kind securities
typically do not provide for cash interest payments but instead provide for the
issuance of additional debt securities of the issuer in the face amount of the
interest payment amount due in lieu of a cash payment. The market prices of
both of these securities are affected to a greater extent by interest rate
changes and thereby tend to be more volatile than securities which pay interest
periodically and in cash.
There are also special considerations associated with investing in
lower-rated debt securities structured as zero coupon or pay-in-kind securities.
For example, the Fund must include the interest ("original issue discount") on
these securities in determining the amount of its required distributions to
shareholders for federal income tax and federal excise tax purposes, even though
it receives no cash interest until the security's maturity or payment date.
Therefore, in order to satisfy these distribution requirements, the Fund may
have to sell some of its assets without regard to their investment merit to
obtain cash to distribute to shareholders. These actions may occur under
disadvantageous circumstances and are likely to reduce the Fund's assets and may
thereby increase its expense ratio and decrease its rate of return. For
additional information concerning these tax considerations, see "Taxes" below.
From time to time, the Fund may also purchase securities not paying interest at
the time acquired if, in the opinion of the Fund's Adviser, such securities have
the potential for future income or capital appreciation.
HEDGING. The Fund may engage in various hedging strategies. See
"Currency Hedging" in the Prospectus.
FORWARD CURRENCY CONTRACTS. The Fund may use forward currency
contracts to protect against uncertainty in the level of future exchange rates
and to enhance total return. The Fund may also enter into forward currency
contracts with respect to specific transactions. For example, when the Fund
anticipates the receipt in a foreign currency of interest payments on a security
that it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such payment, as the case may be, by
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
transaction. The Fund will thereby be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
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The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the Fund security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain.
Forward contracts involve the risk that anticipated currency movements
will not be accurately predicted, causing the Fund to sustain losses on these
contracts and transaction costs. The Fund may enter into a forward contract
and maintain a net exposure on such contract only if (1) the consummation of the
contract would not obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's cash or liquid portfolio securities or (2) the
Fund maintains cash or liquid securities in the amount prescribed. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.
At or before the maturity date of a forward contract requiring the
Fund to sell a currency, the Fund may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, the
Fund may close out a forward contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. The Fund would
realize a gain or loss as a result of entering into such an offsetting forward
currency contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and the offsetting contract.
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The cost to the Fund of engaging in forward currency contracts will
vary with factors such as the currencies involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or commissions
are involved. The use of forward currency contracts will not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it will fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase. Moreover,
investors should be aware that dollar-denominated securities may not be
available in some or all foreign countries, that the forward currency market for
the purchase of U.S. dollars in many foreign countries is not highly developed
and that in certain countries no forward market for foreign currencies currently
exists or that such market may be closed to investment by the Funds.
Although the Fund will value its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. The Fund may convert foreign currency from time
to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
OPTIONS AND FUTURES CONTRACTS. The Fund 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.
The Fund 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
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particular securities may be more volatile than the underlying securities, and
therefore, on a percentage basis, an investment in the underlying securities
themselves. The 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 the 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
the Fund maintains with its custodian liquid assets equal to the contract value.
A call option is also covered if the 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 the Fund purchases a put option, the premium paid by it is
recorded as an asset of the Fund. When the 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 the 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 the 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 the 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 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
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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 "AGAINST THE BOX." In a short sale, the Fund sells a
borrowed security and has a corresponding obligation to the lender to return the
identical security. The 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." In a short sale, a seller does not immediately
deliver the securities sold and is said to have a short position in those
securities until delivery occurs. Until the Fund replaces a borrowed security,
it will maintain at all times cash, U.S. Government securities or other liquid
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. While the short sale is open, the Fund will maintain in a segregated
account an amount of securities equal in kind and amount to the securities sold
short or securities convertible into or exchangeable for such equivalent
securities. These securities constitute the Fund's long position. The Fund
may, however, make a short sale as a hedge, when it believes that the price of a
security may decline, causing a decline in the value of a security owned by the
Fund (or a security convertible or exchangeable for such security), or when the
Fund wants to sell the security at an attractive current price, but also wishes
possibly to defer recognition of gain or loss for federal income tax purposes.
(A short sale against the box will defer recognition of gain for federal income
tax purposes only if the Fund subsequently closes the short position by making a
purchase of the relevant securities no later than 30 days after the end of the
taxable year.) In such case, any future losses in the Fund's long position
should be reduced by a gain in the short position. Conversely, any gain in the
long position should be reduced by a
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<PAGE>
loss in the short position. The extent to which such gains or losses are
reduced will depend upon the amount of the security sold short relative to the
amount the Fund owns. There will be certain additional transaction costs
associated with short sales against the box, but the Fund will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales. The Fund does not presently intend to invest more than 5% of its
net assets in short sales 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 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.
RIGHTS OFFERINGS AND PURCHASE WARRANTS. Rights offerings and purchase
warrants are privileges issued by a corporation which enable the owner to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short lifespan to expiration. The purchase of rights or warrants
involves the risk that the Fund could lose the purchase value of a right or
warrant if the right to subscribe to additional shares is not executed prior to
the rights and warrants expiration. Also, the purchase of rights and/or
warrants involves the risk that the effective price paid for the right and/or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security.
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 the Fund's outstanding Shares (as defined in Section 2(a)(42)
of the 1940 Act). The 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
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<PAGE>
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 assets at the time of such borrowing;
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 the 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
the 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.
