<PAGE>
REGISTRATION NO. 33-27958/811-5797
As Filed with the Securities and Exchange Commission
on December 30, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X /
--
PRE-EFFECTIVE AMENDMENT NO. __ /__/
POST-EFFECTIVE AMENDMENT NO. 25 /X /
--
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X /
--
AMENDMENT NO. 27 /X /
--
NORTH AMERICAN FUNDS
(Exact Name of Registrant as Specified in Charter)
116 Huntington Avenue
Boston, Massachusetts 02116
(617) 266-6004
(Address of Principal Executive Offices)
Joseph Scott, President
North American Funds
116 Huntington Avenue
Boston, Massachusetts 02116
(Agent for Service)
____________________
Copy to:
Sarah E. Cogan, Esq. James D. Gallagher
Simpson Thacher & Bartlett General Counsel
425 Lexington Avenue North American Security
New York, New York 10017 Life Insurance Company
116 Huntington Avenue
Boston, MA 02116
It is proposed that this filing will become effective December 31, 1996
pursuant to paragraph (b) of Rule 485
Registrant has heretofore registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Rule 24f-2 and filed its Rule 24f-2
Notice for the fiscal year ended October 31, 1996 on December 23, 1996.
<PAGE>
NORTH AMERICAN FUNDS
CROSS REFERENCE TO ITEMS
REQUIRED BY RULE 404(a)
<TABLE>
<CAPTION>
N-1A Item of Part A Caption in Prospectus
- ------------------- ---------------------
<S> <C>
1. Cover Page
2. Summary
3. Financial Highlights; General
Information - Performance Information
4. General Information - Organization of
the Fund; Investment Portfolios; Risk
Factors
5. Management of the Fund; General
Information-Custodian and Transfer and
Dividend Disbursing Agent
5A. Not Applicable
6. Multiple Pricing System; General
Information-Dividends and
Distributions; General
Information-Taxes; Shareholder
Services-Shareholder Inquiries
7. Multiple Pricing System; Shareholder
Services; Purchase of Shares
8. Multiple Pricing System; Shareholder
Services-Redemption of Shares, and
General Methods of Redeeming Shares;
Purchase of Shares
9. Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A Item of Part B Caption in Part B
- ------------------- ------------------
<S> <C>
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Policies; Investment
Practices and Related Risks; Investment
Restrictions; Portfolio Turnover
14. Management of the Fund
15. Financial Statements
16. Investment Management Arrangements;
Distribution Plan
17. Portfolio Brokerage
18. General
19. Determination of Net Asset Value
20. Taxes
21. Not Applicable
22. Performance Data
23. Financial Statements
</TABLE>
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE>
NORTH AMERICAN FUNDS
116 Huntington Avenue, Boston, Massachusetts 02116
(800) 872-8037
North American Funds (the "Fund") is an open-end, diversified
management investment company (mutual fund) providing a range of investment
options through thirteen separate investment portfolios (the "Portfolios"), each
of which has a specific investment objective. This Prospectus relates to the
following portfolios of the Fund:
<TABLE>
<CAPTION>
<S> <C>
[_] INTERNATIONAL SMALL CAP FUND
[_] SMALL/MID CAP FUND
[_] GLOBAL EQUITY FUND
[_] GROWTH EQUITY FUND
[_] INTERNATIONAL GROWTH AND INCOME FUND
[_] GROWTH AND INCOME FUND
[_] EQUITY-INCOME FUND
[_] BALANCED FUND
[_] STRATEGIC INCOME FUND
[_] INVESTMENT QUALITY BOND FUND
NATIONAL MUNICIPAL BOND FUND
U.S. GOVERNMENT SECURITIES FUND
MONEY MARKET FUND
</TABLE>
The investment objectives and certain policies of each Portfolio are set
forth on the inside front cover. There can be no assurance that any Portfolio
will achieve its investment objective and each of the Portfolios may employ
certain investment practices which involve special risk considerations. See
also the discussion of "RISK FACTORS" in this Prospectus. In pursuing their
investment objectives, the Strategic Income Fund reserves the right to invest
without limitation, and the Investment Quality Bond and Equity-Income Funds may
invest up to 20% and 10%, respectively, of their assets, in high yield/high risk
securities, commonly known as "junk bonds." Investments of this type involve
comparatively greater risks, including price volatility and risk of default in
the payment of interest and principal, than higher-quality securities. Although
the Strategic Income Fund's Subadviser has the ability to invest up to 100% of
the Portfolio's assets in lower-rated securities, the Portfolio's Subadviser
does not anticipate investing in excess of 75% of the Portfolio's assets in such
securities. Purchasers should carefully assess the risks associated with an
investment in the Strategic Income Fund. See "RISK FACTORS -- High Yield/High
Risk Securities." An investment in the Money Market Fund is neither insured nor
guaranteed by the U.S. Government, and there can be no assurance that the Money
Market Fund will be able to maintain a stable net asset value of $1.00 per
share. Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before making an investment decision.
Investors are encouraged to read this Prospectus and to retain it for future
reference. Additional information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request and without
charge by writing the Fund at the above address or calling (800) 872-8037 and
requesting the "Statement of Additional Information for North American Funds",
dated the date of this Prospectus (hereinafter "Statement of Additional
Information"). The Statement of Additional Information is incorporated by
reference into this Prospectus. The Securities and Exchange Commission
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference, and other
information regarding registrants that file electronically with the Commission.
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.
The date of this Prospectus is December 31, 1996.
<PAGE>
The investment objectives and certain policies of each Portfolio are set forth
below.
INTERNATIONAL SMALL CAP FUND -- The investment objective of the International
Small Cap Fund is to seek long term capital appreciation. Founders manages the
International Small Cap Fund and will pursue this objective by investing
primarily in securities issued by foreign companies which have total market
capitalizations or annual revenues of $1 billion or less. These securities may
represent companies in both established and emerging economies throughout the
world.
SMALL/MID CAP FUND -- The investment objective of the Small/Mid Cap Fund is to
seek long term capital appreciation. Alger manages the Small/Mid Cap Fund and
will pursue this objective by investing at least 65% of the portfolio's total
assets (except during temporary defensive periods) in small/mid cap equity
securities.
GLOBAL EQUITY FUND -- The investment objective of the Global Equity Fund (prior
to October 1, 1996, the "Global Growth Fund") is long-term capital appreciation.
Morgan Stanley manages the Global Equity Fund and intends to pursue this
objective by investing primarily in a globally diversified portfolio of common
stocks and securities convertible into or exercisable for common stocks.
GROWTH EQUITY FUND -- The investment objective of the Growth Equity Fund is to
seek long-term growth of capital. Founders manages the Growth Equity Fund and
will pursue this objective by investing, under normal market conditions, at
least 65% of its total assets in common stocks of well-established, high-quality
growth companies that Founders believes have the potential to increase earnings
faster than the rest of the market.
INTERNATIONAL GROWTH AND INCOME FUND -- The investment objective of the
International Growth and Income Fund is to seek long-term growth of capital and
income. The portfolio is designed for investors with a long-term investment
horizon who want to take advantage of investment opportunities outside the
United States.
GROWTH AND INCOME FUND -- The investment objective of the Growth and Income Fund
is to provide long-term growth of capital and income consistent with prudent
investment risk. Wellington Management manages the Growth and Income Fund and
seeks to achieve the Fund's objective by investing primarily in a diversified
portfolio of common stocks of U.S. issuers which Wellington Management believes
are of high quality.
EQUITY-INCOME FUND -- The investment objective of the Equity-Income Fund (prior
to December 31, 1996, the "Value Equity Fund") is to provide substantial
dividend income and also long term capital appreciation. T. Rowe Price manages
the Equity-Income Fund and seeks to attain this objective by investing primarily
in dividend-paying common stocks, particularly of established companies with
favorable prospects for both increasing dividends and capital appreciation.
BALANCED FUND -- The investment objective of the Balanced Fund (prior to October
1, 1996, the "Asset Allocation Fund") is current income and capital
appreciation. Founders is the manager of the Balanced Fund and seeks to attain
this objective by investing in a balanced portfolio of common stocks, U.S. and
foreign government obligations and a variety of corporate fixed-income
securities.
STRATEGIC INCOME FUND -- The investment objective of the Strategic Income Fund
is to seek a high level of total return consistent with preservation of capital.
The Strategic Income Fund seeks to achieve its objective by giving its
Subadviser, SBAM, broad discretion to deploy the Strategic Income Fund's assets
among certain segments of the fixed-income market as SBAM believes will best
contribute to the achievement of the portfolio's objective.
INVESTMENT QUALITY BOND FUND -- The investment objective of the Investment
Quality Bond Fund is to provide a high level of current income consistent with
the maintenance of principal and liquidity. Wellington Management manages the
Investment Quality Bond Fund and seeks to achieve the Fund's objective by
investing primarily in a diversified portfolio of investment grade corporate
bonds and U.S. Government bonds with intermediate to longer term
maturities.
NATIONAL MUNICIPAL BOND FUND -- The investment objective of the National
Municipal Bond Fund is to achieve a high level of current income which is exempt
from regular federal income taxes, consistent with the preservation of capital,
by investing primarily in a portfolio of municipal obligations. The Portfolio
will not invest in municipal obligations that are rated below investment grade
at the time of purchase.
U.S. GOVERNMENT SECURITIES FUND -- The investment objective of the U.S.
Government Securities Fund is to obtain a high level of current income
consistent with preservation of capital and maintenance of liquidity. SBAM
manages the U.S. Government Securities Fund and seeks to attain its objective by
investing a substantial portion of its assets in debt obligations and mortgage
backed securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and derivative securities such as collateralized mortgage
obligations backed by such securities.
MONEY MARKET FUND -- The investment objective of the Money Market Fund is to
obtain maximum current income consistent with preservation of principal and
liquidity. MAC manages the Money Market Fund and seeks to achieve this
objective by investing in high quality, U.S. dollar denominated money market
instruments.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY
The Fund........................................................
Classes of Shares...............................................
Fee Table and Example...........................................
FINANCIAL HIGHLIGHTS..............................................
MULTIPLE PRICING SYSTEM...........................................
INVESTMENT PORTFOLIOS.............................................
International Small Cap Fund....................................
Small/Mid Cap Fund..............................................
Global Equity Fund (formerly, the Global Growth Fund)...........
Growth Equity Fund..............................................
International Growth and Income Fund............................
Growth and Income Fund..........................................
Equity-Income Fund (formerly, the Value Equity; and prior
thereto the Growth Fund)................................
Balanced Fund (formerly, the Asset Allocation Fund).............
Strategic Income Fund...........................................
Investment Quality Bond Fund....................................
National Municipal Bond Fund....................................
U.S. Government Securities Fund.................................
Money Market Fund...............................................
RISK FACTORS......................................................
Investment Restrictions Generally...............................
High Yield/High Risk Securities.................................
Foreign Securities..............................................
Warrants........................................................
Lending Portfolio Securities....................................
When-Issued Securities ("Forward Commitments")..................
Hedging And Other Strategic Transactions........................
Illiquid Securities.............................................
Repurchase Agreements and Reverse Repurchase Agreements.........
Mortgage Dollar Rolls...........................................
MANAGEMENT OF THE FUND............................................
Advisory Arrangements...........................................
Subadvisory Arrangements........................................
Fund Expenses...................................................
GENERAL INFORMATION...............................................
Net Asset Value.................................................
Dividends and Distributions.....................................
Taxes...........................................................
National Municipal Bond Funds - Taxation........................
Performance Information.........................................
Organization of the Fund........................................
Custodian and Transfer and Dividend.............................
Disbursing Agents...............................................
Independent Accountants.........................................
PURCHASE OF SHARES................................................
Introduction....................................................
General Methods of Purchasing Shares............................
Share Price.....................................................
Class A Shares..................................................
Class B Shares..................................................
Class C Shares..................................................
Contingent Deferred Sales Charge................................
Waiver of CDSC..................................................
Other Dealer Compensation.......................................
Distribution Expenses...........................................
SHAREHOLDER SERVICES..............................................
Automatic Investment Plan.......................................
Exchange Privilege..............................................
Transfer of Shares..............................................
Redemption of Shares............................................
General Methods of Redeeming Shares.............................
Reinstatement Privilege.........................................
Minimum Account Balance...........................................
Redemption In Kind..............................................
Additional Shareholder Privileges.................................
Automatic Investment Plan.......................................
Automatic Dividend Diversification (ADD)........................
Systematic Investing............................................
Systematic Withdrawal Plan......................................
Checkwriting....................................................
Telephone Transactions..........................................
Certificates....................................................
How to Obtain Information on Your Investment....................
APPENDIX I........................................................ A-1
APPENDIX II....................................................... A-4
</TABLE>
<PAGE>
SUMMARY
The Fund
The Fund is an open-end, diversified, management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on September 28, 1988.
NASL Financial Services, Inc. ("NASL Financial" or, in its capacity as
the Fund's investment adviser, the "Adviser") serves as the investment adviser
and distributor for the Fund. NASL Financial is a wholly-owned subsidiary of
the Fund's sponsor, North American Security Life Insurance Company, based in
Boston, Massachusetts, the ultimate controlling parent of which is The
Manufacturers Life Insurance Company ("Manulife"), a Canadian mutual life
insurance company based in Toronto, Canada.
NASL Financial provides certain expense guarantees and administrative
services to the Fund and its shareholders pursuant to an investment advisory
contract (the "Advisory Agreement"). In addition, it contracts with and
compensates eight investment subadvisers which provide portfolio management
services to all Portfolios of the Fund (the "Subadviser(s)"):
<TABLE>
<CAPTION>
<S> <C>
Subadviser Subadviser To
-------------
Fred Alger Management, Inc. ("Alger") Small/Mid Cap Fund
Founders Asset Management, Inc. ("Founders") Growth Equity Fund
Balanced Fund
International Small Cap Fund
Wellington Management Company Growth and Income Fund
("Wellington Management") Investment Quality Bond Fund
Salomon Brothers Asset Management U.S. Government Securities Fund
("SBAM") Strategic Income Fund
National Municipal Bond Fund
J.P. Morgan Investment Management Inc. International Growth and Income Fund
("J.P. Morgan")
Manufacturers Adviser Corporation ("MAC") Money Market Fund
Morgan Stanley Asset Management, Inc. Global Equity Fund
T. Rowe Price Associates, Inc. Equity-Income Fund
</TABLE>
NASL Financial also serves as the distributor of the Fund's shares and
in that role has entered into an exclusive promotional agent agreement with Wood
Logan Associates, Inc. ("Wood Logan") to provide marketing services in
connection with the sales of Fund's shares. See "PURCHASE OF SHARES --
Distribution Expenses."
Each Portfolio has a stated specific investment objectives, which
together with certain investment policies are set forth on the inside cover of
this Prospectus and are also described below. See "INVESTMENT PORTFOLIOS."
There can be no assurance that any Portfolio will attain its investment
objective. The Fund's annual report to shareholders, which is available without
charge upon request, contains a discussion of Fund performance.
In addition to the risks inherent in any investment in securities,
certain Portfolios of the Fund are subject to particular risks associated with
investing in high yield securities, investing in foreign securities, investing
in warrants, lending portfolio securities, investing in when-issued securities
and engaging in various hedging and other strategic transactions (also referred
to as "derivative transactions"). See "RISK FACTORS."
1
<PAGE>
Classes of Shares
As of April 1, 1994, the Fund began offering three classes of shares
in each Portfolio ("Class A" shares, "Class B" shares and "Class C" shares) to
the general public with each class having a different sales charge structure and
expense level (the "Multiple Pricing System"). Each class has distinct
advantages and disadvantages for different investors, and investors may choose
the class that best suits their circumstances and objectives. See "MULTIPLE
PRICING SYSTEM."
Class A shares. Purchases of Class A shares of less than $1 million
are offered for sale at net asset value per share plus a front end sales charge
of up to 4.75% (with the exception of Class A shares of the Money Market Fund,
which are offered without such a charge). Purchases of Class A shares of $1
million or more made on or after May 1, 1995 are offered for sale at net asset
value without a front end sales charge, but subject to a contingent deferred
sales charge ("CDSC") of 1% of the dollar amount subject thereto during the
first year after purchase. The applicable percentage is assessed on an amount
equal to the lesser of the original purchase price or the redemption price of
the shares redeemed. In addition, Class A shares are subject to a distribution
fee of up to .10% of their respective average annual net assets and a service
fee of up to .25% of their respective average annual net assets (with the
exception of Class A shares of the Money Market Fund, which bear no such fees,
and Class A shares of the National Municipal Bond Fund, which are subject to a
service fee of up to .15% of Class A average annual net assets and are not
subject to any distribution fee).
Class B shares. Class B shares are offered for sale for purchases of
$250,000 or less. Class B shares are offered for sale at net asset value
without a front end sales charge but are subject to a CDSC of 5% of the dollar
amount subject thereto during the first and second year after purchase, and
declining by 1% each year thereafter to 0% after the sixth year. The applicable
percentage is assessed on an amount equal to the lesser of the original purchase
price or the redemption price of the shares redeemed. Class B shares are also
subject to a distribution fee of up to .75% of their respective average annual
net assets and a service fee of up to .25% of their respective average annual
net assets (with the exception of Class B shares of the Money Market Fund, which
bear no such fees). Class B shares will automatically convert to Class A shares
of the same Portfolio six years after purchase.