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<PAGE>
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 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,
the Fund may not:
1. Make investments for the purpose of exercising control or
management, but investments by the 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 the 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 the 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 the Fund generally may not be purchased from, sold
or loaned to the Adviser or its affiliates
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<PAGE>
or any of its 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.
POLITICAL, ECONOMIC AND MARKET FACTORS. Investments in foreign
securities involve risks relating to political and economic developments abroad,
as well as those that result from the differences between the regulations to
which U.S. and foreign issuers are subject. These risks may include
expropriation, confiscatory taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of the Fund's assets and political
or social instability or diplomatic developments. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments positions.
Securities of many foreign issuers may be less liquid, and their prices may be
more volatile, than those of securities of comparable U.S. issuers. Brokerage
commissions, custodial services and other costs relating to investment in
foreign securities markets are generally more expensive than in the United
States. Such markets have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. There is generally less government supervision and
regulation of exchanges, brokers and issuers in foreign securities markets than
there is in the United States.
In addition, substantial limitations may exist in certain countries
with respect to the Fund's ability to repatriate investment income, capital or
the proceeds of sales of securities by foreign investors. The Fund could be
adversely affected by delays in, or a refusal to grant, any required government
approval for repatriation of capital, as well as by the application to the Fund
of any restrictions on investments.
REPORTING STANDARDS. Most of the foreign securities held by the Fund
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
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<PAGE>
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 the 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 the Fund. If the value of a foreign currency rises against
the U.S. dollar, the value of the 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 the 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.
INVESTMENT CONTROLS. In certain countries that currently prohibit
direct foreign investment in the securities of their companies, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. The Fund may invest in these investment funds and
registered investment companies subject to the provisions of the 1940 Act. If
the Fund invests in such investment companies, it will bear its proportionate
share of the costs incurred by such companies, including investment advisory
fees.
CLEARANCE AND SETTLEMENT PROCEDURES. Delays in clearance and
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in the value of such portfolio security or, if the
Fund has entered into a contract to sell the security, could result in possible
liability to the purchaser.
OPERATING EXPENSES. The costs attributable to foreign investing that
the Fund must bear frequently are higher than those attributable to domestic
investing. For example, the cost of maintaining custody of foreign securities
exceeds custodian costs for domestic securities. Investment income on certain
foreign securities in which the Fund may invest may be subject to foreign
withholding or other taxes that could reduce the return
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<PAGE>
on those securities. Tax treaties between the United States and foreign
countries however, may reduce or eliminate the amount of foreign tax to which
the Fund would be subject.
SOVEREIGN DEBT. Investments in sovereign debt involve special risks.
The issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due in accordance with the terms of such debt, and the Fund may have
limited legal recourse in the event of a default.
Sovereign debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Legal recourse is therefore somewhat limited.
Political conditions, especially a sovereign entity's willingness to meet the
terms of its debt obligations, are of considerable significance. Also, there
can be no assurance that the holders of commercial bank loans to the same
sovereign entity may not contest payments to the holders of Sovereign debt in
the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect the Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign debt. While the Adviser intends to manage the Fund in a manner
that will minimize its exposure to such risks, there can be no assurance that
adverse political changes will not cause the Fund to suffer a loss of interest
or principal on any of its holdings.
Investors should also be aware that certain sovereign debt instruments
in which the Fund may invest involve great risk. Sovereign debt issued by
issuers in many Emerging Markets generally is deemed to be the equivalent in
terms of quality to
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<PAGE>
securities rated below investment grade by Moody's and S&P. Such securities are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse conditions. Some of such sovereign
debt, which may not be paying interest currently or may be in payment default,
may be comparable to securities rated "D" by S&P or "C" by Moody's. The Fund
may have difficulty disposing of certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market may have an
adverse impact on the market price of such securities and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio and
calculating its net asset value. When and if available, fixed income securities
may be purchased by the Fund at a discount from face value. However, the Fund
does not intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on these securities remain
attractive. From time to time, the Fund may purchase securities not paying
interest at the time acquired if, in the opinion of the Adviser, such securities
have the potential for future income or capital appreciation.
DIRECTORS AND OFFICERS
The directors and executive officers of the Company, their ages,
business addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position
Principal Occupation
Name, Address and Age with the Company During Past Five Years
- --------------------- ---------------- ----------------------
<S> <C> <C>
Arnold M. Reichman - 49* Director Senior Managing
466 Lexington Avenue Director, Chief Operating
New York, NY 10017 Officer and Assistant
Secretary, Warburg Pincus
Asset Management, Inc.;
Director and Executive
Officer, Counsellors
Securities Inc;
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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
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); Director,
Philadelphia, PA 19107-3723 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 March
Wyomissing, PA 19610 the Board 1987, Vice Chairman, Smith
Kline Beecham Corporation
(pharmaceuticals); Director,
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<PAGE>
Position
Principal Occupation
Name, Address and Age with the Company During Past Five Years
- --------------------- ---------------- ----------------------
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 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.
</TABLE>
- ------------------------------
* 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.
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<PAGE>
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:
<TABLE>
<CAPTION>
DIRECTORS COMPENSATION
----------------------
Pension or
Retirement
Benefits Estimated Total Compensation
Aggregate Accrued as Annual from Registrant
Name of Person/ Compensation Part of Fund Benefits Upon and Fund 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>
- ----------------------
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<PAGE>
(1) The 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 Company'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 the Fund pursuant to
an Investment Advisory Agreement. The Advisory Agreement relating to the Fund
is dated July 13, 1998. The advisory agreement is hereinafter referred to
as the "Advisory Agreement."
BEA Associates is a diversified 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 Investment Company 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
Indonesithe 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
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<PAGE>
certain portfolios of fifteen 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, Touchstone Variable Annuity International
Equity Fund, American United Life Conservative Investor Fund, American United
Life Moderate Investor Fund, and American United Life Aggressive Investor Fund.
BEA Associates has sole investment discretion for the Fund and will
make all decisions affecting assets in the Fund under the supervision of the
Company's Board of Directors and in accordance with the Fund's stated policies.
BEA Associates will select investments for the Fund and will place purchase and
sale orders on behalf of the Fund. For its services to the Fund, BEA Associates
will be paid (before any voluntary waivers or reimbursements) a monthly fee
computed at an annual rate of .75% of average daily net assets.
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 the 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 to be fair and equitable. The BEA
Advisor and Institutional Classes of the Fund pay their own administration fees,
and may pay a different share than the other classes of the Fund of other
expenses (excluding advisory 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 Agreement, BEA Associates will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Company
or the Fund in connection with the performance of the Advisory Agreement, 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
Agreement.
The Advisory Agreement was approved on April 29, 1998 by vote of the
Company's Board of Directors, including a majority of those directors who are
not parties to the Advisory Agreement or interested persons (as defined in the
1940 Act) of such parties. The Advisory Agreement was approved by the Fund's
initial shareholder. The Advisory Agreement is terminable by
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<PAGE>
vote of the Company's Board of Directors or by the holders of a majority of the
outstanding voting securities of the Fund, at any time without penalty, on 60
days' written notice to BEA Associates. The Advisory Agreement may also be
terminated by BEA Associates on 60 days' written notice to the Company. The
Advisory Agreement terminates automatically in the event of assignment thereof.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. Brown Brothers Harriman &
Co. ("BBH") acts as the custodian for the Fund and also acts as the custodian
for the Fund's foreign securities pursuant to a Custodian Agreement (the
"Custodian Agreement"). Under the Custodian Agreement, BBH (a) maintains a
separate account or accounts in the name of the Fund, (b) holds and transfers
portfolio securities on account of the Fund, (c) accepts receipts and makes
disbursements of money on behalf of the Fund, (d) collects and receives all
income and other payments and distributions on account of the Fund's portfolio
securities, and (e) makes periodic reports to the Company's Board of Directors
concerning the Fund's operations. BBH is authorized to select one or more banks
or trust companies to serve as sub-custodian on behalf of the Company, provided
that BBH remains responsible for the performance of all of 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, BBH receives a fee which is calculated based upon the
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 Fund. It has delegated to Boston Financial Data
Services, Inc. ("BFDS"), a 50%- owned subsidiary, responsibility for most
transfer agent servicing functions. State Street serves as the transfer and
dividend disbursing agent for the Fund pursuant to a Transfer Agency Agreement,
as supplemented (collectively, the "Transfer Agency Agreement"), under which it
(a) issues and redeems shares of each Class of the Fund, (b) addresses and mails
all communications by the Fund to record owners of shares of each such Class,
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 Class of the Fund. For its
services to the Company under the Transfer Agency Agreement, State Street
receives a fee on a per transaction basis.
ADMINISTRATION AGREEMENT AND ADMINISTRATIVE SERVICES AGREEMENT --
ADVISOR CLASS. PFPC Inc. ("PFPC") an indirect, wholly-owned subsidiary of PNC
Bank Corp., serves as the
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administrator to the Fund pursuant to an Administration and Accounting Services
Agreement dated July 13, 1998 (the "Administration and Accounting
Services Agreement"). PFPC has agreed to furnish statistical and research data,
clerical, accounting and bookkeeping services and certain other services with
respect to the Advisor Class of the Fund. PFPC has also agreed to, among other
things, prepare and file (or assist in the preparation) of certain reports with
the SEC and other regulatory agencies.
The Administration and Accounting Services Agreement provides 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
Agreement, except a loss resulting from willful misfeasance, gross negligence or
reckless disregard of its duties and obligations under the Administration and
Accounting Services Agreement. In consideration for the services provided under
the Administration and Accounting Services Agreement, PFPC receives a fee
calculated at an annual rate of .125% of the average daily net assets of the
Advisor Class of the Fund, with a minimum annual fee of $75,000.
BEA serves as co-administrator to the Advisor Class of the Fund
pursuant to a Co-Administration Agreement dated July 13, 1998 (the
"BEA Co-Administration Agreement"). BEA has agreed to provide shareholder
liaison services to the Advisor Class of the Fund including responding to
shareholder inquiries and providing information on shareholder accounts. The
BEA Co-Administration Agreement provides that BEA shall not be liable for any
error of judgment or mistake of law or any loss suffered by the Company or the
Fund in connection with the performance of the BEA Co-Administration 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 Agreement, BEA
receives a fee calculated at an annual rate of .05% of average daily net assets
of the Advisor Class of the Fund 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
Institutional Class of the Fund pursuant to an Administration and Accounting
Services Agreement (the "Administration and Accounting Services Agreement")
dated July 13, 1998. PFPC has agreed to furnish statistical and research
data, clerical, accounting, and bookkeeping services and certain other
services with respect to the Institutional Shares of the Fund. PFPC has also
agreed to, among other things, prepare and file (or assist in the preparation)
of certain reports with the SEC and other regulatory agencies.