Class C shares. Class C shares are offered for sale for purchases of
less than $1 million, at net asset value without a front end sales charge .
Class C shares purchased on or after May 1, 1995, are subject to a CDSC of 1% of
the dollar amount subject thereto during the first year after purchase. Shares
purchased prior to May 1, 1995 are not subject to any CDSC upon redemption. The
applicable percentage is assessed on an amount equal to the lesser of the
original purchase price or the redemption price of shares redeemed. Class C
shares are subject to a distribution fee of up to .75% of their respective
average annual net assets and a service fee of up to .25% of their respective
average annual net assets (with the exception of Class C shares of the Money
Market Fund, which bear no such fees). Class C shares will automatically
convert to Class A shares of the same Portfolio ten years after purchase.
The Fund implemented the Multiple Pricing System by reclassifying the
then existing shares of each Portfolio as shares of a particular class of each
such Portfolio. This reclassification was effected in such a manner so that the
shares of each Portfolio outstanding at April 1, 1994 would be subject to
identical distribution and service fees both before and after the
reclassification. Specifically, all outstanding shares of the Strategic Income,
Investment Quality Bond, U.S. Government Securities, National Municipal Bond,
and Money Market Funds were reclassified as Class A shares of each such
Portfolio, and all outstanding shares of the Global Equity, Equity-Income,
Growth and Income and Balanced Funds were reclassified as Class C shares of each
such Portfolio.
For a discussion of factors to consider in selecting the most
beneficial class of shares for a particular investor, see "MULTIPLE PRICING
SYSTEM--Factors for Consideration."
2
<PAGE>
Fee Table and Example
The following tables are intended to assist investors in understanding
the expenses applicable to each class of shares of each Portfolio:
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Class A Class B Class C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases
of shares (as a percentage
of offering price)
All Portfolios except
Money Market Fund....... 4.75%* None None
Money Market Fund........ None None None
Sales charge imposed on
dividend reinvestment
All Portfolios........... None None None
Contingent Deferred Sales
Charge
(as a percentage of
original purchase price
or redemption price,
whichever is lower)
All Portfolios except
Money Market Fund....... 1% first year **5% first year 1% first year***
........................ 0% after first 5% second year 0% after first
........................ year 4% third year year
........................ 3% fourth year
........................ 2% fifth year
........................ 1% sixth year,
........................ and
........................ 0% after sixth
........................ year
........................
........................
Money Market Fund....... None None None
Exchange Fee None None None
</TABLE>
* See schedule of sales charge breakpoints under "Purchases of Shares - Class A
Shares."
**For purchases of $1 million or more made on or after May 1, 1995.
***For purchases made on or after May 1, 1995.
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets after fee
waivers and expense reimbursements in certain cases). Total Fund Operating
Expenses absent reimbursement or waiver are set forth below under each Fund's
"Financial Highlights."
<TABLE>
<CAPTION>
Portfolio Class A Class B Class C
<S> <C> <C> <C>
International Small Cap Fund
Management fees..................... 1.050% 1.050% 1.050%
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.500% 0.500% 0.500%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.900% 2.550% 2.550%
Small/Mid Cap Fund
Management fees..................... 0.925% 0.925% 0.925%
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.400% 0.400% 0.400%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.675% 2.325% 2.325%
Portfolio Class A Class B Class C
Global Equity Fund (formerly,
"Global Growth Fund")
Management fees..................... 0.900% 0.900% 0.900%
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.500% 0.500% 0.500%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.750% 2.400% 2.400%
Growth Equity Fund
Management fees..................... 0.900% 0.900% 0.900%
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.400% 0.400% 0.400%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.650% 2.300% 2.300%
International Growth and Income
Fund
Management fees..................... 0.900% 0.900% 0.900%
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.500% 0.500% 0.500%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.750% 2.400% 2.400%
Growth and Income Fund
Management fees..................... 0.725% 0.725% 0.725%
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.265% 0.265% 0.265%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.340% 1.990% 1.990%
Equity-Income Fund (formerly, "Value
Equity Fund" and previously
"Growth Fund")
Management fees..................... 0.800% 0.800% 0.800%
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.265% 0.265% 0.265%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.415% 2.065% 2.065%
Balanced Fund (formerly, "Asset
Allocation Fund")
Management fees..................... 0.775% 0.775% 0.775%
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.265% 0.265% 0.265%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.390% 2.040% 2.040%
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Strategic Income Fund
Management fees..................... 0.750% 0.750% 0.750%
Rule 12b-1 fees..................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver)... 0.400% 0.400% 0.400%
----- ----- -----
Total fund operating expenses*
(after fee waiver).................. 1.500% 2.150% 2.150%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Portfolio Class A Class B Class C
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Quality Bond..............
Management fees.................... 0.600% 0.600% 0.600%
Rule 12b-1 fees.................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver).. 0.300% 0.300% 0.300%
----- ----- -----
Total fund operating expenses*
(after fee waiver)................. 1.250% 1.900% 1.900%
National Municipal Bond Fund
Management fees.................... 0.600% 0.600% 0.600%
Rule 12b-1 fees.................... 0.150% 1.000% 1.000%
Other expenses*(after fee waiver).. 0.240% 0.240% 0.240%
----- ----- -----
Total fund operating expenses*
(after fee waiver)................. 0.990% 1.840% 1.840%
U.S. Government Securities Fund......
Management fees.................... 0.600% 0.600% 0.600%
Rule 12b-1 fees.................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver).. 0.300% 0.300% 0.300%
----- ----- -----
Total fund operating expenses*
(after fee waiver)................. 1.250% 1.900% 1.900%
Money Market Fund
Management fees.................... 0.200% 0.200% 0.200%
Rule 12b-1 fees.................... 0.000% 1.000% 1.000%
Other expenses*(after fee waiver).. 0.300% 0.300% 0.300%
----- ----- -----
Total fund operating expenses*.....
(after fee waiver)................. 0.500% 0.500% 0.500%
</TABLE>
*Amounts listed under "Other expenses" and "Total fund operating expenses"
in the table above for each class of all Portfolios (except the International
Small Cap, Growth Equity and the Small/Mid Cap Funds) are based on the
application of expense limitations applicable during the most recent fiscal
year. See "Advisory Arrangements" below. Amounts listed under "Other expenses"
and "Total fund operating expenses" for the above-named Portfolios are based on
estimates for current fiscal year expenses. To the extent that actual expenses
are lower than the expense limitations, "Other expenses" may vary as between
classes of a Portfolio as a result of certain class-specific incremental
expenses being allocated to a particular class of shares.
The amounts set forth under the caption "Shareholder Transaction Expenses"
are the maximum sales charges applicable to purchases of Fund shares. Because a
portion of the 12b-1 fees payable by each class of shares is considered an asset
based sales charge by the National Association of Securities Dealers, Inc.
("NASD"), long-term shareholders in each class of each Portfolio (other than the
Money Market Fund) may pay more than the economic equivalent of the maximum
front end sales charges permitted by the NASD. See "PURCHASE OF SHARES -- Class
A Shares -- Reduced Sales Charges" in this Prospectus.
The fees and expenses listed under the caption "Annual Fund Operating
Expenses" are described in this Prospectus under the captions "MANAGEMENT OF THE
FUND" and "PURCHASE OF SHARES -- Distribution Expenses." The Advisory Agreement
and Distribution Plans operate to limit Total Fund Operating Expenses to the
amounts listed in the fee table. Such contractual expense limits shall remain in
effect unless the Adviser notifies the Fund (with 30 days notice) that it will
not continue the limits. See "MANAGEMENT OF THE FUND -- Advisory Agreement."
Total Fund Operating Expenses for the year ended October 31, 1996, absent
reimbursement or waiver are set forth below under "Financial Highlights."
EXAMPLE
- -------
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end of each time
period, with the exception of the lines marked "Class B No redemption" and
"Class C No redemption" in which case it is assumed that no redemption is made
at the end of each time period:
6
<PAGE>
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
International Small Cap
Class A Shares $66 $104
Class B Shares $76 $119
Class B No redemption $26 $79
Class C Shares $36 $79
Class C No redemption $26 $79
Small/Mid Cap
Class A Shares $64 $98
Class B Shares $74 $113
Class B No redemption $24 $73
Class C Shares $34 $73
Class C No redemption $24 $73
Global Equity (formerly, "Global Growth")
Class A Shares $64 $100 $138 $244
Class B Shares $74 $115 $148 $243*
Class B No redemption $24 $75 $128 $243*
Class C Shares $34 $75 $128 $274
Class C No redemption $24 $75 $128 $274
Growth Equity Fund
Class A Shares $63 $97
Class B Shares $73 $112
Class B No redemption $23 $72
Class C Shares $33 $72
Class C No redemption $23 $72
International Growth and Income
Class A Shares $64 $100 $138 $244
Class B Shares $74 $115 $148 $243
Class B No redemption $24 $75 $128 $243
Class C Shares $34 $75 $128 $274
Class C No redemption $24 $75 $128 $274
Growth and Income
Class A Shares $60 $88 $117 $201
Class B Shares $70 $102 $127 $200*
Class B No redemption $20 $62 $107 $200*
Class C Shares $30 $62 $107 $232
Class C No redemption $20 $62 $107 $232
Equity-Income (formerly, "Value Equity"
and previously "Growth")
Class A Shares $60 $88 $117 $201
Class B Shares $70 $102 $127 $200*
Class B No redemption $20 $62 $107 $200*
Class C Shares $30 $62 $107 $232
Class C No redemption $20 $62 $107 $232
Balanced (formerly, "Asset Allocation")
Class A Shares $60 $88 $117 $201
Class B Shares $70 $102 $127 $200*
Class B No redemption $20 $62 $107 $200*
Class C Shares $30 $62 $107 $232
</TABLE>
7
<PAGE>
Class C No redemption $20 $ 62 $107 $232
8
<PAGE>
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Strategic Income
Class A Shares $62 $ 93 $125 $218
Class B Shares $72 $107 $135 $217*
Class B No redemption $22 $ 67 $115 $217*
Class C Shares $32 $ 67 $115 $248
Class C No redemption $22 $ 67 $115 $248
Investment Quality Bond
Class A Shares $60 $ 85 $113 $191
Class B Shares $69 $100 $123 $190*
Class B No redemption $19 $ 60 $103 $190*
Class C Shares $29 $ 60 $103 $222
Class C No redemption $19 $ 60 $103 $222
National Municipal Bond
Class A Shares $57 $ 78 $100 $163
Class B Shares $69 $ 98 $120 $173*
Class B No redemption $19 $ 58 $100 $173*
Class C Shares $29 $ 58 $100 $216
Class C No redemption $19 $ 58 $100 $216
U.S. Government Securities
Class A Shares $60 $ 85 $113 $191
Class B Shares $69 $100 $123 $190*
Class B No redemption $19 $ 60 $103 $190*
Class C Shares $29 $ 60 $103 $222
Class C No redemption $19 $ 60 $103 $222
Money Market
Class A Shares $ 5 $ 16 $ 28 $ 63
Class B Shares $ 5 $ 16 $ 28 $ 63
Class C Shares $ 5 $ 16 $ 28 $ 63
</TABLE>
* Reflects the conversion to Class A shares six years after purchase; therefore
years seven through ten reflect Class A expenses.
The foregoing Fee Table and Example are intended to assist investors in
understanding the various costs and expenses that investors in the Fund bear
directly and indirectly. The examples for the International Small Cap and the
Small/Mid Cap Funds do not include 5 and 10 year figures because they are newly
formed Portfolios. Actual expenses for all the Portfolios may be higher or
lower than the amounts shown in the Fee Table and, consequently, the actual
expenses incurred by an investor may be greater (in the event the expense
limitations are removed) or less than the amounts shown in the Example.
Moreover, while the Example assumes a 5% annual return, the performance of each
Portfolio will vary and may result in a return greater or less than 5%.
* * * * *
The information in the foregoing summary is qualified in its entirety
by the more detailed information appearing elsewhere in this Prospectus and in
the Statement of Additional Information.
Information about the performance of each Portfolio is contained in
the Fund's annual report to shareholders which may be obtained without charge.
9
<PAGE>
FINANCIAL HIGHLIGHTS
10
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
===============================================================================
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP FUND
--------------------------------------------
03/04/96* 03/04/96* 03/04/96*
TO TO TO
10/31/96 10/31/96 10/31/96
CLASS A CLASS B CLASS C
------------ ------------ --------------
<S> <C> <C> <C>
Net asset value, beginning of period.............................. $ 12.50 $ 12.50 $ 12.50
Income (loss) from investment
- -----------------------------
operations:
- -----------
Net investment income (loss) (B)................................. 0.05 (0.01) (0.01)
Net realized and unrealized gain on
investment and foreign currency
transactions................................................... 0.88 0.88 0.88
-------- --------- --------
Total from investment
operations.......................................... 0.93 0.87 0.87
Net asset value, end of period.................................. $ 13.43 $ 13.37 $ 13.37
======== ========= ========
Total return......................................... 7.44% 6.96% 6.96%
Net assets, end of period (000's)............................... $ 2,120 $ 5,068 $ 5,517
Ratio of operating expenses to
average net assets (C)........................................ 1.90%(A) 2.55%(A) 2.55%(A)
Ratio of net investment income (loss) to
average net assets............................................ 0.50%(A) (0.15%)(A) (0.15%)(A)
Portfolio turnover rate......................................... 67%(A) 67%(A) 67%(A)
Average commission rate per share (D)........................... $ 0.016 $ 0.016 $ 0.016
</TABLE>
_____________________________
* Commencement of operations
(A) Annualized
(B) After expense reimbursement by the adviser of $0.11, $0.02 and $0.02 per
share for the International Small Cap Fund - Classes A, B and C
respectively, for the period March 4, 1996 (commencement of operations) to
October 31, 1996.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
3.07%, 3.27% and 3.25% for the International Small Cap Fund, Classes A, B
and C respectively, for the period March 4, 1996 (commencement of
operations) to October 31, 1996 on an annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged. In certain foreign markets the relationship
between the translated U.S. dollar price per share and commission paid per
share may vary from that of domestic markets.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- --------------------------------------------------------------------------------
<TABLE>
CAPTION>
SMALL/MID CAP FUND
--------------------------------------------------
03/04/96* 03/04/96* 03/04/96*
TO TO TO
10/31/96 10/31/96 10/31/96
CLASS A CLASS B CLASS C
-------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period..................... $ 12.50 $ 12.50 $ 12.50
Income (loss) from investment operations:
- ----------------------------------------
Net investment loss (B).................................. (0.02) (0.05) (0.05)
Net realized and unrealized gain on investments.......... 0.14 0.13 0.14
Total from investment
operations................................... 0.12 0.08 0.09
Net asset value, end of period........................... $ 12.62 $ 12.58 $ 12.59
======== ========= ========
Total return................................... 0.96%+ 0.64%+ 0.72%+
Net assets, end of period (000's)........................ $ 2,966 $ 6,659 $ 8,241
Ratio of operating expenses to
average net assets (C)................................. 1.675%(A) 2.325%(A) 2.325%(A)
Ratio of net investment loss to
average net assets..................................... (0.40%)(A) (1.05%)(A) (1.05%)(A)
Portfolio turnover rate.................................. 92%(A) 92%(A) 92%(A)
Average commission rate per share (D).................... $ 0.069 $ 0.069 $ 0.069
- -----------------------------
</TABLE>
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement by the adviser of $0.06, $0.03 and $0.03 per
share for the Small/Mid Cap Fund - Classes A, B and C respectively, for the
period March 4, 1996 (commencement of operations) to October 31, 1996.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
2.69%, 3.05% and 3.04% for the Small/Mid Cap Fund, Classes A, B and C
respectively, for the period March 4, 1996 (commencement of operations) to
October 31, 1996 on an annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
(FORMERLY, THE GLOBAL GROWTH FUND)
---------------------------------------------------------------------------------------
YEAR YEAR 04/01/94* YEAR YEAR 04/01/94*
ENDED ENDED TO ENDED ENDED TO
10/31/96** 10/31/95 10/31/94 10/31/96** 10/31/95** 10/31/94
CLASS A CLASS A CLASS A CLASS B CLASS B CLASS B
------------ ------------ ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................................ $13.84 $14.82 $14.13 $13.73 $14.79 $14.13
Income (loss) from investment operations
- ----------------------------------------
Net investment loss (B)................... (0.04) -- (0.01) (0.14) (0.09) (0.03)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions.......................... 0.91 (0.54) 0.70 0.91 (0.53) 0.69
------- ------ ------- ------- ------- -----
Total from investment
operations.................... 0.87 (0.54) 0.69 0.77 (0.62) 0.66
Less distributions
- ------------------
Dividends from net investment income...... (0.21) -- -- (0.14) -- --
Distributions from capital gains.......... -- (0.44) -- -- (0.44) --
------- ------ ------- ------- ------- ------
Total distributions............. (0.21) (0.44) -- (0.14) (0.44) --
------- ------ ------- ------- ------- ------
Net asset value, end of period............ $14.50 $13.84 $14.82 $14.36 $13.73 $14.79
======= ====== ======= ======= ======= ======
Total return.................... 6.33% (3.52%) 9.16%(E) 5.64% (4.09%) 8.94%(E)
Net assets, end of period (000's).........$25,924 $23,894 $18,152 $25,661 $23,317 $13,903
Ratio of operating expenses
to average net assets (C)............... 1.75% 1.75% 1.75%(A) 2.40% 2.40% 2.40%(A)
Ratio of net investment income
(loss) to average net assets............ (0.30%) 0.03% (0.12%)(A) (0.95%) (0.61%) (0.77%)(A)
Portfolio turnover rate................... 165% 57% 54% 165% 57% 54%
Average commission rate per share (D)..... $0.016 N/A N/A $0.016 N/A N/A
</TABLE>
______________________________
* Commencement of operations
** Net investment income per share has been calculated using the average shares
method.