The Administration and Accounting Services Agreement provides that
PFPC shall not be liable for any loss suffered by
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the Company in connection with the performance of services under the
Administration and Accounting Services Agreement, 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 Agreement, PFPC receives a fee
calculated at an annual rate of .125% of the average daily net assets of the
Institutional Class of the Fund, with a minimum annual fee of $75,000.
Provident Distributors, Inc. ("PDI") provides certain
administrative services to the Institutional Class of the Fund 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 Fund in connection with the performance of services under the Agreement,
except a loss resulting from willful misfeasance, negligence or reckless
disregard of its duties and obligations thereunder.
As compensation for its services to the Institutional Class of the
Fund under the Administrative Services Agreement, PDI receives a monthly
fee for the previous month calculated at the annual rate of .15% of the average
daily net assets of the Institutional Class of the Fund.
Pursuant to an agreement between PDI and Counsellors Funds Service,
Inc. ("Counsellors"), dated as of May 29, 1998, PDI has delegated
substantially all of its administrative services agent functions to
Counsellors.
DISTRIBUTION AND SHAREHOLDER SERVICING -- ADVISOR CLASS
The Fund has entered into a Distribution Agreement with PDI
pursuant to its Distribution Plan (the "12b-1 Plan") under Rule 12b-1 of the
1940 Act. In consideration for Services (as defined below), the Distribution
Agreement provides that the Fund will pay PDI a fee calculated at an annual
rate of .25% of the average daily net assets of the Advisor Shares of the
Fund. Services performed by PDI include (a) the sale of the Fund's Advisor
Shares, as set forth in the 12b-1 Plan ("Selling Services"), (b) ongoing
servicing and/or maintenance of the accounts of shareholders of the Advisor
Class of the Fund, as set forth in the 12b-1 Plan ("Shareholder Services"),
and (c) sub-transfer agency services, subaccounting services or
administrative services, as set forth in the 12b-1 Plan ("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
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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
Fund, and 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 Fund to prospective shareholders of the Fund; 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 Inc., a registered broker-dealer. Mr. Sablowsky, a
Director of the Fund, has an indirect interest in the operation of the Plan
by virtue of his position with Fahnestock Co., Inc., a registered
broker-dealer.
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 Fund. In executing portfolio
transactions, BEA Associates seeks to obtain the best net results for the 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 Fund may be effected on domestic or
foreign securities exchanges. In transactions for securities not actively
traded on a domestic or foreign securities exchange, the 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
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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 Fund has no obligation to deal with any broker in the
execution of transactions in portfolio securities. The Fund may use affiliates
of Credit Suisse, 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.
Commission rates for brokerage transactions on foreign stock exchanges
are generally fixed. The reasonableness of any negotiated commission paid by
the Fund will be evaluated on the basis of the difficulty involved in execution,
the time taken to conclude the transaction, the extent of the broker's
commitment, if any, of its own capital and the amount involved in the
transaction. It should be noted that commission rates in U.S. markets are
negotiated.
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.
The Fund has no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. BEA Associates may, consistent with
the interests of the 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 the 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 the Fund and its other clients and that the
total commissions paid by the Fund will be reasonable in relation to the
benefits to the 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 Fund 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
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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 the 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 the Fund's anticipated need for liquidity makes
such action desirable. Any such repurchase prior to maturity reduces the
possibility that the 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 the 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 the Fund is concerned, in other cases it is
believed to be beneficial to the Fund. The 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.
A high rate of portfolio turnover (100% or more) involves
correspondingly greater brokerage commission expenses and other transaction
costs, which must be borne directly by the Fund. The Fund anticipates that its
annual portfolio turnover rate will vary from year to year. The portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the securities in the Fund during the year.
The Fund has the benefit of an exemptive order issued by the SEC under
the 1940 Act authorizing the Fund and other
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investment companies advised by BEA to acquire jointly securities issued in
private placements, subject to the terms and conditions of the order.
PURCHASES AND REDEMPTION INFORMATION
The Company reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption of the 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 the
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 the 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 the Fund.
Under the 1940 Act, the 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. (The
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 Fund 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 the Fund, is computed by adding the value of the
proportionate interest of each class of the 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. Securities
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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 not Business Days. Because net asset value per
share of the Fund is determined only on Business Days, the net asset value of
shares of the 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 the 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
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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. The Fund may advertise its "average annual total
return" by computing such return separately for each class of shares by
determining the average annual 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.
The Fund may advertise its "aggregate total return" by computing 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
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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 Fund 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 the
Fund's performance with other measures of investment return. For example, in
comparing the Fund's total return with data published by Lipper Analytical
Services, Inc., or CDA/Weisenberger Investment Technologies, Inc. or with the
performance of the Standard & Poor's 500 Stock Index, the 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 date. The Fund does not, for these purposes, deduct from the
initial value invested any amount representing sales charges. The Fund 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 Fund and its 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 Fund or its 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.
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The 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, the 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, if any, 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 the 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 the Fund's principal business of investing in stock or
securities (or in options or futures 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 the 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
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more than 10% of the outstanding voting securities of such issuer), and no more
than 25% of the value of the 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 the 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. The 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.
The 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% rate gain,
as the case may be), 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 the Fund as capital gain dividends may not exceed the net capital
gain of the 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 the Fund's respective taxable year.
In the case of corporate shareholders, distributions (other than
capital gain dividends) of the 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 the Fund for the year. Generally, a dividend
will be
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treated as a "qualifying dividend" only if it has been received from a domestic
corporation. However, if the 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 the 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 the
Fund that are treated as "qualifying dividends" for purposes of the dividends
received deduction in determining its "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,
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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%.
If for any taxable year the 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 the 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 the Fund will be disallowed to the extent an investor repurchases
shares of the 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
the 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 the Fund intends to distribute all of its
taxable income currently, the Fund does not anticipate incurring any liability
for this excise tax. However, investors should note that the 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."
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder 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
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retroactive effect with respect to the transactions contemplated herein.
Although the 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, the 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. The 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
Fund. The ability of the Fund to engage in options, short sale and futures
activities will be somewhat limited by the requirements for its 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 Fund enters 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 Fund. In
addition, losses realized by the Fund 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
Fund 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 Fund must make in
order to avoid federal excise tax. Furthermore, in determining its investment
company taxable income and ordinary income, the Fund 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 Fund of holding straddle positions may be
further affected by various elections provided under the Code and Treasury
regulations, but at the present time the Fund is uncertain which (if any) of
these elections they will make.
-48-
<PAGE>
Because only a few regulations implementing the straddle rules have
been promulgated by the U.S. Treasury, the tax consequences to the Fund 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 Fund enters into, as well as
futures transactions and transactions in forward foreign currency contracts that
are traded in the interbank market entered into by the Fund, 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 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 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
the Fund must make to avoid federal excise tax liability.
The Fund may elect not to have the year-end mark-to-market rule apply
to Section 1256 contracts that are part of a
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<PAGE>
"mixed straddle" with other investments of the 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.
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, the Fund may elect capital gain or loss treatment for such
transactions. Alternatively, the 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, the 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 the Fund acquires shares in
certain foreign investment entities, called "passive foreign investment
companies" ("PFIC"), the 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 the Fund.
Additional charges in the nature of interest may also be imposed on the Fund in
respect of such deferred taxes. However, in lieu of sustaining the foregoing
tax
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<PAGE>
consequences, the Fund may elect to have its investment in any PFIC taxed as an
investment in a "qualified electing fund" ("QEF"). If the Fund makes a QEF
election, it instead 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 the Fund for purposes of satisfying the Distribution Requirement and
the excise tax distribution requirement.
The Code permits the 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 was deemed to realize as
ordinary income. The Fund generally would not be subject to deferred federal
income tax on any gains that it was deemed to realize as a consequence of making
a mark-to-market election, but such gains would be 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 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, the 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.
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<PAGE>
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 13.93 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 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
-52-
<PAGE>
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); 100 million shares are classified as Class
ZZ Common Stock (BEA Class Long-Short Market Neutral), 100 million shares are
classified as Class AAA Common Stock (BEA Advisor Long-Short Market Neutral),
100 million shares are classified as Class BBB Common Stock (BEA Class
Long-Short Equity), 100 million shares are classified as Class CCC Common Stock
(BEA Advisor Long-Short Equity), 100 million shares are classified as Class DDD
Common Stock (BEA Class Select Economic Value Equity), 100 million shares are
classified as Class EEE Common Stock (BEA Advisor Select Economic Value Equity),
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
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<PAGE>
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 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 ten
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 and the Boston Partners Family
represents interest in three non-money market funds.
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
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<PAGE>
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 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.
CONTROL PERSONS. As of June 30, 1998, to the Company's knowledge,
the following named persons at the addresses shown below owned of record
approximately 5% or more of the total
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<PAGE>
outstanding shares of the class of the Company indicated below. See "Additional
Information Concerning the Company Shares" above. The Company does not know
whether such persons also beneficially own such shares.
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
BEA INT'L EQUITY- Employees Ret Plan Marshfield Clini 7.34%
INSTITUTIONAL 1000 N. Oak Avenue
Marshfield, WI 54449-5772
- -------------------------------------------------------------------------------
Indiana University Foundation 5.13%
Attn: Walter L. Koon, Jr.
P.O. Box 500
Bloomington, IN 47402-0500
- -------------------------------------------------------------------------------
BEA EMERGING Wachovia Bank North Carolina 45.76%
MARKETS EQUITY- Trust Carolina Power & Light Co.
INSTITUTIONAL Supplemental Retirement Trust
P.O. Box 3073
301 N. Main Street, MC NC 31057
Winston-Salem, NC 27101-3819
- -------------------------------------------------------------------------------
Clariden Bank 6.92%
Clariden Str. 26
CH-8002 Zurich
Switzerland
- -------------------------------------------------------------------------------
National Academy of Sciences 5.36%
2101 Constitution Ave. NW
Washington, DC 20418-0006
- -------------------------------------------------------------------------------
Arkansas Public Emp. Retirement Syst. 31.99%
124 W. Capitol Ave.
Little Rock, AR 72201-3704
- -------------------------------------------------------------------------------