(A) Annualized
(B) After expense reimbursement by the adviser of $0.01 and $0.02 per share for
the Global Equity Fund - Class A and $0.01 and $0.02 per share for the
Global Equity Fund - Class B, for the years ended October 31, 1996 and 1995,
respectively and $0.01 and $0.01 per share for the Global Equity Fund -
Classes A and B respectively, for the period April 1, 1994 to October 31,
1994.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.83% and 1.92% for the Global Equity Fund - Class A and 2.48% and 2.58% for
the Global Equity Fund - Class B, for the years ended October 31, 1996 and
1995, respectively and 1.97% and 2.71% for the Global Equity Fund - Classes
A and B respectively, for the period April 1, 1994 to October 31, 1994 on an
annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged. In certain foreign markets the relationship
between the translated U.S. dollar price per share and commission paid per
share may vary from that of domestic markets.
(E) Historical total returns for Classes A and B shares are one year performance
returns which include Class C performance prior to April 1, 1994.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND - CLASS C
(FORMERLY, THE GLOBAL GROWTH FUND - CLASS C)
--------------------------------------------------------------------
YEARS ENDED OCTOBER, 31
--------------------------------------------------------------------
1996** 1995** 1994 1993 1992 1991
--------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $13.73 $14.79 $13.74 $10.33 $10.76 $10.12
Income (loss) from investment operations
- ----------------------------------------
Net investment income (loss) (B).................. (0.14) (0.09) (0.10) (0.01) (0.02) 0.25
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions.................................. 0.92 (0.53) 1.15 3.43 (0.37) 0.63
-------- ------- -------- -------- -------- -------
Total from investment
operations............................ 0.78 (0.62) 1.05 3.42 (0.39) 0.88
Less distributions
- ----------------------------------------
Dividends from net investment income.............. (0.10) -- -- (0.01) -- (0.24)
Distributions from capital gains.................. -- (0.44) -- -- -- --
Distributions from capital........................ -- -- -- -- (0.04) --
-------- ------- -------- -------- -------- -------
Total distributions..................... (0.10) (0.44) -- (0.01) (0.04) (0.24)
-------- ------- -------- -------- -------- -------
Net asset value, end of period.................... $14.41 $13.73 $ 14.79 $13.74 $10.33 $10.76
-------- ------- -------- -------- -------- -------
Total return............................ 5.70% (4.09%) 8.94% 33.06% (3.57%) 8.80%
Net assets, end of period (000's)................. $64,830 $83,340 $101,443 $63,503 $14,291 $8,828
Ratio of operating expenses
to average net assets (C)....................... 2.40% 2.40% 2.40% 2.40% 2.52% 1.47%
Ratio of net investment income
(loss) to average net assets.................... (0.95%) (0.64%) (0.91%) (0.40%) (0.27%) 1.41%
Portfolio turnover rate........................... 165% 57% 54% 57% 69% 70%
Average commission rate per share (D)............. $0.016 N/A N/A N/A N/A N/A
</TABLE>
______________________________
** Net investment income per share has been calculated using the average shares
method.
(A) Annualized
(B) After expense reimbursement by the adviser of $0.01, $0.02, $0.01, $0.02,
$0.02 and $0.05 per share for the Global Equity Fund - Class C for the years
ended October 31, 1996, 1995, 1994, 1993, 1992 and 1991, respectively.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
2.48%, 2.53%, 2.52%, 2.72%, 2.78% and 4.37% for the Global Equity Fund -
Class C for the years ended October 31, 1996, 1995, 1994, 1993, 1992 and
1991, respectively.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged. In certain foreign markets the relationship
between the translated U.S. dollar price per share and commission paid per
share may vary from that of domestic markets.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH EQUITY FUND
-----------------------------------------
03/04/96* 03/04/96* 03/04/96*
TO TO TO
10/31/96 10/31/96 10/31/96
CLASS A CLASS B CLASS C
------------- ------------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period..................... $ 12.50 $ 12.50 $ 12.50
Income from investment operations:
- ----------------------------------------
Net investment income (B)................................ 0.28 0.24 0.24
Net realized and unrealized gain on investments
and foreign currency transactions...................... 1.00 0.99 0.99
--------- --------- --------
Total from investment
operations................................... 1.28 1.23 1.23
Net asset value, end of period........................... $ 13.78 $ 13.73 $ 13.73
========= ========= ========
Total return................................... 10.24%+ 9.84%+ 9.84%+
Net assets, end of period (000's)........................ $ 2,244 $ 4,748 $ 6,494
Ratio of operating expenses to
average net assets (C)................................. 1.65%(A) 2.30%(A) 2.30%(A)
Ratio of net investment income to
average net assets..................................... 4.11%(A) 4.18%(A) 4.13%(A)
Portfolio turnover rate.................................. 450%(A) 450%(A) 450%(A)
Average commission rate per share (D).................... $ 0.043 $ 0.043 $ 0.043
</TABLE>
_____________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement by the adviser of $0.07, $0.04 and $0.04 per
share for the Growth Equity Fund - Classes A, B and C respectively, for the
period March 4, 1996 (commencement of operations) to October 31, 1996.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
2.71%, 3.06% and 2.96% for the Growth Equity Fund, Classes A, B and C
respectively, for the period March 4, 1996 (commencement of operations) to
October 31, 1996 on an annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged. In certain foreign markets the relationship
between the translated U.S. dollar price per share and commission paid per
share may vary from that of domestic markets.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH AND INCOME FUND
--------------------------------------------------------------------------------------
YEAR 01/09/95* YEAR 01/09/95* YEAR 01/09/95*
ENDED TO ENDED TO ENDED TO
10/31/96** 10/31/95** 10/31/96** 10/31/95** 10/31/96** 10/31/95**
CLASS A CLASS A CLASS B CLASS B CLASS C CLASS C
------------ ------------ ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $10.11 $10.00 $10.10 $10.00 $10.10 $10.00
Income from investment operations:
- ----------------------------------
Net investment income (B).................. 0.09 0.06 0.06 0.01 0.06 0.01
Net realized and unrealized gain on
investments and foreign currency
transactions............................ 1.33 0.08 1.30 0.12 1.30 0.12
-------- -------- --------- --------- --------- ---------
Total from investment
operations..................... 1.42 0.14 1.36 0.13 1.36 0.13
Less distributions
- ------------------
Dividends from net investment income....... (0.08) (0.03) (0.05) (0.03) (0.05) (0.03)
Distributions from capital gains........... (0.10) -- (0.11) -- (0.10) --
-------- -------- --------- --------- --------- ---------
Total distributions.............. (0.18) (0.03) (0.16) (0.03) (0.15) (0.03)
-------- -------- --------- --------- --------- ---------
Net asset value, end of period............. $11.35 $10.11 $11.30 $10.10 $11.31 $10.10
-------- -------- --------- --------- --------- ---------
Total return..................... 14.25% 1.37%+ 13.58% 1.28%+ 13.63% 1.28%+
Net assets, end of period (000's).......... $4,732 $6,897 $15,217 $8,421 $ 9,076 $6,324
Ratio of operating expenses to
average net assets (C)................... 1.75% 1.75%(A) 2.40% 2.40%(A) 2.40% 2.40%(A)
Ratio of net investment income to
average net assets....................... 0.84% 0.70%(A) 0.57% 0.15%(A) 0.51% 0.13%(A)
Portfolio turnover rate.................... 170% 69%(A) 170% 69%(A) 170% 69%(A)
Average commission rate per share (D)...... $0.022 N/A $0.022 N/A $0.022 N/A
</TABLE>
_____________________________
* Commencement of operations
** Net investment income per share has been calculated using the average
shares method.
+ Non-annualized
(A) Annualized
(B) After expense reimbursement by the adviser of $0.02, $0.02 and $0.02 per
share for the International Growth and Income Fund - Classes A, B and C
respectively, for the year ended October 31, 1996 and $0.04, $0.04 and $0.04
per share for the International Growth and Income Fund - Classes A, B and C
respectively, for the period January 9, 1995 (commencement of operations) to
October 31, 1995.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.97%, 2.60% and 2.60% for the International Growth and Income Fund, Classes
A, B and C respectively, for the year ended October 31, 1996 and 2.18%,
2.93% and 2.93% for the International Growth and Income Fund, Classes A, B
and C respectively, for the period January 9, 1995 (commencement of
operations) to October 31, 1995 on an annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged. In certain foreign markets the relationship
between the translated U.S. dollar price per share and commission paid per
share may vary from that of domestic markets.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
-----------------------------------------------------------------------------------
YEAR YEAR 04/01/94* YEAR YEAR 04/01/94*
ENDED ENDED TO ENDED ENDED TO
10/31/96 10/31/95** 10/31/96 10/31/96** 10/31/95** 10/31/94
CLASS A CLASS A CLASS A CLASS B CLASS B CLASS B
---------- ------------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $14.72 $13.09 $12.29 $14.69 $13.08 $12.29
Income from investment operations
- ----------------------------------
Net investment income (B).............. 0.18 0.26 0.12 0.07 0.16 0.10
Net realized and unrealized gain
on investments....................... 2.99 1.90 0.76 2.99 1.94 0.77
--------- --------- ---------- --------- --------- ---------
Total from investment
operations................. 3.17 2.16 0.88 3.06 2.10 0.87
Less distributions
- ---------------------------
Dividends from net investment income... (0.21) (0.23) (0.08) (0.13) (0.19) (0.08)
Distributions from capital gains....... (0.12) (0.30) -- (0.12) (0.30) --
--------- -------- --------- -------- -------- --------
Total distributions.......... (0.33) (0.53) (0.08) (0.25) (0.49) (0.08)
--------- -------- --------- -------- -------- --------
Net asset value, end of................ $17.56 $14.72 $13.09 $17.50 $14.69 $13.08
period................................ ========= ======== ========= ======== ======== ========
Total return................. 21.84% 17.28% 5.06%(E) 21.08% 16.73% 4.98%(E)
Net assets, end of period (000's)...... $18,272 $12,180 $8,134 $34,740 $19,052 $3,885
Ratio of operating expenses to average
net assets (C)....................... 1.34% 1.34% 1.34%(A) 1.99% 1.99% 1.99%(A)
Ratio of net investment income to
average net assets................... 1.10% 1.91% 1.72%(A) 0.45% 1.14% 1.07%(A)
Portfolio turnover rate................ 49% 40% 45% 49% 40% 45%
Average commission rate per share (D).. $0.055 N/A N/A $0.055 N/A N/A
</TABLE>
______________________________
* Commencement of operations
** Net investment income per share has been calculated using the average shares
method.
(A) Annualized
(B) After expense reimbursement by the adviser of $0.03 and $0.05 per share for
the Growth and Income Fund - Class A and $0.03 and $0.05 per share for the
Growth and Income Fund - Class B, for the years ended October 31, 1996 and
1995, respectively and $0.05 and $0.12 per share for the Growth and Income
Fund - Classes A and B respectively, for the period April 1, 1994 to October
31, 1994.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.56% and 1.69% for the Growth and Income Fund - Class A and 2.20% and 2.33%
for the Growth and Income Fund - Class B, for the years ended October 31,
1996 and 1995, respectively and 2.08% and 3.12% for the Growth and Income
Fund - Classes A and B respectively, for the period April 1, 1994 to October
31, 1994 on an annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged.
(E) Historical total returns for Classes A and B shares are one year performance
returns which include Class C performance prior to April 1, 1994.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND - CLASS C
----------------------------------------------------------------------------
05/01/91*
YEARS ENDED OCTOBER 31, TO
1996 1995 1994 1993 1992 10/31/91
--------- ---------- ---------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $14.71 $13.08 $12.71 $11.21 $10.51 $10.00
Income from investment operations
- ---------------------------------
Net investment income (B)............... 0.07 0.18 0.15 0.14 0.18 0.11
Net realized and unrealized gain
on investments........................ 3.00 1.90 0.46 1.48 0.70 0.47
------- ------- ------- ------- ------- --------
Total from investment
operations.................. 3.07 2.08 0.61 1.62 0.88 0.58
Less distributions
- ------------------
Dividends from net investment income.... (0.10) (0.15) (0.13) (0.12) (0.18) (0.07)
Distributions from capital gains........ (0.12) (0.30) (0.11) -- -- --
------- ------- ------- ------- ------- --------
Total distributions........... (0.22) (0.45) (0.24) (0.12) (0.18) (0.07)
------- ------- ------- ------- ------- --------
Net asset value, end of period.......... $17.56 $14.71 $13.08 $12.71 $11.21 $10.51
======= ======= ======= ======= ======= ========
Total return.................. 21.12% 16.56% 4.85% 14.57% 8.42% 5.88%+
Net assets, end of period (000's)....... $74,825 $63,154 $46,078 $37,483 $10,821 $2,090
Ratio of operating expenses to average
net assets (C)........................ 1.99% 1.99% 1.99% 1.99% 1.94% 1.85%(A)
Ratio of net investment income to
average net assets.................... 0.45% 1.26% 1.11% 1.12% 1.51% 2.05%(A)
Portfolio turnover rate................. 49% 40% 45% 37% 48% 111%(A)
Average commission rate per share (D)... $0.055 N/A N/A N/A N/A N/A
</TABLE>
______________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.03, $0.04,
$0.05, $0.06, $0.15 and $0.37 per share for the Growth and Income Fund-
Class C for the years ended October 31, 1996, 1995, 1994, 1993 and 1992 and
the period May 1, 1991 (commencement of operations) to October 31, 1991,
respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 2.20%, 2.26%, 2.38%, 2.46%, 3.18% and 10.69% for the Growth
and Income Fund - Class C for the years ended October 31, 1996, 1995, 1994,
1993 and 1992 and the period May 1, 1991 (commencement of operations) to
October 31, 1991 on an annualized basis, respectively.
(D) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of all security
trades on which commissions are charged.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE EQUITY FUND
(FORMERLY, THE GROWTH FUND)
---------------------------------------------------------------------------------
YEAR YEAR 04/01/94* YEAR YEAR 04/01/94*
ENDED ENDED TO ENDED ENDED TO
10/31/96 10/31/96** 10/31/94 10/31/96 10/31/95** 10/31/94
CLASS A CLASS A CLASS A CLASS B CLASS B CLASS B
---------- ------------- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........ $15.94 $14.78 $14.59 $15.84 $14.77 $14.59
Income (loss) from investment operations
- -----------------------------------------
Net investment income (loss) (B)............ 0.16 0.12 0.02 0.06 0.02 (0.02)
Net realized and unrealized gain
on investments............................ 2.69 1.83 0.17 2.69 1.84 0.20
--------- -------- -------- ------- ------- -------
Total from investment
operations...................... 2.85 1.95 0.19 2.75 1.86 0.18
Less distributions
- ---------------------------
Distributions from net investment income.... (0.14) -- -- (0.09) -- --
Distributions from capital gains............ (1.28) (0.79) -- (1.28) (0.79) --
--------- -------- -------- ------- ------- -------
Total distributions............... (1.42) (0.79) -- (1.37) (0.79) (0.24)
--------- -------- -------- ------- ------- -------
Net asset value, end of period.............. $17.37 $15.94 $14.78 $17.22 $15.84 $14.77
========== ======== ======== ======= ======== ========
Total return...................... 19.23% 14.22% 4.82%(E) 18.59% 13.58% 4.75%(E)
Net assets, end of period (000's)........... $28,470 $22,026 $16,326 $27,058 $19,874 $5,054
Ratio of operating expenses to average
net assets (C)............................ 1.34% 1.34% 1.34%(A) 1.99% 1.99% 1.99%(A)
Ratio of net investment income (loss) to
average net assets........................ 0.98% 0.79% 0.13%(A) 0.33% 0.13% (0.52%)(A)
Portfolio turnover rate..................... 169% 54% 39% 169% 54% 39%
Average commission rate per share (D)....... $0.053 N/A N/A $0.053 N/A N/A
</TABLE>
______________________________
* Commencement of operations
** Net investment income per share has been calculated using the average shares
method for fiscal year 1995.
(A) Annualized
(B) After expense reimbursement by the adviser of $0.04 and $0.04 per share for
the Value Equity Fund - Class A and $0.04 and $0.05 per share for the Value
Equity Fund - Class B, for the years ended October 31, 1996 and 1995,
respectively and $0.06 and $0.03 per share for the Value Equity Fund -
Classes A and B respectively, for the period April 1, 1994 to October 31,
1994.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.55% and 1.62% for the Value Equity Fund - Class A and 2.20% and 2.32% for
the Value Equity Fund - Class B, for the years ended October 31, 1996 and
1995, respectively and 1.79% and 2.82% for the Value Equity Fund - Classes
A and B respectively, for the period April 1, 1994 to October 31, 1994 on an
annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged.
(E) Historical total returns for Classes A and B shares are one year performance
returns which include Class C performance prior to April 1, 1994.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE EQUITY FUND - CLASS C
(FORMERLY, THE GROWTH FUND - CLASS C)
-------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 08/28/89*
------------------------------------------------------------------------------ TO
1996 1995** 1994 1993 1992 1991 1990 10/31/89
--------- ---------- ---------- ---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $15.84 $14.77 $14.21 $12.05 $10.70 $8.22 $11.19 $12.25
Income (loss) from
investment operations
- ----------------------
Net investment income
(loss) (B)................ 0.06 0.02 (0.07) 0.01 (0.01) 0.02 0.05 0.01
Net realized and
unrealized gain
(loss) on investments.... 2.69 1.84 0.74 2.15 1.37 2.54 (2.39) (1.07)
------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations.......... 2.75 1.86 0.67 2.16 1.36 2.56 (2.34) (1.06)
Less distributions
- ------------------
Dividends from net
investment income......... (0.04) -- (0.03) -- -- (0.03) (0.05) --
Distributions from capital
gains..................... (1.28) (0.79) (0.08) -- -- -- (0.58) --
Distributions from capital. -- -- -- -- (0.01) (0.05) -- --
------- ------- ------- ------- ------- ------- ------- -------
Total distributions... (1.32) (0.79) (0.11) -- (0.01) (0.08) (0.63) --
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................... $17.27 $15.84 $14.77 $14.21 $12.05 $10.70 $8.22 $11.19
======= ======= ======= ======= ======= ======= ======= ======
Total return.......... 18.53% 13.58% 4.75% 17.93% 12.75% 31.32% (22.16%) (8.65%) +
Net assets, end of period
(000's)................... $83,855 $83,719 $71,219 $64,223 $24,291 $15,354 $19,370 $30,627
Ratio of operating
expenses to average
net assets (C)........... 1.99% 1.99% 1.99% 1.99% 2.47% 2.97% 2.85% 2.57%(A)
Ratio of net investment
income (loss) to
average net assets....... 0.33% 0.15% (0.49%) 0.27% (0.15%) 0.27% 0.43% 0.37%(A)
Portfolio turnover rate.... 169% 54% 39% 40% 91% 37% 58% 65%(A)
Average commission rate
per share (D)............. $0.053 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
______________________________
* Commencement of operations
** Net investment income per share has been calculated using the average shares
method for fiscal year 1995.
+ Non-annualized
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.03, $0.04,
$0.04, $0.02, $0.05 and $0.01 per share for the Value Equity Fund - Class C
for the years ended October 31, 1996, 1995, 1994, 1993, 1992 and 1991,
respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 2.20%, 2.23%, 2.29%, 2.35%, 3.00% and 3.12% for the Value
Equity Fund - Class C for the years ended October 31, 1996, 1995, 1994,
1993, 1992 and 1991, respectively.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCED FUND
(FORMERLY, THE ASSET ALLOCATION FUND)
---------------------------------------------------------------------------
YEAR YEAR 04/01/94* YEAR YEAR 04/01/94
ENDED ENDED TO ENDED ENDED TO
10/31/96** 10/31/95** 10/31/94 10/31/96** 10/31/95** 10/31/94
CLASS A CLASS A CLASS A CLASS B CLASS B CLASS B
------------ ------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $12.02 $11.13 $11.06 $11.98 $11.12 $11.06
Income (loss) from investment operations
- ----------------------------------------
Net investment income (B).................. 0.39 0.38 0.17 0.31 0.30 0.12
Net realized and unrealized gain
(loss) on investments.................... 1.07 1.35 (0.10) 1.07 1.36 (0.06)
------- ------- ------- ------ ------ ------
Total from investment
operations..................... 1.46 1.73 0.07 1.38 1.66 0.06
------- ------- ------- ------ ------ ------
Less distributions
- ------------------
Dividends from net
investment income......................... (0.40) (0.32) -- (0.35) (0.28) --
Distributions from capital gains........... (0.75) (0.52) -- (0.75) (0.52) --
------- ------- ------- ------ ------ ------
Total distributions.............. (1.15) (0.84) -- (1.10) (0.80) --
------- ------- ------- ------ ------ ------
Net asset value, end of period............. $12.33 $12.02 $11.13 $12.26 $11.98 $11.12
------- ------- ------- ------ ------ ------
Total return..................... 13.10% 16.95% 0.76%(E) 12.35% 16.31% 0.67%(E)
Net assets, end of period (000's).......... $10,873 $10,033 $7,830 $16,219 $9,875 $4,760
Ratio of operating expenses to average
net assets (C)........................... 1.34% 1.34% 1.34%(A) 1.99% 1.99% 1.99%(A)
Ratio of net investment income to average
net assets............................... 3.32% 3.39% 2.72%(A) 2.67% 2.69% 2.07%(A)
Portfolio turnover rate.................... 253% 226% 246% 253% 226% 246%
Average commission rate per share (D)...... $0.059 N/A N/A $0.059 N/A N/A
</TABLE>
______________________________
* Commencement of operations
** Net investment income per share has been calculated using the average shares
method.
(A) Annualized
(B) After expense reimbursement by the adviser of $0.02 and $0.04 for the
Balanced Fund - Class A and $0.02 and $0.04 for the Balanced Fund - Class B,
for the years ended October 31, 1996 and 1995, respectively and $0.03 and
$0.04 for the Balanced Fund - Classes A and B respectively, for the period
April 1, 1994 to October 31, 1994.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.55% and 1.69% for the Balanced Fund - Class A and 2.20% and 2.37% for the
Balanced Fund - Class B, for the years ended October 31, 1996 and 1995,
respectively and 1.86% and 2.73% for the Balanced Fund - Classes A and B
respectively, for the period April 1, 1994 to October 31, 1994 on an
annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged.
(E) Historical total returns for Classes A and B shares are one year performance
returns which include Class C performance prior to April 1, 1994.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND - CLASS C (E)
(FORMERLY, THE ASSET ALLOCATION FUND - CLASS C (E))
-------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 08/28/89*
-------------------------------------------------------------------------------------- TO
1996** 1995** 1994 1993 1992 1991 1990 10/31/89
---------- --------- --------- --------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $12.02 $11.12 $11.52 $10.20 $9.76 $8.12 $9.84 $10.17
Income (loss) from
investment operations
- ---------------------
Net investment income (B).. 0.32 0.31 0.22 0.21 0.20 0.27 0.32 0.05
Net realized and
unrealized gain
(loss) on investments.... 1.07 1.35 (0.15) 1.30 0.87 1.70 (1.66) (0.38)
------- ------- ------- ------- ----- ------- ------- -------
Total from
investment
operations..... 1.39 1.66 0.07 1.51 1.07 1.97 (1.34) (0.33)
Less distributions
- ---------------------------
Dividends from net
investment income......... (0.31) (0.24) (0.18) (0.09) (0.19) (0.33) (0.26) ------
Distributions from capital
gains..................... (0.75) (0.52) (0.29) (0.10) (0.44) ------ ------ ------
Distributions from
capital................... ------ ------ ------ ------ ------ ------ (0.12) ------
Total
distributions... (1.06) (0.76) (0.47) (0.19) (0.63) (0.33) (0.38) ------
------- ------- ------- ------- ------- ------ ------- -------
Net asset value, end of
period.................... $12.35 $12.02 $11.12 $11.52 $10.20 $9.76 $8.12 $9.84
======= ======= ======= ======= ======= ======= ======= =======
Total return..... 12.41% 16.25% 0.67% 15.02% 11.25% 24.53% (13.97%) (3.24%)+
Net assets, end of period
(000's)................... $72,821 $80,626 $86,902 $96,105 $48,160 $30,724 $34,713 $43,915
Ratio of operating
expenses to
average net assets (C)... 1.99% 1.99% 1.99% 1.99% 2.40% 2.88% 2.63% 2.13%(A)
Ratio of net investment
income to
average net assets....... 2.67% 2.76% 1.93% 1.96% 1.93% 2.77% 3.34% 3.09%(A)
Portfolio turnover rate.... 253% 226% 246% 196% 171% 84% 73% 84%(A)
Average commission rate
per share (D)............. $0.059 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
_____________________________
* Commencement of operations
** Net investment income per share has been calculated using the average
shares method.
+ Non-annualized
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.01, $0.03,
$0.04, $0.03 and $0.04 for the Balanced Fund - Class C for the years ended
October 31, 1996, 1995, 1994, 1993 and 1992, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 2.20%, 2.24%, 2.22%, 2.28% and 2.89% for the Balanced Fund -
Class C for the years ended October 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged.
(E) On July 10, 1992, the Aggressive Fund and Conservative Fund portfolios of
the old Asset Allocation Funds were liquidated and shares were exchanged for
shares of the new Asset Allocation Fund. The new Asset Allocation Fund is
comprised of the Moderate Fund portfolio of the old Asset Allocation Fund
(the accounting "survivor") and the assets of the former Aggressive and
Conservative portfolios of the old Asset Allocation Funds. For purposes of
presenting financial highlights - selected per share data and ratios, only
the historical results of the old Moderate Fund have been presented since it
is considered the accounting survivor of the merger because, among other
reasons, the investment objective of the new Asset Allocation Fund is
substantially the same as that of the old Moderate Fund. At the date of the
merger, 3,567,198 shares of the old Moderate Fund with a per share value of
$8.11 were decreased to 2,891,572 shares with a per share value of $10.00,
similar to a reverse stock split, and re-named as shares of the new Asset
Allocation Fund. The historical per share data presented above has been
adjusted as though a reverse stock split had occurred at the beginning of
the earliest period presented which results in fewer shares outstanding at a
correspondingly higher net asset value per share.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
STRATEGIC INCOME FUND
------------------------------------------------------------------------------------------------
YEAR YEAR 11/01/93* YEAR YEAR 04/01/94* YEAR YEAR 4/01/94*
ENDED ENDED TO ENDED ENDED TO ENDED ENDED TO
10/31/96 10/31/95 10/31/94 10/31/96 10/31/95 10/31/94 10/31/96 10/31/95 10/31/94
CLASS A CLASS A CLASS A CLASS B CLASS B CLASS B CLASS C CLASS C CLASS C
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 9.07 $ 8.90 $ 10.00 $ 9.07 $ 8.90 $ 9.31 $ 9.07 $ 8.90 $ 9.31
Income (loss) from
investment operations
- ---------------------------
Net investment income (B).. 0.80 0.78 0.65 0.73 0.73 0.38 0.73 0.73 0.38
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions.............. 0.72 0.18 (1.10) 0.73 0.17 (0.41) 0.73 0.17 (0.41)
------- --------- ------- --------- ------- --------- ------- --------- ------
Total from
investment
operations..... 1.52 0.96 (0.45) 1.46 0.90 (0.03) 1.46 0.90 (0.03)
Less distributions
- ------------------
Dividends from net
investment income......... (0.79) (0.79) (0.65) (0.73) (0.73) (0.38) (0.73) (0.73) (0.38)
----- ----- --------- ------- --------- ------- --------- ------ --------
Net asset value, end of
period.................... $ 9.80 $ 9.07 $ 8.90 $ 9.80 $ 9.07 $ 8.90 $ 9.80 $ 9.07 $ 8.90
======= ========= ======= ========= ======= ========= ======= ========= ======
Total return..... 17.35% 11.43% (3.79%) 16.59% 10.72% (4.18%)(D) 16.59% 10.72% (4.20%)(D)
Net assets, end of period
(000's)................... $13,382 $ 10,041 $15,507 $ 30,890 $20,672 $ 5,440 $22,783 $ 14,273 $8,439
Ratio of operating
expenses to
average net assets (C).... 1.50% 1.07% 0.41% 2.15% 1.95% 1.00%(A) 2.15% 1.95% 1.00%(A)
Ratio of net investment
income to
average net assets........ 8.28% 9.08% 8.26% 7.63% 8.10% 8.59%(A) 7.63% 8.25% 8.59%(A)
Portfolio turnover rate.... 68% 180% 136% 68% 180% 136% 68% 180% 136%
</TABLE>
______________________________
* Commencement of operations
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.01, $0.05 and
$0.04 per share for the Strategic Income Fund - Class A for the years ended
October 31, 1996, 1995 and 1994, respectively, $0.01 and $0.04 for the
Strategic Income Fund - Class B and $0.01 and $0.05 for the Strategic Income
Fund - Class C, for the years ended October 31, 1996 and 1995, respectively
and $0.05 and $0.04 for the Strategic Income Fund - Classes B and C
respectively, for the period April 1, 1994 to October 31, 1994.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 1.65%, 1.69% and 0.96% for the Strategic Income Fund - Class A
for the years ended October 31, 1996, 1995 and 1994, respectively. The
ratio of operating expenses, before reimbursement and waiver by the adviser,
was 2.27% and 2.38% for the Strategic Income Fund - Class B and 2.28% and
2.37% for the Strategic Income Fund - Class C, for the years ended October
31, 1996 and 1995, respectively and 2.04% and 1.96% for the Strategic Income
Fund - Classes B and C respectively, for the period April 1, 1994 to October
31, 1994 on an annualized basis.
(D) Historical total returns for Classes B and C shares are one year performance
returns which include Class A performance prior to April 1, 1994.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Quality Bond Fund - Class A
-----------------------------------------------------------------
Years Ended October 31, 05/01/91*
-------------------------------------------------- to
1996 1995 1994 1993 1992 10/31/91
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $10.56 $9.74 $11.16 $10.56 $10.26 $10.00
Income (loss) from investment operations
- ----------------------------------------
Net investment income (B)............... 0.66 0.68 0.60 0.66 0.82 0.40
Net realized and unrealized gain (loss)
on investments........................ (0.20) 0.82 (1.37) 0.64 0.27 0.30
------ ------ ------ ------ ------ ------
Total from investment
operations.................. 0.46 1.50 (0.77) 1.30 1.09 0.70
Less distributions
- ----------------------------------------
Dividends from net investment income.... (0.68) (0.68) (0.56) (0.64) (0.79) (0.40)
Distributions from capital gains........ ---- ---- (0.09) (0.06) ---- ----
Distributions from capital.............. ---- ---- ---- ---- ---- (0.04)
------ ------ ------ ------ ------ ------
Total distributions........... (0.68) (0.68) (0.65) (0.70) (0.79) (0.44)
------ ------ ------ ------ ------ ------
Net asset value, end of period.......... $10.34 $10.56 $ 9.74 $11.16 $10.56 $10.26
====== ====== ====== ====== ====== ======
Total return.................. 4.52% 15.91% (7.08%) 12.66% 11.00% 7.21% +
Net assets, end of period (000's)....... $9,056 $10,345 $11,150 $14,674 $6,773 $ 2,713
Ratio of operating expenses to
average net assets (C)................ 1.25% 1.25% 1.25% 0.98% 0.00% 0.00%(A)
Ratio of net investment income to
average net assets.................... 6.37% 6.72% 5.86% 5.82% 7.76% 7.08%(A)
Portfolio turnover rate................. 56% 132% 186% 41% 44% 39%(A)
</TABLE>
______________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.03, $0.05,
$0.06, $0.07, $0.27 and $0.19 per share for the Investment Quality Bond Fund
- Class A for the years ended October 31, 1996, 1995, 1994, 1993 and 1992
and the period May 1, 1991 (commencement of operations) to October 31, 1991,
respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 1.55%, 1.73%, 1.74%, 1.57%, 2.56% and 3.37% for the Investment
Quality Bond Fund - Class A for the years ended October 31, 1996, 1995,
1994, 1993 and 1992 and the period May 1, 1991 (commencement of operations)
to October 31, 1991 on an annualized basis, respectively.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
<TABLE>
<CAPTION>
INVESTMENT QUALITY BOND FUND
--------------------------------------------------------------------------
YEAR YEAR 04/01/94* YEAR YEAR 04/01/94*
ENDED ENDED TO ENDED ENDED TO
10/31/96 10/31/95 10/31/94 10/31/96 10/31/96 10/31/94
CLASS B CLASS B CLASS B CLASS C CLASS C CLASS C
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $10.55 $ 9.74 $10.21 $ 10.55 $ 9.74 $10.21
Income (loss) from investment operations
- ----------------------------------------
Net investment income (B)............... 0.60 0.61 0.33 0.60 .61 0.33
Net realized and unrealized gain (loss)
on investments........................ (0.20) 0.82 (0.51) (0.20) 0.82 (0.51)
------- ------ ------ ------- ------- ------
Total from investment
operations.................. 0.40 1.43 (0.18) 0.40 1.43 (0.18)
Less distributions
- ----------------------------------------
Dividends from net investment income.... (0.62) (0.62) (0.29) (0.62) (0.62) (0.29)
------- ------ ------ ------- ------- ------
Net asset value, end of period.......... $10.33 $10.55 $ 9.74 $ 10.33 $ 10.55 $ 9.74
======= ====== ====== ======= ======= ======
Total return.................. 3.92% 15.12% (7.34%)(D) 3.92% 15.12% (7.34%)(D)
Net assets, end of period (000's)....... $4,678 $3,472 $ 489 $7,543 $7,206 $2,406
Ratio of operating expenses to
average net assets (C)................ 1.90% 1.90% 1.90% (A) 1.90% 1.90% 1.90%(A)
Ratio of net investment income to
average net assets.................... 5.72% 5.95% 5.70% (A) 5.72% 6.00% 5.70%(A)
Portfolio turnover rate................. 56% 132% 186% 56% 132% 186%
</TABLE>
______________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement by the adviser of $0.03 and $0.08 per share for
the Investment Quality Bond Fund - Class B and $0.03 and $0.06 per share for
the Investment Quality Bond Fund - Class C, for the years ended October 31,
1996 and 1995, respectively and $0.19 and $0.07 per share for the Investment
Quality Bond Fund - Classes B and C respectively, for the period April 1,
1994 to October 31, 1994.