BEA U.S. CORE EQUITY Werner & Pfleiderer Pension Plan 6.62%
- -INSTITUTIONAL Employees
663 E. Crescent Ave.
Ramsey, NJ 07446-1287
- -------------------------------------------------------------------------------
Credit Suisse Private Banking 11.57%
Dividend Reinvest Plan
C/o Credit Suisse Pvt Bkg
12 E. 49th St., 40th Floor
New York, NY 10017-1028
- -------------------------------------------------------------------------------
Washington Hebrew Congregation 11.58%
3935 Macomb St., NW
Washington, DC 20016-3799
- -------------------------------------------------------------------------------
Fleet National Bank Trst. 5.73%
Hospital St. Raphael Malpractice
Attn: 1958875010
P.O. Box 92800
Rochester, NY 14692-8900
- -------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
Patterson & Co. 46.24%
P.O. Box 7829
Philadelphia, PA 19101-7829
- -------------------------------------------------------------------------------
BEA U.S. CORE FIXED DCA Food Industries Inc. 5.87%
INCOME- 100 East Grand Ave.
INSTITUTIONAL Beloit, WI 53511-6255
- -------------------------------------------------------------------------------
Fidelity Investments Institutional 6.67%
Operations Co. Inc. (FHOC) as Agent
for Credit Suisse First Boston
Employee's Savings PSP
100 Magellan Way #KWIC
Covington, KY 41015-1987
- -------------------------------------------------------------------------------
Local 239 Pension Fund 6.17%
R.J. Scheer, A.I. Miceli, H. Blomberg,
R.T. Waldbauer, Jr, A. Evarieto,
I. Stockel TTEES DTD 04/01/1960
2380 Hempstead Tpke.
East Meadow, NY 11554-2030
- -------------------------------------------------------------------------------
The TJX Companies Inc. Retirement 5.49%
State Street Bank & Trust Co TTEE
770 Cochituate Rd.
Framingham, MA 01701-4672
- -------------------------------------------------------------------------------
Winifred Masterson Burke Foundation 8.22%
785 Mamaroneck Ave.
White Plains, NY 10605-2593
- -------------------------------------------------------------------------------
New England UFCW & Employers' 16.17%
Pension Fund Board of Trustees
161 Forbes Rd. Ste. 201
Braintree, MA 02184-2606
- -------------------------------------------------------------------------------
BEA STRATEGIC Sunkist Master Trust 52.79%
GLOBAL FIXED 14130 Riverside Dr.
INCOME FUND Sherman Oaks, CA 91423-2392
- -------------------------------------------------------------------------------
Patterson & Co. 37.75%
P.O. Box 7829
Philadelphia, PA 19101-7829
- -------------------------------------------------------------------------------
State St. Bank & Trust TTEE 5.36%
Fenway Holdings LLC Master Trust
P.O. Box 470
Boston, MA 02102-0470
- -------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
BEA HIGH YIELD- Carl F Besenbach 18.30%
INSTITUTIONAL Trst Michelin North America Inc.
Master Trust
P.O. Box 19001
Greenville, SC 29602-9001
- -------------------------------------------------------------------------------
Southdown Inc. Pension Pl 9.58%
Mac & Co A/C SDIF8575302
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- -------------------------------------------------------------------------------
Edward J. Demske TTEE 5.53%
Miami University Foundation
202 Roudebush Hall
Oxford, OH 45056
- -------------------------------------------------------------------------------
Fidelity Investments Institutional 16.96%
Operations Co. Inc. as Agent for
Certain Employee Benefits Plan
100 Magellan Way #KWIC
Covington, KY 41015-1987
- -------------------------------------------------------------------------------
MAC & CO A/C CSBF8605082 5.16%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- -------------------------------------------------------------------------------
BEA MUNI BOND- Arnold Leon 12.92%
INSTITUTIONAL c/o Fiduciary Trust Company
P.O. Box 3199 Church Street Station
New York, NY 10008-3199
- -------------------------------------------------------------------------------
William A. Marquard 36.97%
2199 Maysville Rd.
Carlisle, KY 40311-9716
- -------------------------------------------------------------------------------
Leo Bogart 5.58%
135 Central Park West 9N
New York, NY 10023-2465
- -------------------------------------------------------------------------------
Howard Isermann 6.37%
9 Tulane Dr.
Livingston, NJ 07039-6212
- -------------------------------------------------------------------------------
BEA INT'L EQUITY- TRANSCORP 8.09%
ADVISOR FBO William E Burns
P.O. Box 6535
Englewood, CO 80155-6535
- -------------------------------------------------------------------------------
State Street Bank & Trust Co. 16.80%
Cust. for the IRA of
Gerald W. McKinney
- -------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
5873 Cove Road
Ellensburg, WA 98926-7963
- -------------------------------------------------------------------------------
Bob & Co. 65.47%
P.O. Box 1809
Boston, MA 02105-1809
- -------------------------------------------------------------------------------
BEA EMERGING SEMA & Co. 81.25%
MARKETS EQUITY- 12 E 49th St. Fl. 41
ADVISOR New York, NY 10017-1028
- -------------------------------------------------------------------------------
NFSC FEBO # 114-623016 14.43%
Fmt Co Cust IRA
FBO Patricia F. Powell
5811 Valley Oak Dr.
Los Angeles, CA 90068-3650
- -------------------------------------------------------------------------------
BEA GLOBAL TELE- E.M. Warburg Pincus & Co. Inc. 13.47%
COMMUNICATIONS- Attn: Sandra Correale
ADVISOR 466 Lexington Ave.