(C) The ratio of operating expenses, before reimbursement by the
adviser, was 2.27% and 2.69% for the Investment Quality Bond Fund - Class B
and 2.22% and 2.50% for the Investment Quality Bond Fund - Class C, for the
years ended October 31, 1996 and 1995, respectively and 4.88% and 3.05% for
the Investment Quality Bond Fund - Classes B and C respectively, for the
period April 1, 1994 to October 31, 1994 on an annualized basis.
(D) Historical total returns for Classes B and C shares are one year performance
returns which include Class A performance prior to April 1, 1994.
<PAGE>
<TABLE>
<CAPTION>
NATIONAL MUNICIPAL BOND FUND - CLASS A
----------------------------------------------------------------
07/06/93*
YEARS ENDED OCTOBER 31, TO
1996 1995 1994 10/31/93
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 9.62 $ 8.82 $10.25 $ 10.00
Income (loss) from investment operations
- ----------------------------------------
Net investment income (B)............... 0.48 0.51 0.51 0.17
Net realized and unrealized gain (loss)
on investments........................ 0.11 0.80 (1.43) 0.24
---------- ----------- ----------- ---------
Total from investment
operations.................. 0.59 1.31 (0.92) 0.41
Less distributions
- ----------------------------------------
Dividends from net investment income.... (0.48) (0.51) (0.51) (0.16)
---------- ----------- ----------- ---------
Net asset value, end of period.......... $ 9.73 $ 9.62 $ 8.82 $ 10.25
========== =========== =========== =========
Total return.................. 6.31% 15.26% (9.24%) 4.17%+
Net assets, end of period (000's)....... $7,710 $7,618 $7,663 $ 9,131
Ratio of operating expenses to
average net assets (C)................ 0.99% 0.80% 0.57% 0.23%(A)
Ratio of net investment income to
average net assets.................... 4.99% 5.55% 5.28% 4.86%(A)
Portfolio turnover rate................. 49% 44% 6% 150%(A)
</TABLE>
______________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.03, $0.05, $0.07
and $0.03 per share for the National Municipal Bond Fund - Class A for the
years ended October 31, 1996, 1995 and 1994 and the period July 6, 1993
(commencement of operations) to October 31, 1993, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 1.25%, 1.34%, 1.26% and 1.10% for the National Municipal Bond
Fund - Class A for the years ended October 31, 1996, 1995 and 1994 and the
period July 6, 1993 (commencement of operations) to October 31, 1993 on an
annualized basis, respectively.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL MUNICIPAL BOND FUND
--------------------------------------------------------------------------------------
YEAR YEAR 04/01/94* YEAR YEAR 04/01/94*
ENDED ENDED TO ENDED ENDED TO
10/31/96 10/31/95 10/31/94 10/31/96 10/31/95 10/31/94
CLASS B CLASS B CLASS B CLASS C CLASS C CLASS C
--------- --------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period.............................. $9.62 $8.81 $9.30 $9.62 $8.81 $9.30
Income (loss) from investment operations
- ----------------------------------------
Net investment income (B).. 0.40 0.43 0.25 0.40 0.43 0.25
Net realized and unrealized gain (loss)
on investments........................ 0.11 0.81 (0.49) 0.11 0.81 (0.49)
----- ----- ------ ----- ---- ------
Total from investment
operations........................ 0.51 1.24 (0.24) 0.51 1.24 (0.24)
Less distributions
- ------------------
Dividends from net
investment income...................... (0.40) (0.43) (0.25) (0.40) (0.43) (0.25)
----- ----- ------ ----- ---- ------
Net asset value, end of
period................................. $9.73 $9.62 $8.81 $9.73 $9.62 $8.81
===== ===== ===== ===== ===== =====
Total return.................. 5.41% 14.42% (9.71%)(D) 5.41% 14.42% (9.71%)(D)
Net assets, end of period
(000's)................................ $6,130 $5,876 $2,036 $5,693 $6,834 $1,911
Ratio of operating
expenses to
average net assets (C)................ 1.84% 1.70% 1.24%(A) 1.84% 1.70% 1.24%(A)
Ratio of net investment
income to
average net assets.................... 4.14% 4.59% 4.62%(A) 4.14% 4.53% 4.62%(A)
Portfolio turnover rate................. 49% 44% 6% 49% 44% 6%
</TABLE>
______________________________
* Commencement of operations
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.03 and $0.07 per
share for the National Municipal Bond Fund - Class B and $0.04 and $0.09 per
share for the National Municipal Bond Fund - Class C, for the years ended
October 31, 1996 and 1995, respectively and $0.09 and $0.09 per share for
the National Municipal Bond Fund - Classes B and C respectively, for the
period April 1, 1994 to October 31, 1994.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 2.11% and 2.41% for the National Municipal Bond Fund - Class B
and 2.25% and 2.63% for the National Municipal Bond Fund - Class C, for the
years ended October 31, 1996 and 1995, respectively and 2.81% and 2.78% for
the National Municipal Bond Fund - Classes B and C respectively, for the
period April 1, 1994 to October 31, 1994 on an annualized basis.
(D) Historical total returns for Classes B and C shares are one year performance
returns which include Class A performance prior to April 1, 1994.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND - CLASS A
-------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 08/28/89*
------------------------------------------------------------------------- TO
1996** 1995 1994 1993 1992 1991 1990 10/31/89
--------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 9.98 $ 9.45 $ 10.35 $ 10.04 $ 9.89 $ 9.47 $ 9.74 $ 9.73
Income (loss) from
investment operations
- ---------------------------
Net investment income (B).. 0.56 0.63 0.53 0.51 0.74 0.84 0.75 0.15
Net realized and
unrealized gain (loss)
on investments........... (0.12) 0.57 (0.74) 0.34 0.13 0.42 (0.20) 0.01
------- ------- -------- -------- -------- ------- ------- --------
Total from
investment
operations..... 0.44 1.20 (0.21) 0.85 0.87 1.26 0.55 0.16
Less distributions
- ------------------
Dividends from net
investment income......... (0.56) (0.67) (0.50) (0.50) (0.72) (0.84) (0.75) (0.15)
Dividends in excess of net
investment income......... (0.06) ---- ---- ---- ---- ---- ---- ----
Distributions from capital
gains..................... ---- ---- (0.19) (0.04) ---- ---- ---- ----
Distributions from capital. ---- ---- ---- ---- ---- ---- (0.07) ----
------- ------- -------- -------- -------- ------- ------- --------
Total
distributions... (0.62) (0.67) (0.69) (0.54) (0.72) (0.84) (0.82) (0.15)
------- ------- -------- -------- -------- ------- ------- --------
Net asset value, end of
period.................... $ 9.80 $ 9.98 $ 9.45 $ 10.35 $ 10.04 $ 9.89 $ 9.47 $ 9.74
======= ======= ======== ======== ======== ======= ======= ========
Total return..... 4.64% 13.15% (2.13%) 8.64% 9.15% 13.86% 5.90% 1.66% +
Net assets, end of period
(000's)................... $72,774 $81,179 $100,622 $163,296 $118,543 $45,662 $43,299 $ 56,069
Ratio of operating
expenses to
average net assets (C)... 1.25% 1.25% 1.25% 1.07% 0.24% 0.68% 2.28% 2.18%(A)
Ratio of net investment
income to
average net assets....... 5.71% 6.54% 5.39% 4.97% 7.21% 8.65% 7.89% 8.54%(A)
Portfolio turnover rate.... 477% 469% 279% 208% 108% 195% 71% 93%(A)
</TABLE>
______________________________
* Commencement of operations
** Net investment income per share has been calculated using the average
shares method.
+ Non-annualized
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.02, $0.02,
$0.02, $0.04, $0.19, $0.18 and $0.03 per share for the U.S. Government
Securities Fund - Class A for the years ended October 31, 1996, 1995, 1994,
1993, 1992, 1991 and 1990, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 1.41%, 1.45%, 1.47%, 1.42%, 2.13%, 2.61% and 2.57% for the
years ended October 31, 1996, 1995, 1994, 1993, 1992, 1991 and 1990,
respectively.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Oustanding Throughout the Period
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------------------
YEAR YEAR 04/01/94* YEAR YEAR 04/01/94
ENDED ENDED TO ENDED ENDED * TO
10/31/96** 10/31/95 10/31/94* 10/31/96 10/31/95 10/31/94
CLASS B CLASS B CLASS B CLASS C CLASS C CLASS C
------------- ----------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $9.98 $9.45 $9.77 $9.98 $9.45 $9.77
Income (loss) from
investment operations
- ---------------------------
Net investment income (B).. 0.50 0.56 0.29 0.50 0.56 0.26
Net realized and
unrealized gain (loss)
on investments........... (0.12) 0.58 (0.35) (0.12) 0.58 (0.32)
------ ------ ------ ------ ------ ------
Total from
investment
operations..... 0.38 1.14 (0.06) 0.38 1.14 (0.06)
Less distributions
- ---------------------------
Dividends from net
investment income......... (0.50) (0.61) (0.26) (0.50) (0.61) (0.26)
Dividends in excess of net
investment income......... (0.06) ---- ---- (0.06) ---- ----
------ ------ ------ ------ ------ ------
Total
distributions... (0.56) (0.61) (0.26) (0.56) (0.61) (0.26)
------ ------ ------ ------ ------ ------
Net asset value, end of
period.................... $9.80 $9.98 $9.45 $9.80 $9.98 $9.45
===== ===== ===== ===== ===== =====
Total return..... 3.97% 12.45% (2.44%)(D) 3.97% 12.45% (2.44%)(D)
Net assets, end of period
(000's)................... $19,444 $13,993 $2,746 $20,009 $20,186 $10,766
Ratio of operating
expenses to average
net assets (C)........... 1.90% 1.90% 1.90%(A) 1.90% 1.90% 1.90%(A)
Ratio of net investment
income to average
net assets............... 5.06% 5.53% 5.06%(A) 5.06% 5.74% 5.06%(A)
Portfolio turnover rate.... 477% 469% 279% 477% 469% 279%
</TABLE>
______________________________
* Commencement of operations
** Net investment income per share has been calculated using the average shares
method.
(A) Annualized
(B) After expense reimbursement by the adviser of $0.02 and $0.04 per share for
the U.S. Government Securities Fund - Class B and $0.02 and $0.03 per share
for the U.S. Government Securities Fund - Class C, for the years ended
October 31, 1996 and 1995, respectively and $0.08 and $0.03 per share for
the U.S. Government Securities Fund - Classes B and C respectively, for the
period April 1, 1994 to October 31, 1994.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
2.06% and 2.28% for the U.S. Government Securities Fund - Class B and 2.06%
and 2.15% for the U.S. Government Securities Fund - Class C, for the years
ended October 31, 1996 and 1995, respectively and 3.40% and 2.44% for the
U.S. Government Securities Fund - Classes B and C respectively, for the
period April 1, 1994 to October 31, 1994 on an annualized basis.
(D) Historical total returns for Classes B and C shares are one year performance
returns which include Class A performance prior to April 1, 1994.
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET FUND - CLASS A
---------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 08/28/89*
------------------------------------------------------------------------------------------ TO
1996 1995 1994 1993 1992 1991 1990 10/31/89
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment
operations
- ---------------------------
Net investment income (B).. 0.05 0.05 0.03 0.03 0.04 0.06 0.06 0.01
Less distributions
- ---------------------------
Dividends from net
investment income......... (0.05) (0.05) (0.03) (0.03) (0.04) (0.06) (0.06) (0.01)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
====== ====== ====== ====== ====== ====== ====== ======
Total return..... 5.16% 5.60% 3.48% 2.80% 3.69% 6.22% 5.76% 0.53% +
Net assets, end of period
(000's)................... $8,087 $11,379 $8,499 $18,109 $2,244 $3,421 $4,526 $7,781
Ratio of operating
expenses to average
net assets (C)........... 0.50% 0.50% 0.50% 0.50% 0.50% 1.00% 2.45% 1.96%(A)
Ratio of net investment
income to
average net assets....... 5.02% 5.45% 3.40% 2.75% 3.77% 6.01% 5.52% 6.59%(A)
</TABLE>
______________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.004, $0.004,
$0.0044, $0.0084, $0.0211, $0.0270 and $0.0002 per share for the Money
Market Fund - Class A for the years ended October 31, 1996, 1995, 1994,
1993, 1992, 1991 and 1990, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 0.95%, 0.96%, 0.95%, 1.32%, 2.71%, 2.68% and 2.47% for the
Money Market Fund - Class A for the years ended October 31, 1996, 1995,
1994, 1993, 1992, 1991 and 1990, respectively.
<PAGE>
<TABLE>
<CAPTION>
MONEY MARKET FUND
--------------------------------------------------------------------
YEAR YEAR 04/01/94* YEAR YEAR 04/01/94*
ENDED ENDED TO ENDED ENDED TO
10/31/96 10/31/95 10/31/94 10/31/96 10/31/95 10/31/94
CLASS B CLASS B CLASS B CLASS C CLASS C CLASS C
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations
- ----------------------------------
Net investment income (B)......... 0.05 0.05 0.02 0.05 0.05 0.02
Less distributions
- ------------------
Dividends from net investment income
investment income......... (0.05) (0.05) (0.02) (0.05) (0.05) (0.02)
------- ------- -------- ------- ------- -------
Net asset value, end of
period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= ======= =======
Total return..... 5.16% 5.60% 3.48%(D) 5.16% 5.60% 3.48%(D)
Net assets, end of period
(000's)................... $ 3,062 $1,564 $ 312 $9,840 $9,394 $12,170
Ratio of operating
expenses to average
net assets (C)........... 0.50% 0.50% 0.50%(A) 0.50% 0.50% 0.50%(A)
Ratio of net investment
income to average
net assets............... 5.02% 5.52% 3.96%(A) 5.02% 5.46% 3.96%(A)
</TABLE>
______________________________
* Commencement of operations
(A) Annualized
(B) After expense reimbursement by the adviser of $0.007 and $0.009 per share
for the Money Market Fund - Class B and $0.005 and $0.005 per share for the
Money Market Fund - Class C, for the years ended October 31, 1996 and 1995,
respectively and $0.0228 and $0.0037 per share for the Money Market Fund -
Classes B and C respectively, for the period April 1, 1994 to October 31,
1994.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.18% and 1.41% for the Money Market Fund - Class B and 0.98% and 0.95% for
the Money Market Fund - Class C, for the years ended October 31, 1996 and
1995, respectively and 4.83% and 1.18% for the Money Market Fund - Classes B
and C respectively, for the period April 1, 1994 to October 31, 1994 on an
annualized basis.
(D) Historical total returns for Classes B and C shares are one year performance
returns which include Class A performance prior to April 1, 1994.
<PAGE>
MULTIPLE PRICING SYSTEM
The Fund's Multiple Pricing System permits an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase and the length of time the investor expects to hold the shares.
Class A Shares. Purchases of Class A shares of less than $1 million are
offered for sale at net asset value per share plus a front end sales charge of
up to 4.75% payable at the time of purchase (with the exception of Class A
shares of the Money Market Fund, which are offered without such a charge).
Purchases of Class A shares of $1 million or more made on or after May 1, 1995
are offered for sale at net asset value without a front end sales charge but are
subject to a contingent deferred sales charge ("CDSC") of 1% of the dollar
amount subject thereto during the first year after purchase. See "MULTIPLE
PRICING SYSTEM-Contingent Deferred Sales Charge." In addition, Class A shares
are subject to a distribution fee of up to .10% of their respective average
annual net assets and a service fee of up to .25% of their respective average
annual net assets (with the exception of Class A shares of the Money Market
Fund, which bear not such fees, and Class A shares of the National Municipal
Bond Fund, which are subject to a service fee of up to .15% of Class A average
annual net assets and are not subject to any distribution fee). Certain
purchases of Class A shares qualify for reduced front end sales charges. See
"PURCHASE OF SHARES--Class A Shares--Reduced Sales Charges" and "--Distribution
Expenses."
Class B Shares. Class B shares are offered for sale for purchases of
$250,000 or loss. Class B shares are offered for sale at net asset value
without a front end sales charge, but are subject to a CDSC of 5% of the dollar
amount subject thereto during the first and second year after purchase, and
declining by 1% each year thereafter to 0% after the sixth year. See "MULTIPLE
PRICING SYSTEM - Contingent Deferred Sales Charge." In addition, Class B shares
are subject to a distribution fee of up to .75% of their respective average
annual net assets and a service fee of up to .25% of their respective average
annual net assets (with the exception of Class B shares of the Money Market
Fund, which bear no such fees). The Class B shares enjoy the benefit of
permitting all of the investor's dollars to work from the time the investment is
made. The higher ongoing distribution and service fees paid by Class B shares
will cause such shares to have a higher expense ratio and to pay lower dividends
than Class A shares. See "PURCHASE OF SHARES--Class B Shares" and "--
Distribution Expenses." Class B shares will automatically convert to Class A
shares six years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "MULTIPLE PRICING SYSTEM--Conversion
Feature."