New York, NY 10017-3140
- -------------------------------------------------------------------------------
Charles Schwab & Co. 5.98%
Special Custody Account for the
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122
- -------------------------------------------------------------------------------
John B. Hurford 36.68%
153 E. 53rd St., Fl. 57
New York, NY 10022-4611
- -------------------------------------------------------------------------------
FTC & Co. 18.10%
Attn: DATALYNX #148
P.O. Box 173736
Denver, CO 80217-3736
- -------------------------------------------------------------------------------
BEA HIGH YIELD- Charles Schwab & Co. 97.49%
ADVISOR Special Custody Account for the
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122
- -------------------------------------------------------------------------------
CASH PRESERVATION Jewish Family and Children's Agency 47.6%
MONEY MARKET of Phil Capital Campaign
Attn: S. Ramm
1610 Spruce Street
Philadelphia, PA 19103
- -------------------------------------------------------------------------------
Marian E. Kunz 12.7%
52 Weiss Ave.
Flourtown, PA 19031
- -------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
SAMSON STREET Saxon and Co. 72.3%
MONEY MARKET FBO Paine Webber
A/C 32 32 400 4000038
P.O. Box 7780 1888
Phila., PA 19182
- -------------------------------------------------------------------------------
Wasner & Co. for Account of 26.8%
Paine Webber and Managed Assets
Sundry Holdings
Attn: Joe Domizio
76 A 260 ABC 200 Stevens Drive
Lester, PA 19113
- -------------------------------------------------------------------------------
CASH PRESERVATION Gary L. Lange 39.7%
MUNICIPAL MONEY and Susan D. Lange
MARKET JT TEN
1354 Shady Knoll Ct.
Longwood, FL 32750
- -------------------------------------------------------------------------------
Andrew Diederich 6.3%
Doris Diederich
JT TEN
1003 Lindeman
Des Peres, MO 63131
- -------------------------------------------------------------------------------
Kenneth Farwell 11.4%
and Valerie Farwell
3854 Sullivan
St. Louis, MO 63107
- -------------------------------------------------------------------------------
Gwendolyn Haynes 5.1%
2757 Geyer
St. Louis, MO 63104
- -------------------------------------------------------------------------------
N/I MICRO CAP FUND Charles Schwab & Co. Inc. 14.2%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- -------------------------------------------------------------------------------
Janis Claflin, Bruce Fetzer and 5.2%
Winston Franklin, Robert Lehman Trst
the John E. Fetzer Institute, Inc.
U/A DTD 06-1992
Attn: Christina Adams
9292 West KL Ave.
Kalamazoo, MI 49009
- -------------------------------------------------------------------------------
-60-
<PAGE>
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
Public Inst. For Social Security 7.3%
1001 19th Str. N. 16th Flr.
Arlington, VA 22209
- -------------------------------------------------------------------------------
Portland General Holdings Inc. 16.5%
DTD 01/29/90
Attn: William J. Valach
121 S.W. Salmon St.
Portland, OR 97202
- -------------------------------------------------------------------------------
State Street Bank and Trust Company 8.4%
FBO Yale Univ. Ret. Pln for Staff Emp
State Street Bank & Tr Co. Master Tr.
Div.
Attn: Kevin Sutton
Solomon Williard Bldg. One Enterprise
Dr.
North Quincy, MA 02171
- -------------------------------------------------------------------------------
N/I GROWTH FUND Charles Schwab & Co. Inc. 18.7%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- -------------------------------------------------------------------------------
Citibank North America Inc. 19.5%
Trst Sargent & Lundy Retirement Trust
DTD 06/01/96
Mutual Fund Unit
Bld. B Floor 1 Zone 7
3800 Citibank Center Tampa
Tampa, FL 33616-9122
- -------------------------------------------------------------------------------
U.S. Equity Investment Portfolio LP 5.9%
1001 N. US Hwy One Suite 800
Jupiter, FL 33477
- -------------------------------------------------------------------------------
N/I GROWTH AND Charles Schwab & Co. Inc. 21.7%
VALUE FUND Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- -------------------------------------------------------------------------------
The John E. Fetzer Institute Inc. 5.2%
Attn: Christina Adams
9292 W. KL Ave.
Kalamazoo, MI 49009
- -------------------------------------------------------------------------------
-61-
<PAGE>
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
Bankers Trust Cust Pge-Enron 5.8%
Foundation
Attn: Procy Fernandez
300 S. Grand Ave. 40th Floor
Los Angeles, CA 90071
- -------------------------------------------------------------------------------
N/I LARGER CAP Charles Schwab & Co. Inc. 35.3%
VALUE FUND Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- -------------------------------------------------------------------------------
Bank of America NT & SA 34.1%
FBO Community Hospital Central Cal
Pn Pl
A/C 10-35-155-2048506
Attn: Mutual Funds 38615
P.O. Box 513577
Los Angeles, CA 90051
- -------------------------------------------------------------------------------
BOSTON PARTNERS Dr. Janice B. Yost 17.8%
LARGE CAP FUND INST Trst Mary Black Foundation Inc.
SHARES Bell Hill -- 945 E. Main St.