Class C Shares. Class C shares are offered for purchases of less than
$1 million, at net asset value without a front end sales charge. Class C shares
purchased on or after May 1, 1995 are subject to a CDSC of 1% of the dollar
amount subject thereto during the first year after purchase. Shares purchased
prior to May 1, 1995 are not subject to any CDSC upon redemption. See
"MULTIPLE CLASS PRICING SYSTEM-Contingent Deferred Sales Charge." Class C
shares are subject to a distribution fee of up to .75% of their respective
average annual net assets and a service fee of up to .25% of their respective
average annual net assets (with the exception of Class C shares of the Money
Market Fund, which bear no such fees). Class C shares, like Class B shares,
enjoy the benefit of permitting all of the investor's dollars to work from the
time the investment is made. The higher ongoing distribution and service fees
paid by Class C shares will cause such shares to have a higher expense ratio and
to pay lower dividends than Class A shares. See "PURCHASE OF SHARES--Class C
Shares" and "--Distribution Expenses." Class C shares will automatically
convert to Class A shares ten years after the end of the calendar month in which
the shareholder's order to purchase was accepted. See "MULTIPLE PRICING SYSTEM
- --Conversion Feature."
Contingent Deferred Sales Charge. Purchases of $1 million or more of
Class A shares made on or after May 1, 1995 are subject to a CDSC of 1% if
redeemed within one year of purchase; purchases of Class B shares are subject to
a CDSC of 5% during the first and second year after purchase declining by 1%
each year thereafter to 0% after the sixth year; and Class C shares purchased on
or after May 1, 1995 are subject to a CDSC of 1% if redeemed within one year of
purchase. The applicable percentage is assessed on an amount equal to the
lesser of the original purchase price or the redemption price of the shares
redeemed. The CDSC is not applicable with respect to redemption of shares of
the Money Market Fund which were initially purchased as such and which were
never exchanged for shares of the same class of another Portfolio. However, in
the case of shares of the Money Market Fund which were obtained through an
exchange, such shares are subject to any applicable CDSC due at redemption.
Similarly, shares initially purchased as shares of the Money Market Fund which
are subsequently exchanged for shares of the same class of other Portfolios will
be subject to any applicable CDSC due at redemption. See "SHAREHOLDER SERVICES
- --Exchange Privilege."
Conversion Feature. Class B shares and Class C shares will
automatically convert to Class A shares six years and ten years, respectively,
after the end of the calendar month in which the shareholder's order to purchase
was accepted and will thereafter no longer be subject to the higher distribution
and service fees. Such conversion will be on the basis of the relative net asset
values per share, without the imposition of any sales charge, fee or other
charge. The purpose of the conversion feature is to relieve the holders of Class
B shares and Class C shares from most of the burden of distribution-related
expenses at such time as when the shares have been outstanding for a duration
sufficient for the Fund's distributor. NASL Financial Services, Inc. (in such
capacity, the "Distributor"), to have been substantially compensated for
distribution-related expenses incurred in connection with Class B shares or
Class C shares, as the case may be.
32
<PAGE>
Accordingly, Class B and Class C shares of the Money Market Fund do not convert
to Class A shares of the Money Market Fund at any time, as shares of all classes
of the Money Market Fund do not bear any distribution or service fees. In
addition, because Class B and Class C shares of the Money Market Fund are not
subject to any distribution or service fees, the applicable conversion period is
tolled for any period of time in which Class B or Class C shares are held in
that Portfolio. For example, if Class B shares of a Portfolio other than the
Money Market Fund are exchanged for Class B shares of the Money Market Fund two
years after purchase and are subsequently exchanged one year later for Class B
shares of a Portfolio other than the Money Market Fund, the one year of
ownership in the Money Market Fund does not count in the determination of the
time of conversion to Class A shares.
For purposes of the conversion of Class B and Class C shares to Class
A shares, shares purchased through the reinvestment of dividends and
distributions paid on Class B shares or Class C shares, as the case may be, in a
shareholder's Fund account will be considered to be held in a separate sub-
account. Each time any Class B shares or Class C shares in the shareholder's
Fund account (other than those in the sub-account) convert to Class A shares, a
pro rata portion of the Class B shares or Class C shares, as the case may be, in
the sub-account will also convert to Class A shares.
The conversion of Class B shares to Class A shares and the conversion
of Class C shares to Class A shares are both subject to the continuing
availability of a ruling of the Internal Revenue Service that payment of
different dividends on Class A shares and Class B shares, and on Class A shares
and Class C shares, does not result in the Portfolios' dividends or
distributions constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended (the "Code"), and the continuing availability of an
opinion of counsel to the effect that the conversion of shares does not
constitute a taxable event under Federal income tax law. The conversion of
Class B shares and Class C shares may be suspended if such an opinion is no
longer available. In that event, no further conversions of Class B shares or
Class C shares would occur, and those shares might continue to be subject to
higher distribution and service fees for an indefinite period which may extend
beyond the period ending six years or ten years, respectively, after the end of
the calendar month in which the shareholder's order to purchase was accepted.
Factors for Consideration. The Fund's Multiple Pricing System is
designed to provide investors with the option of choosing the class of shares
which is best suited to their individual circumstances and objectives. The
different sales charges, distribution and service fees and conversion features
applicable to each class, as outlined above, should all be taken into
consideration by investors in making the determination of which alternative is
best suited for them. To assist investors in evaluating the costs and benefits
of purchasing shares of each class, the information provided above under the
caption "Fee Table and Example" sets forth the charges applicable to each class
of shares and illustrates an example of a hypothetical investment in each class
of shares of each Portfolio.
There are several key distinctions among the classes of shares that
investors should understand and evaluate in comparing the options presented by
the Multiple Pricing System. Class A shares are subject to lower distribution
and service fees than are Class B and Class C shares, and, accordingly, pay
correspondingly higher dividends per share. However, because for purchases of
less than $1 million of Class A shares a front end sales charge is deducted at
the time of purchase, investors purchasing Class A shares do not have all of
their funds invested initially and, therefore, initially own fewer shares than
they would own if they had invested the identical sum in Class B shares or Class
C shares instead. In addition, Class C shares are subject to the same ongoing
distribution and service fees as Class B shares but are subject to a CDSC for a
shorter period of time (one year as opposed to six years) than Class B shares.
However, Class B shares convert to Class A shares, and lower ongoing
distribution and service fees, in a shorter time frame than do Class C shares.
In light of these distinctions among the classes of shares, investors
should weigh such factors as (i) whether they qualify for a reduced front end
sales load for a purchase of Class A shares; (ii) whether, at the time of
purchase, they anticipate being subject to a CDSC upon redemption if they
purchase Class A shares (purchases of $1 million or more), Class B shares or
Class C shares; (iii) the differential in the relative amounts that would be
paid during the anticipated life of investments (which are made at the same time
and in the same amount) in each class which are attributable to (a) the front
end sales charge (for purchases of less than $1 million) and any applicable CDSC
(for purchases of $1 million or more) and accumulated distribution and service
fees payable with respect to Class A shares and (b) the accumulated distribution
and service fees (and any applicable CDSC) payable with respect to Class B
shares or Class C shares prior to their conversion to Class A shares; and (iv)
to what extent the differential referred to above might be offset by the higher
yield of Class A shares. Investors should also weigh these considerations
against the fact that the higher continued distribution and service fees
associated with Class B shares and Class C shares will be offset to the extent
any return is realized on the additional funds initially invested and that there
can be no assurance as to the return, if any, which will be realized on such
additional funds. Class A shares are, in general, the most beneficial for the
investor who qualifies for reduced front end sales charges, as described herein
under "PURCHASE OF SHARES -- Class A Shares." For this reason, Class B shares
are not offered for purchases in excess of $250,000 and Class C shares are not
offered for purchases of $1 million or more. Investors should consult their
investment representative for assistance in evaluating the relative benefits of
the different classes of shares.
The distribution and shareholder service expenses incurred by the
Distributor in connection with the sale of shares will be paid, in the case of
Class A shares (purchases of less than $1 million), from the proceeds of front
end sales charges and ongoing distribution and
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service fees and in the case of Class A shares (purchases of $1 million or
more), Class B shares and Class C shares, from the proceeds of CDSCs and ongoing
distribution and service fees. Sales personnel of broker-dealers distributing
the Fund's shares and any other persons entitled to receive compensation for
selling or servicing the Fund's shares may receive different compensation for
selling or servicing one class of shares over another. Investors should
understand that front end sales charges, CDSCs and ongoing distribution and
service fees are all intended to compensate the Distributor for distribution
services. See "PURCHASE OF SHARES --Distribution Expenses."
Dividends paid by the Fund with respect to each class of shares will
be calculated in substantially the same manner at the same time on the same day,
except that distribution and service fees and any other costs specifically
attributable to a particular class of shares will be borne solely by the
applicable class. See "GENERAL INFORMATION -- Dividends and Distributions."
Shares of the Fund may be exchanged for shares of the same class of any other
Portfolio, but not for shares of other classes of any Portfolio. See
"SHAREHOLDER SERVICES -- Exchange Privilege."
The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Trustees of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 (the "1940 Act") and state laws, will seek to ensure that no
such conflict arises.
INVESTMENT PORTFOLIOS
Each Portfolio has a stated investment objective which it pursues
through separate investment policies. The differences in objectives and
policies among the Portfolios can be expected to affect the return of each
Portfolio and the degree of market and financial risk to which each Portfolio is
subject.
The investment objective of each Portfolio represents fundamental
policies of each such Portfolio and may not be changed without the approval of
the holders of a majority of the outstanding shares of the Portfolio. Except
for certain investment restrictions, the policies by which a Portfolio seeks to
achieve its investment objectives may be changed by the Trustees of the Fund
without the approval of the shareholders.
The following is a description of the investment objective and
policies of each Portfolio. More complete descriptions of the money market
instruments and certain other investments in which each Portfolio may invest and
of the options, futures and currency transactions that certain Portfolios may
engage in are set forth in the Statement of Additional Information. With regard
to fixed income securities there is an inverse relationship between changes in
the direction of interest rates and the market value of the securities. A more
complete description of the debt security ratings used by the Fund assigned by
Moody's Investors Service, Inc. ("Moody's"), Standard and Poor's Ratings Group
("Standard & Poor's" or "S&P") or Fitch Investors Service, Inc. ("Fitch") is
included in Appendix I to this Prospectus.
International Small Cap Fund
The investment objective of the International Small Cap Fund is to
seek long-term capital appreciation. Founders manages the International Small
Cap Fund and will pursue this objective by investing primarily in securities
issued by foreign companies which have total market capitalizations (present
market value per share multiplied by the total number of shares outstanding) or
annual revenues of $1 billion or less. These securities may represent companies
in both established and emerging economies throughout the world.
At least 65% of the Portfolio's total assets will normally be invested
in foreign securities representing a minimum of three countries (other than the
United States). The Portfolio may invest in larger foreign companies or in U.S.
based companies if, in Founders' opinion, they represent better prospects for
capital appreciation.
The International Small Cap Fund may invest a significant portion of
its assets in the securities of small companies. Small companies are those
which are still in the developing stages of their life cycles and are attempting
to achieve rapid growth in both sales and earnings. Investments in small
companies involve greater risk than is customarily associated with more
established companies. These companies often have sales and earnings growth
rates which exceed those of large companies. Such growth rates may be reflected
in more rapid share price appreciation. However, smaller companies often have
limited operating histories, product lines, markets or financial resources, and
they may be dependent upon one-person management. These companies may be
subject to intense competition from larger entities, and the securities of such
companies may have limited marketability and may be subject to more abrupt or
erratic movements in price than securities of larger companies or the market
averages in general. Therefore, the net asset value of the International Small
Cap Fund may fluctuate more widely than the popular market averages.
Accordingly, an investment in the Portfolio may not be appropriate for all
investors.
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The International Small Cap Fund will invest primarily in equity
securities but may also invest in convertible securities, preferred stocks,
bonds, debentures and other corporate obligations when Founders believes that
these investments offer opportunities for capital appreciation. Current income
will not be a substantial factor in the selection of these securities. The
portfolio will only invest in bonds, debentures and corporate obligations--other
than convertible securities and preferred stock--rated investment-grade (Baa or
higher by Moody's or BBB or higher by S&P) at the time of purchase or, if
unrated, of comparable quality in the opinion of Founders. Convertible
securities and preferred stocks purchased by the Portfolio may be rated in
medium and lower categories by Moody's or S&P (Ba or lower by Moody's and BB or
lower by S&P) but will not be rated lower than B. The portfolio may also invest
in unrated convertible securities and preferred stocks in instances in which
Founders believes that the financial condition of the issuer or the protection
afforded by the terms of the securities limits risk to a level similar to that
of securities rated in categories no lower than B. At no time will the portfolio
have more than 5% of its total assets invested in any fixed-income securities
which are unrated or are rated below investment grade either at the time of
purchase or as a result of a reduction in rating after purchase. The portfolio
is not required to dispose of debt securities whose ratings are downgraded below
these ratings subsequent to the portfolio's purchase of the securities, unless
such a disposition is necessary to reduce the portfolio's holdings of such
securities to less than 5% of its total assets. See "RISK FACTORS - High
Yield/High Risk Securities." A description of the ratings used by Moody's and S
& P is set forth in Appendix I to the Prospectus.
The International Small Cap Fund may invest up to 100% of its assets
temporarily in the following securities if Founders determines that it is
appropriate for purposes of enhancing liquidity or preserving capital in light
of prevailing market or economic conditions: cash, cash equivalents, U.S.
government obligations, commercial paper, bank obligations, repurchase
agreements, and negotiable U.S. dollar-denominated obligations of domestic and
foreign branches of U.S. depository institutions, U.S. branches of foreign
depository institutions, and foreign depository institutions. The portfolio may
also acquire certificates of deposit and bankers' acceptances of banks which
meet criteria established by the Fund's Trustees. When the portfolio is in a
defensive position, the opportunity to achieve capital growth will be limited,
and, to the extent that this assessment of market conditions is incorrect, the
portfolio will be foregoing the opportunity to benefit from capital growth
resulting from increases in the value of equity investments and may not achieve
its investment objective.
Foreign Securities. The portfolio may invest up to 100% of its total
assets in foreign securities and will be subject to special risks as a result of
these investments. These risks are described under the caption "RISK FACTORS --
Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under "GENERAL
INFORMATION -Taxes" in this Prospectus.
Foreign investments of the International Small Cap Fund may include
securities issued by companies located in countries not considered to be major
industrialized nations. Such countries are subject to more economic, political
and business risk than major industrialized nations, and the securities they
issue and of issuers located in such countries are expected to be more volatile
and more uncertain as to payments of interest and principal. The secondary
market for such securities is expected to be less liquid than for securities of
major industrialized nations. Such countries may include (but are not limited
to) Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Chile, China,
Colombia, Costa Rica, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Finland,
Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Jordan,
Malaysia, Mexico, Netherlands, New Zealand, Nigeria, North Korea, Norway,
Pakistan, Paraguay, Peru, Philippines, Poland, Portugal, Singapore, Slovak
Republic, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland,
Taiwan, Thailand, Turkey, Uruguay, Venezuela, Vietnam and the countries of the
former Soviet Union. Investments of the Portfolio may include securities
created through the Brady Plan, a program under which heavily indebted countries
have restructured their bank debt into bonds. See "OTHER INSTRUMENTS--High
Yield Foreign Sovereign Debt Securities" in the Statement of Additional
Information.
Since the International Small Cap Fund's assets will be invested
primarily in foreign securities and since substantially all of the portfolio's
revenues will be received in foreign currencies, the portfolio's net asset
values will be affected by changes in currency exchange rates. The portfolio
will pay dividends in dollars and will incur currency conversion costs.
Use of Hedging and Other Strategic Transactions. The International
Small Cap Fund is currently authorized to use all of the various investment
strategies referred to under "RISK FACTORS -- Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
Small/Mid Cap Fund
The investment objective of the Small/Mid Cap Fund is to seek long
term capital appreciation. Alger manages the Small/Mid Cap Fund and will pursue
this objective by investing at least 65% of the Portfolio's total assets (except
during temporary defensive periods) in small/mid cap equity securities. As used
in this Prospectus small/mid cap equity securities are equity securities of
companies that, at the time of purchase, have "total market capitalization" --
present market value per share multiplied by the total number of shares
outstanding --
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between $500 million and $5 billion. The Portfolio may invest up to 35% of its
total assets in equity securities of companies that, at the time of purchase,
have total market capitalization of $5 billion or greater and in excess of that
amount (up to 100% of its assets ) during temporary defensive periods.
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The Small/Mid Cap Fund seeks to achieve its investment objective by
investing in equity securities, such as common or preferred stocks, or
securities convertible into or exchangeable for equity securities, including
warrants and rights. The Portfolio will invest primarily in companies whose
securities are traded on domestic stock exchanges or in the over-the-counter
market.
The Small/Mid Cap Fund may invest a significant portion of its assets
in the securities of small companies. Small companies are those which are still
in the developing stages of their life cycles and will attempt to achieve rapid
growth in both sales and earnings. Investments in small companies involve
greater risk than is customarily associated with more established companies.