Spartanburg, SC 29302
- -------------------------------------------------------------------------------
Shady Side Academy Endowment 5.0%
423 Fox Chapel Rd.
Pittsburgh, PA 15238
- -------------------------------------------------------------------------------
Saxon And Co. 6.8%
FBO UJF Equity Funds
AC 10-01-001-0578481
P.O. Box 7780-1888
Philadelphia, PA 19182
- -------------------------------------------------------------------------------
Irving Fireman's Relief & Ret Fund 7.4%
Attn: Edith Auston
825 W. Irving Blvd.
Irvin, TX 75060
- -------------------------------------------------------------------------------
Wells Fargo Bank 7.1%
Trst Stoel Rives
Tr 008125
P.O. Box 9800
Calabasas, CA 91308
- -------------------------------------------------------------------------------
James B. Beam 6.7%
Trst World Publishing Co Pft Shr Trust
P.O. Box 1511
Wenatchee, WA 98807
- -------------------------------------------------------------------------------
-62-
<PAGE>
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
Swanee Hunt and Charles Ansbacher 8.6%
Trst The Swanee Hunt Family Fund
C/o Elizabeth Alberti
168 Brattle St.
Cambridge, MA 02138
- -------------------------------------------------------------------------------
Swanee Hunt and Charles Ansbacher 6.6%
Trst The Hunt Alternatives Fund
C/o Elizabeth Alberti
168 Brattle St.
Cambridge, MA 02138
- -------------------------------------------------------------------------------
Samuel Gary and Ronald Williams 7.5%
And David Younggren
Trst Gary Tax Advantaged PRO+PSP
370 17th St. Suite 5300
Denver, CO 80202
- -------------------------------------------------------------------------------
BOSTON PARTNERS National Financial Services Corp. 67.0%
LARGE CAP FUND For the Exclusive Bene of Our
INVESTOR SHARES Customers
Attn: Mutual Funds 5th Floor
200 Liberty St I World Financial
Center
New York, NY 10281
- -------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 10.2%
Special Custody Account for the
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- -------------------------------------------------------------------------------
BOSTON PARTNERS U.S. Bank National Association as Cust 5.0%
MID CAP VALUE FUND Jean Vollum
INST. SHARES P.O. Box 64010
St. Paul, MN 55164-0010
- -------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette 12.8%
Securities Corporation
Attn: Mutual Funds
P.O. Box 2052
Jersey City, NJ 07303
- -------------------------------------------------------------------------------
North American Trst. Co. 6.5%
FBO Cooley Godward
P.O. Box 84419
San Diego, CA 92138
- -------------------------------------------------------------------------------
-63-
<PAGE>
- -------------------------------------------------------------------------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE OF
ADDRESS FUND HELD
- -------------------------------------------------------------------------------
John Carroll University 7.5%
20700 N. Park Blvd.
University Heights, OH 44118
- -------------------------------------------------------------------------------
MAC & CO. 10.6%
A/C BPHF 3006002
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- -------------------------------------------------------------------------------
ISTCO 7.5%
P.O. Box 523
Belleville, IL 62222-0523
- -------------------------------------------------------------------------------
Coastal Insurance Enterprises Inc. 9.7%
Attn: Chris Baldwin
P.O. Box 240429
Montgomery AL 36124
- -------------------------------------------------------------------------------
Healthcare Workers Compensation 6.7%
Fund
Attn: Chris Baldwin
P.O. Box 240429
Montgomery AL 36124
- -------------------------------------------------------------------------------
BOSTON PARTNERS National Financial Svcs Corp. for 12.5%
MID CAP VALUE FUND Exclusive Bene of Our Customers Sal
INV SHARES Vella
200 Liberty St.
New York, NY 10281
- -------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 42.6%
Special Custody Account for Benefit of
Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- -------------------------------------------------------------------------------
George B. Smithy, Jr 5.5%
38 Greenwood Rd.
Wellesley, MA 02181
- -------------------------------------------------------------------------------
BOSTON PARTNERS Boston Partners Asset Mgmt LP 79.3%
BOND FUND One Financial Center 43rd Fl.
INSTITUTIONAL Boston, MA 02111
SHARES
- -------------------------------------------------------------------------------
Chiles Foundation 20.7%
111 S.W. Fifth Ave.
4010 US Bancorp Tower
Portland, OR 97204
- -------------------------------------------------------------------------------
BOSTON PARTNERS Charles Schwab & Co. Inc. 77.0%
BOND FUND INVESTOR Special Custody Account for Benefit of
SHARES Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- -------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette 5.1%
Securities Corporation
Attn: Mutual Funds
P.O. Box 2052
Jersey City, NJ 07303
- -------------------------------------------------------------------------------
Stephen W. Hamilton 15.3%
17 Lakeside Ln
N. Barrington, IL 60010
- -------------------------------------------------------------------------------
As of the above date, directors and officers as a group owned less
than one percent of the shares of the Company.
-64-
<PAGE>
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.
A-1
<PAGE>
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:
"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.
A-2
<PAGE>
"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.
"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
A-3
<PAGE>
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."
"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.
A-4
<PAGE>
"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. 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.
A-5
<PAGE>
"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 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
A-6
<PAGE>
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.
"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.
A-7
<PAGE>
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.
"B" - Bonds are considered highly speculative. these ratings indicate
that significant credit risk is present, but a
A-8
<PAGE>
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
A-9
<PAGE>
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.
"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.
A-10
<PAGE>
"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.
"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-11
<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.
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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 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
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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.
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
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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.
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
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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 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
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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
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substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, 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
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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.
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 unds from registration as a "commodity
pool operator."
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