These companies often have sales and earnings growth rates which exceed those of
large companies. Such growth rates may be reflected in more rapid share price
appreciation. However, smaller companies often have limited operating
histories, product lines, markets or financial resources, and they may be
dependent upon the management of only a few people. These companies may be
subject to intense competition from larger entities, and the securities of such
companies may have limited marketability and may be subject to more abrupt or
erratic movements in price than securities of larger companies or the market
averages in general. Therefore, the net asset values of the Small/Mid Cap Fund
may fluctuate more widely than the popular market averages. Accordingly, an
investment in the portfolio may not be appropriate for all investors.
In order to afford the Portfolio the flexibility to take advantage of
new opportunities for investments in accordance with its investment objectives,
it may hold up to 15% of its net assets (up to 100% of their assets during
temporary defensive periods) in money market instruments, bank and thrift
obligations, obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities, foreign bank obligations and obligations of
foreign branches of domestic banks, variable rate master demand notes and
repurchase agreements. When the Portfolio is in a defensive position, the
opportunity to achieve capital growth will be limited, and, to the extent that
this assessment of market conditions is incorrect, the Portfolio will be
foregoing the opportunity to benefit from capital growth resulting from
increases in the value of its investments and may not achieve its investment
objective.
Foreign Securities. The Portfolio may invest up to 20% of its total
assets in foreign securities and will be subject to certain risks as a result of
these investments. These risks are described under the caption "RISK FACTORS --
Foreign Securities" in this Prospectus. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under "GENERAL
INFORMATION -Taxes" in this Prospectus. The Portfolio may also purchase
American Depository Receipts ("ADRs") or U.S. dollar-denominated securities of
foreign issuers that are not included in the 20% foreign securities limitation.
See "RISK FACTORS - Foreign Securities" in this Prospectus for a description of
ADRs.
Use of Hedging and Other Strategic Transactions. The Small/Mid Cap
Fund is currently authorized to use all of the various investment strategies
referred to under "RISK FACTORS -- Hedging and Other Strategic Transactions".
The Statement of Additional Information contains a description of these
strategies and of certain risks associated therewith.
Global Equity Fund
The investment objective of the Global Equity Fund (prior to October
1, 1996, the "Global Growth Fund") is long-term capital appreciation. Morgan
Stanley manages the Global Equity Fund and seeks to attain this objective by
investing primarily in common and preferred stocks, convertible securities,
rights and warrants to purchase common stocks, American and Global Depository
Receipts and other equity securities of issuers throughout the world, including
issuers in the U.S. and emerging market countries.
Under normal circumstances, at least 65% of the value of the total
assets of the Global Equity Fund will be invested in equity securities and at
least 20% of the value of the portfolio's total assets will be invested in the
common stocks of U.S. issuers. The portfolio may also invest in money market
instruments. Although the portfolio intends to invest primarily in securities
listed on stock exchanges, it will also invest in equity securities that are
traded over-the-counter or that are not admitted to listing on a stock exchange
or dealt in on a regulated market. As a result of the absence of a public
trading market, such securities may pose liquidity risks.
The Subadviser's approach is oriented to individual stock selection
and is value driven. In selecting stocks for the portfolio, the Subadviser
initially identifies those stocks that it believes to be undervalued in relation
to the issuer's assets, cash flow, earnings and revenues, and then evaluates the
future value of such stocks by running the results of an in-depth study of the
issuer through a dividend discount model. In selecting investments, the
Subadviser utilizes the research of a number of sources, including Morgan
Stanley Capital International, an affiliate of the Subadviser located in Geneva,
Switzerland. Portfolio holdings are regularly reviewed and subjected to
fundamental analysis to determine whether they continue to conform to the
Subadviser's value criteria. Equity securities which no longer conform to such
investment criteria will be sold. Although the portfolio will not invest for
short-term trading purposes, investment securities may be sold from time to time
without regard to the length of time they have been held.
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The Global Equity Fund may engage in forward foreign currency
exchanges and when-issued or delayed delivery securities.
The Global Equity Fund will be subject to special risks as a result of
its ability to invest up to 100% of its total assets in foreign securities.
These risks, including the risks of the possible increased likelihood of
expropriation or the return to power of a communist regime which would institute
policies to expropriate, nationalize or otherwise confiscate investments, are
described under the caption "RISK FACTORS --Foreign Securities" in this
Prospectus. Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "GENERAL INFORMATION --Taxes" in
this Prospectus.
Use of Hedging and Other Strategic Transactions
The Global Equity Fund is currently authorized to use all of the
various investment strategies referred to under "RISK FACTORS -- Hedging and
Other Strategic Transactions." With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the portfolio. The Statement of Additional
Information contains a description of these strategies and of certain risks
associated therewith.
Growth Equity Fund
The investment objective of the Growth Equity Fund is to seek long-
term growth of capital. Founders manages the Growth Equity Fund and will pursue
this objective by investing, under normal market conditions, at least 65% of its
assets in common stocks of well-established, high-quality growth companies that
Founders believes have the potential to increase earnings faster than the rest
of the market. These companies tend to have strong performance records, solid
market positions and reasonable financial strength, and have continuous
operating records of three years or more.
The Growth Equity Fund may invest in convertible securities, preferred
stocks, bonds, debentures and other corporate obligations when Founders believes
that these investments offer opportunities for capital appreciation. Current
income will not be a substantial factor in the selection of these securities.
The Growth Equity Fund will only invest in bonds, debentures and corporate
obligations--other than convertible securities and preferred stock--rated
investment-grade (Baa or higher by Moody's and BBB or higher by S&P) or, if
unrated, of comparable quality in the opinion of Founders at the time of
purchase. Convertible securities and preferred stocks purchased by the
Portfolio may be rated in medium and lower categories by Moody's or S&P (Ba or
lower by Moody's and BB or lower by S&P) but will not be rated lower than B.
The Growth Equity Fund may also invest in unrated convertible securities and
preferred stocks in instances in which Founders believes that the financial
condition of the issuer or the protection afforded by the terms of the
securities limits risk to a level similar to that of securities rated in
categories no lower than B. At no time will the portfolio have more than 5% of
its total assets invested in any fixed-income securities which are unrated or
are rated below investment grade either at the time of purchase or as a result
of a reduction in rating after purchase. The portfolio is not required to
dispose of debt securities whose ratings are downgraded below these ratings
subsequent to the portfolio's purchase of the securities, unless such a
disposition is necessary to reduce the portfolio's holdings of such securities
to less than 5% of its total assets. See "RISK FACTORS - High Yield Securities."
The Growth Equity Fund may invest up to 100% of its assets temporarily
in the following securities if Founders determines that it is appropriate for
purposes of enhancing liquidity or preserving capital in light of prevailing
market or economic conditions: cash, cash equivalents, U.S. government
obligations, commercial paper, bank obligations, repurchase agreements, and
negotiable U.S. dollar-denominated obligations of domestic and foreign branches
of U.S. depository institutions, U.S. branches of foreign depository
institutions, and foreign depository institutions. The portfolio may also
acquire certificates of deposit and bankers' acceptances of banks which meet
criteria established by the Fund's Trustees. When the Growth Equity Fund is in a
defensive position, the opportunity to achieve capital growth will be limited,
and, to the extent that this assessment of market conditions is incorrect, the
Growth Equity Fund will be foregoing the opportunity to benefit from capital
growth resulting from increases in the value of equity investments and may not
achieve its investment objective.
Foreign Securities. The Growth Equity Fund may invest without limit
in ADRs and up to 30% of its total assets in foreign securities (other than
ADRs), with no more than 25% invested in any one foreign country. The Growth
Equity Fund will be subject to certain risks as a result of these investments.
These risks are described under the caption "RISK FACTORS -- Foreign Securities"
in this Prospectus. Moreover, substantial investments in foreign securities may
have adverse tax implications as described under "GENERAL INFORMATION -Taxes" in
this Prospectus.
Use of Hedging and Other Strategic Transactions. The Growth Equity
Fund is currently authorized to use all of the various investment strategies
referred to under "RISK FACTORS -- Hedging and Other Strategic Transactions."
The Statement of Additional Information contains a description of these
strategies and of certain risks associated therewith.
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International Growth and Income Fund
The investment objective of the International Growth and Income Fund
is to seek long-term growth of capital and income. The Portfolio is designed
for investors with a long-term investment horizon who want to take advantage of
investment opportunities outside the United States.
J.P. Morgan manages the International Growth and Income Fund and will
seek to achieve the Portfolio's investment objective by investing, under normal
circumstances, at least 65% of its total assets in equity securities of foreign
issuers, consisting of common stocks and other securities with equity
characteristics such as preferred stock, warrants, rights and convertible
securities. The Portfolio will focus primarily on the common stock of
established companies based in developed countries outside the United States.
Such investments will be made in at least three foreign countries. For this
purpose, a developed country is any country included in the MSCI World Index.
The countries currently included in this Index are: Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, Malaysia, Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland, United Kingdom and the U.S. The Portfolio invests in securities
listed on foreign or domestic securities exchanges and securities traded in
foreign or domestic over-the-counter markets, and may invest in certain
restricted or unlisted securities. See "RISK FACTORS -- Foreign Securities."
Under normal circumstances, the International Growth and Income Fund expects to
invest primarily in equity securities. However, the Portfolio may invest up to
35% of its assets in debt obligations of corporate, sovereign issuers or
supranational organizations rated A or higher by Moody's or S&P, or if unrated,
of equivalent credit quality as determined by the Subadviser. See "Strategic
Income Fund" below for additional information on supranational organizations.
Under normal circumstances, the Portfolio will be invested approximately 85% in
equity securities and 15% in fixed income securities. J.P. Morgan may allocate
the Portfolio's investment in these asset classes in a manner consistent with
the Portfolio's investment objective and current market conditions. Using a
variety of analytical tools, J.P. Morgan assesses the relative attractiveness of
each asset class and determines an optimal allocation between them. Yields on
non-U.S. equity securities tend to be lower than those on equity securities of
U.S. issuers. Therefore, current income from the Portfolio may not be as high
as that available from a portfolio of U.S. equity securities.
In pursuing the International Growth and Income Fund's objective, J.P.
Morgan will actively manage the assets of the Portfolio through country
allocation and stock valuation and selection. Based on fundamental research,
quantitative valuation techniques and experienced judgment, J.P. Morgan uses a
structured decision-making process to allocate the Portfolio primarily across
the developed countries of the world outside the United States. This universe
is typically represented by the Morgan Stanley Europe, Australia and Far East
Index (the "EAFE Index").
Using a dividend discount model and based on analysts' industry
expertise, securities within each country are ranked within industry sectors
according to their relative value. Based on this valuation, J.P. Morgan selects
the securities which appear the most attractive for the Portfolio. J.P. Morgan
believes that under normal market conditions, industrial sector weightings
generally will be similar to those of the EAFE index.
Finally, J.P. Morgan actively manages currency exposure, in
conjunction with country and stock allocation, in an attempt to protect and
possibly enhance the International Growth and Income Fund's market value.
Through the use of forward foreign currency exchange contracts, J.P. Morgan will
adjust the Portfolio's foreign currency weightings to reduce its exposure to
currencies that the Subadviser deems unattractive and, in certain circumstances,
increase exposure to currencies deemed attractive, as market conditions warrant,
based on fundamental research, technical factors and the judgment of a team of
experienced currency managers.
The International Growth and Income Fund intends to manage its
portfolio actively in pursuit of its investment objective. The Portfolio does
not expect to trade in securities for short-term profits; however, when
circumstances warrant, securities may be sold without regard to the length of
time held. See "GENERAL INFORMATION -- Taxes." To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
The International Growth and Income Fund may also invest in securities
on a when-issued or delayed delivery basis, enter into repurchase and reverse
repurchase agreements, loan its portfolio securities and purchase certain
privately placed securities. See "RISK FACTORS."
The International Growth and Income Fund may make money market
investments pending other investments or settlement or for liquidity purposes.
In addition, when J.P. Morgan believes that investing for defensive purposes is
appropriate, such as during periods of unusual or unfavorable market or
economics conditions, up to 100% of the Portfolio's assets may be temporarily
invested in money market instruments. The money market investments permitted
for the Portfolio include obligations of the U.S. Government and its agencies
and instrumentalities, other debt securities, commercial paper, bank obligations
and repurchase agreements, as described below under "Money Market Fund."
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The International Growth and Income Fund will be subject to special
risks as a result of its ability to invest up to 100% of its assets in foreign
securities. These risks are described under the caption "RISK FACTORS --
Foreign Securities" in this Prospectus. The ability to diversify its
investments among the equity markets of different countries may, however, reduce
the overall level of market risk to the extent it may reduce the Portfolio's
exposure to a single market. Moreover, substantial investments in foreign
securities may have adverse tax implications as described under "GENERAL
INFORMATION -- Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions. The International
Growth and Income Fund is currently authorized to use all of the various
investment strategies referred to under "RISK FACTORS -- Hedging and Other
Strategic Transactions". With the exception of currency transactions, however,
it is not presently anticipated that any of these strategies will be used to a
significant degree by the Portfolio. The Statement of Additional Information
contains a description of these strategies and of certain risks associated
therewith.
Growth and Income Fund
The investment objective of the Growth and Income Fund is to provide
long-term growth of capital and income consistent with prudent investment risk.
Wellington Management manages the Growth and Income Fund and seeks to
achieve the Portfolio's objective by investing primarily in a diversified
portfolio of common stocks of U.S. issuers which Wellington Management believes
are of high quality. Wellington Management believes that high quality is
evidenced by a leadership position within an industry, a strong or improving
balance sheet, relatively high return on equity, steady or increasing dividend
payout, and strong management skills. The Growth and Income Fund's investments
will primarily emphasize dividend paying stocks of larger companies. The Growth
and Income Fund may also invest in securities convertible into or which carry
the right to buy common stocks, including those convertible securities issued in
the Euromarket; preferred stocks; and marketable debt securities of domestic
issuers and of foreign issuers (payable in U.S. dollars), if such marketable
debt securities of domestic issuers and foreign issuers are rated at the time of
purchase "A" or better by Moody's or S&P or, if unrated, deemed to be of
equivalent quality in Wellington Management's judgment. When market or
financial conditions warrant a temporary defensive posture, the Growth and
Income Fund may, in order to reduce risk and achieve attractive total investment
return, invest in securities which are authorized for purchase by the Investment
Quality Bond Fund or the Money Market Fund. The Subadviser expects that under
normal market conditions, the Growth and Income Fund's portfolio will consist
primarily of equity securities.
Investments will be selected on the basis of fundamental analysis to
identify those securities that, in Wellington Management's judgment, provide the
potential for long-term growth of capital and income. Fundamental analysis
involves assessing a company and its business environment, management, balance
sheet, income statement, anticipated earnings and dividends and other related
measures of value. When selecting securities of issuers domiciled outside of
the United States, Wellington Management will also monitor and evaluate the
economic and political climate and the principal securities markets of the
country in which each company is located.
The Growth and Income Fund will invest primarily in securities listed
on national securities exchanges, but from time to time it may also purchase
securities traded in the "over-the-counter" market.
The Growth and Income Fund will be subject to certain risks as a
result of its ability to invest up to 20% of its assets in foreign securities.
These risks are described under the caption "RISK FACTORS -- Foreign Securities"
in this Prospectus. Moreover, substantial investments in foreign securities may
have adverse tax implications as described under "GENERAL INFORMATION -- Taxes"
in this Prospectus.
Use of Hedging and Other Strategic Transactions. The Growth and
Income Fund is currently authorized to use all of the various investment
strategies referred to under "RISK FACTORS -- Hedging and Other Strategic
Transactions." However, it is not presently anticipated that any of these
strategies will be used to a significant degree by the Portfolio. The Statement
of Additional Information contains a description of these strategies and of
certain risks associated therewith.
Equity-Income Fund
The investment objective of the Equity-Income Fund (prior to December
31, 1996 the "Value Equity Fund") is to provide substantial dividend income and
also long term capital appreciation. T. Rowe Price manages the Equity-Income
Fund and seeks to attain this objective by investing primarily in dividend-
paying common stocks, particularly of established companies with favorable
prospects for both increasing dividends and capital appreciation.
Under normal circumstances, the Equity-Income Fund will invest at
least 65% of total assets in the common stocks of established companies paying
above-average dividends. T. Rowe Price believes that income can be a significant
contributor to total return over time and expects the portfolio's yield to be
above that of the Standard & Poor's 500 Stock Index.
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The Equity-Income Fund will generally consider companies with the following
characteristics:
-- Established operating histories;
-- Above-average current dividend yield relative to the average yield of
the S&P 500;
-- Low price/earnings ratios relative to the S&P 500;
-- Sound balance sheets and other financial characteristics;
-- Low stock price relative to a company's underlying value as measured by
assets, earnings, cash flow, or business franchises.
The Equity-Income Fund will tend to take a "value" approach and invest in
stocks and other securities that appear to be temporarily undervalued by various
measures, such as price/earnings ratios. Value investors seek to buy a stock
(or other security) when its price is low in relation to what they believe to be
its real worth or future prospects. By identifying companies whose stocks are
currently out of favor, value investors hope to realize significant appreciation
as other investors recognize the stock's intrinsic value and the price rises
accordingly. Finding undervalued stocks requires considerable research to
identify the particular stock, to analyze the company's underlying financial
condition and prospects, and to assess the likelihood that the stock's
underlying value will be recognized by the market and reflected in its price.
The Equity-Income Fund may also purchase other types of securities, for
example, foreign securities, preferred stocks, convertible stocks and bonds, and
warrants, when considered consistent with the portfolio's investment objective
and program. The portfolio will hold a certain portion of its assets in U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or less.
For temporary, defensive purposes, the portfolio may invest without limitation
in such securities. This reserve position provides flexibility in meeting
redemptions, expenses, and the timing of new investments and serves as a short-
term defense during periods of unusual market volatility
The Equity-Income Fund may also invest in debt securities of any type
including municipal securities without regard to quality or rating. The total
return and yield of lower-quality (high-yield/high-risk) bonds, commonly
referred to as "junk" bonds, can be expected to fluctuate more than the total
return and yield of higher-quality, shorter-term bonds, but not as much as
common stocks. Junk bonds (those rated below BBB or in default) are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The portfolio will not purchase a
noninvestment-grade debt security (or junk bond) if immediately after such
purchase the portfolio would have more than 10% of its total assets invested in
such securities.
The Equity-Income Fund may also engage in a variety of investment
management practices, such as buying and selling futures and options. The
portfolio may invest up to 10% of its total assets in hybrid instruments, which
are a type of high-risk derivative which can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conversion terms of a security could be related to the market price of some
commodity, currency or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. The Statement
of Additional Information contains a fuller description of such instruments and
the risks associated therewith.
The Equity-Income Fund will be subject to special risks as a result of its
ability to invest up to 25% of its total assets in foreign securities. These
include nondollar-denominated securities traded outside of the U.S. and dollar-
denominated securities of foreign issuers traded in the U.S. (such as ADRs).
These risks are described under the caption "RISK FACTORS --Foreign Securities"
in this Prospectus. Moreover, substantial investments in foreign securities may
have adverse tax implications as described under "GENERAL INFORMATION --Taxes"
in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Equity-Income Fund is currently authorized to use all of the various
investment strategies referred to under "RISK FACTORS -- Hedging and Other
Strategic Transactions." The Statement of Additional Information contains a
description of these strategies and of certain risks associated therewith.
Balanced Fund
The investment objective of the Balanced Fund is current income and capital
appreciation. Founders is the manager of the Balanced Fund and seeks to attain
this objective by investing in a balanced portfolio of common stocks, U.S. and
foreign government obligations and a variety of corporate fixed-income
securities.
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Normally, the Balanced Fund will invest a significant percentage (up to
75%) of its total assets in common stocks, convertible corporate obligations,
and preferred stocks. The portfolio emphasizes investment in dividend-paying
common stocks with the potential for increased dividends, as well as capital
appreciation. The portfolio also may invest in non-dividend-paying companies if,
in Founders' opinion, they offer better prospects for capital appreciation.
The Balanced Fund may invest in convertible securities, preferred stocks,
bonds, debentures, and other corporate obligations when Founders believes that
these investments offer opportunities for capital appreciation. Current income
is also a factor in the selection of these securities.
The Balanced Fund will maintain a minimum of 25% of its total assets in
fixed-income, investment-grade securities rated Baa or higher by Moody's or BBB
or higher by S&P. There is, however, no limit on the amount of straight debt
securities in which the portfolio may invest. Up to 5% of the Balanced Fund's
total assets may be invested in lower-grade (Ba or less by Moody's, BB or less
by S&P) or unrated straight debt securities, generally referred to as junk
bonds, where Founders determines that such securities present attractive
opportunities. The portfolio will not invest in securities rated lower than B.
Securities rated B generally lack characteristics of a desirable investment and
are deemed speculative with respect to the issuer's capacity to pay interest and
repay principal over a long period of time.
The Balanced Fund may also invest in convertible corporate obligations and
preferred stocks. Convertible securities and preferred stocks purchased by the
portfolio may be rated in medium and lower categories by Moody's or S&P (Ba or
lower by Moody's and BB or lower by S&P) but will not be rated lower than B. The
portfolio may also invest in unrated convertible securities and preferred stocks
in instances in which Founders believes that the financial condition of the
issuer or the protection afforded by the terms of the securities limits risk to
a level similar to that of securities eligible for purchase by the portfolio
rated in categories no lower than B. At no time will the portfolio have more
than 5% of its total assets invested in any fixed-income securities which are
unrated or are rated below investment grade either at the time of purchase or as
a result of a reduction in rating after purchase. The portfolio is not required
to dispose of debt securities whose ratings are downgraded below these ratings
subsequent to the portfolio's purchase of the securities, unless such a
disposition is necessary to reduce the portfolio's holdings of such securities
to less than 5% of its total assets. See "RISK FACTORS -- High Yield /High Risk
Securities." A description of the ratings used by Moody's and S&P is set forth
in Appendix I to the Prospectus.
Up to 100% of the assets of the Balanced Fund may be invested temporarily
in U.S. Government obligations, commercial paper, bank obligations, repurchase
agreements, and negotiable U.S. dollar-denominated obligations of domestic and
foreign branches of U.S. depository institutions, U.S. branches of foreign
depository institutions, and foreign depository institutions, in cash, or in
other cash equivalents, if Founders determines it to be appropriate for purposes
of enhancing liquidity or preserving capital in light of prevailing market or
economic conditions. The portfolio may also acquire certificates of deposit and
bankers' acceptances of banks which meet criteria established by the Fund's
Board of Trustees. While the portfolio is in a defensive position, the
opportunity to achieve capital growth will be limited, and, to the extent that
this assessment of market conditions is incorrect, the portfolio will be
foregoing the opportunity to benefit from capital growth resulting from
increases in the value of equity investments.
The Balanced Fund may invest without limit in ADRs and up to 30% of its
total assets in foreign securities (other than ADRs). The portfolio will not
invest more than 25% of its total assets in the securities of any one country.
The Balanced Fund will be subject to special risks as a result of its
ability to invest up to 30% of its total assets in foreign securities, excluding
ADRs. These risks are described under the caption "RISK FACTORS --Foreign
Securities" in this Prospectus. Moreover, substantial investments in foreign
securities may have adverse tax implications as described under "GENERAL
INFORMATION --Taxes" in this Prospectus.
Use of Hedging and Other Strategic Transactions
The Balanced Fund is currently authorized to use all of the various
investment strategies referred to under "RISK FACTORS -- Hedging and Other
Strategic Transactions." The Statement of Additional Information contains a
description of these strategies and of certain risks associated therewith.
Strategic Income Fund
The investment objective of the Strategic Income Fund is to seek a high
level of total return consistent with preservation of capital.
The Strategic Income Fund seeks to achieve its objective by giving its
Subadviser, SBAM, broad discretion to deploy the Strategic
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Income Fund's assets among certain segments of the fixed-income market as SBAM
believes will best contribute to the achievement of the Portfolio's objective.
At any point in time, SBAM will deploy the Portfolio's assets based on SBAM's
analysis of current economic and market conditions and the relative risks and
opportunities present in the following market segments: U.S. Government
obligations, investment grade domestic corporate debt, high yield corporate debt
securities, mortgage-backed securities and investment grade and high yield
international debt securities. SBAM is an affiliate of Salomon Brothers Inc
("SBI"), and in making investment decisions is able to draw on the research and
market expertise of SBI with respect to fixed-income securities. In addition,
SBAM has entered into a subadvisory consulting agreement with its London based
affiliate, Salomon Brothers Asset Management Limited ("SBAM Limited") pursuant
to which SBAM Limited will provide certain advisory services to SBAM relating to
currency transactions and investments in non-dollar denominated debt securities
for the benefit of the Portfolio.
In pursuing the Strategic Income Fund's investment objective, the Portfolio
reserves the right to invest without limitation in lower-rated securities,
commonly known as "junk bonds." (i.e., rated "B" or below by Moody's (Moody's
lowest rating is C, See Appendix I.) or "BB" or below by S&P(S&P lowest rating
is D, see Appendix I.), or if unrated, of comparable quality as determined by
SBAM). No minimum rating standard is required for a purchase by the Portfolio.
Investments of this type involve comparatively greater risks, including price
volatility and risk of default in the payment of interest and principal, than
higher-quality securities. Although the Portfolio's Subadviser has the ability
to invest up to 100% of the Portfolio's assets in lower-rated securities, the
Portfolio's Subadviser does not anticipate investing in excess of 75% of the
Portfolio's assets in such securities. Purchasers should carefully assess the
risks associated with an investment in this Portfolio. See "RISK FACTORS --
High Yield/High Risk Securities."
SBAM will determine the amount of assets to be allocated to each type of
security in which it invests based on its assessment of the maximum level of
total return that can be achieved from a portfolio which is invested in these
securities without incurring undue risks to principal value. In making this
determination, SBAM will rely in part on quantitative analytical techniques that
measure relative risks and opportunities of each type of security based on
current and historical economic, market, political and technical data for each
type of security, as well as on its own assessment of economic and market
conditions both on a global and local (country) basis. In performing
quantitative analysis, SBAM will employ prepayment analysis and option adjusted
spread technology to evaluate mortgage securities, mean variance optimization
models to evaluate international debt securities, and total rate of return
analysis to measure relative risks and opportunities in other fixed-income
markets. Economic factors considered will include current and projected levels
of growth and inflation, balance of payment status and monetary policy. The
allocation of assets to international debt securities will further be influenced
by current and expected currency relationships and political and sovereign
factors. The Portfolio's assets may not always be allocated to the highest
yielding securities if SBAM feels that such investments would impair the
Portfolio's ability to preserve shareholder capital. SBAM will continuously
review this allocation of assets and make such adjustments as it deems
appropriate. The Portfolio does not plan to establish a minimum or a maximum
percentage of the assets which it will invest in any particular type of fixed-
income security.
In addition, SBAM will have discretion to select the range of maturities of
the various fixed-income securities in which the Portfolio invests. Such
maturities may vary substantially from time to time depending on economic and
market conditions.
The types and characteristics of the U.S. Government obligations, mortgage-
backed securities, investment grade corporate debt securities and investment
grade international debt securities to be purchased by the Portfolio are set
forth in the discussion of investment objectives and policies for the Investment
Quality Bond and U.S. Government Securities Funds, and in the section entitled
"OTHER INSTRUMENTS" in the Statement of Additional Information; and the types
and characteristics of the money market securities to be purchased are set forth
in the discussion of investment objectives and policies of the Money Market
Fund. Potential investors should review the discussion therein in considering
an investment in shares of the Strategic Income Fund. As described below, the
Strategic Income Fund may also invest in high yield domestic and foreign debt
securities.
The Strategic Income Fund may also invest in debt obligations issued or
guaranteed by a foreign sovereign government or one of its agencies or political
subdivisions and debt obligations issued or guaranteed by supranational
organizations. Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and 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 Inter-American Development Bank. Such
supranational issued instruments may be denominated in multi-national currency
units.
The Strategic Income Fund currently intends to invest substantially all of
its assets in fixed-income securities. In order to maintain liquidity, however,
the Strategic Income Fund may invest up to 20% of its assets in high-quality
short-term money market instruments. If at some future date, in the opinion of
SBAM, adverse conditions prevail in the market for fixed-income securities, the
Strategic Income Fund for temporary defensive purposes may invest its assets
without limit in high-quality short-term money market instruments.
As discussed above, the Strategic Income Fund may invest in U.S. dollar-
denominated securities issued by domestic issuers that are rated below
investment grade or, if unrated, determined by SBAM to be of comparable quality.
Although SBAM does not anticipate
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investing in excess of 75% of the Strategic Income Fund's assets in domestic and
developing country debt securities that are rated below investment grade, the
Strategic Income Fund may invest a greater percentage in such securities when,
in the opinion of SBAM, the yield available from such securities outweighs their
additional risks. By investing a portion of the Strategic Income Fund's assets
in securities rated below investment grade, as well as through investments in
mortgage securities and international debt securities, as described below, SBAM
expects to provide investors with a higher yield than a high-quality domestic
corporate bond fund while at the same time presenting less risk than a fund that
invests principally in securities rated below investment grade. Certain of the
debt securities in which the Strategic Income Fund may invest may have, or be
considered comparable to securities having, the lowest ratings for non-
subordinated debt instruments assigned by Moody's or S&P (i.e., rated C by
Moody's or CCC or lower by S&P). See "RISK FACTORS -- High Yield/High Risk
Securities -- General."
In light of the risks associated with high yield corporate and sovereign
debt securities, SBAM will take various factors into consideration in evaluating
the creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt service
ratios, the issuer's access to capital markets and other sources of funding, and
the issuer's debt service payment history. SBAM will also review the ratings,
if any, assigned to the security by any recognized rating agencies, although
SBAM's judgment as to the quality of a debt security may differ from that
suggested by the rating published by a rating service. The Strategic Income
Fund's ability to achieve its investment objective may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities. A description of the ratings used by Moody's and S&P is set
forth in Appendix I to this Prospectus.
The high yield sovereign debt securities in which the Strategic Income Fund
may invest are U.S. dollar-denominated and non-dollar-denominated debt
securities, including Brady Bonds, that are issued or guaranteed by governments
or governmental entities of developing and emerging countries. SBAM expects
that these countries will consist primarily of those which have issued or have
announced plans to issue Brady Bonds, but the Portfolio is not limited to
investing in the debt of such countries. Brady Bonds are debt securities issued
under the framework of the Brady Plan, an initiative announced by former U.S.
Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations
to restructure their outstanding external indebtedness. SBAM anticipates that
the Portfolio's initial investments in sovereign debt will be concentrated in
Latin American countries, including Mexico and Central and South American and
Caribbean countries. SBAM expects to take advantage of additional opportunities
for investment in the debt of North African countries, such as Nigeria and
Morocco, Eastern European countries, such as Poland and Hungary, and Southeast
Asian countries, such as the Philippines. Sovereign governments may include
national, provincial, state, municipal or other foreign governments with taxing
authority. Governmental entities may include the agencies and instrumentalities
of such governments, as well as state-owned enterprises. For a more detailed
discussion on high yield sovereign debt securities, see "OTHER INSTRUMENTS -- 5.
High Yield/High Risk Foreign Sovereign Debt Securities" in the Statement of
Additional Information.
The Strategic Income Fund will be subject to special risks as a result of
its ability to invest up to 100% of its assets in foreign securities. These
risks are described under the captions "RISK FACTORS -- High Yield/High Risk
Securities" and "RISK FACTORS -- Foreign Securities" in this Prospectus.
Moreover, substantial investments in foreign securities may have adverse tax
implications as described under "GENERAL INFORMATION -- Taxes" in this
Prospectus. The ability to spread its investments among the fixed-income
markets in a number of different countries may, however, reduce the overall
level of market risk to the extent it may reduce the Strategic Income Fund's
exposure to a single market.
Use of Hedging and Other Strategic Transactions. The Strategic Income Fund
is currently authorized to use all of the various investment strategies referred
to under "RISK FACTORS -- Hedging and Other Strategic Transactions." With the
exception of currency transactions, however, it is not presently anticipated
that any of these strategies will be used to a significant degree by the
Portfolio. The Statement of Additional Information contains a description of
these strategies and of certain risks associated therewith.
Investment Quality Bond Fund
The investment objective of the Investment Quality Bond Fund is to provide
a high level of current income consistent with the maintenance of principal and
liquidity.
Wellington Management manages the Investment Quality Bond Fund and seeks to
achieve its objective by investing primarily in a diversified portfolio of
investment grade corporate bonds and U.S. Government bonds with intermediate to
longer term maturities. Investment management will emphasize sector analysis,
which focuses on relative value and yield spreads among security types and among
quality, issuer, and industry sectors, call protection and credit research.
Credit research on corporate bonds is based on both quantitative and
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qualitative criteria established by Wellington Management, such as an issuer's
industry, operating and financial profiles, business strategy, management
quality, and projected financial and business conditions. Wellington Management
will attempt to maintain a high, steady and possibly growing income stream.
At least 65% of the Investment Quality Bond Fund's assets will be invested
in the following types of bonds:
* marketable debt securities of domestic issuers and of foreign issuers
(payable in U.S. dollars) rated at the time of purchase "A" or better by
Moody's or S&P or, if unrated, of comparable quality as determined by
Wellington Management; and
* securities issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities, including mortgage-backed
securities (described below under U.S. Government Securities Fund).
The balance of the Investment Quality Bond Fund's investments may include:
domestic and foreign debt securities rated below "A" by Moody's and S&P (and
unrated securities of comparable quality as determined by Wellington
Management), preferred stocks, convertible securities (including those issued in
the Euromarket) and securities carrying warrants to purchase equity securities,
privately placed debt securities, asset-backed securities and privately issued
mortgage securities. The Portfolio may also invest in cash or cash equivalent
securities which are authorized for purchase by the Money Market Fund. At least
65% of the Investment Quality Bond Fund's assets will be invested in bonds and
debentures.
In pursuing its investment objective, the Investment Quality Bond Fund may
invest up to 20% of its assets in domestic and foreign high yield corporate and
government debt securities, commonly known as "junk bonds" (i.e., rated "B" or
below by Moody's (Moody's lowest rating is "C", See Appendix I) or "BB" or below
by S&P (S&P's lowest rating is "D", See Appendix I), or if unrated, of
comparable quality as determined by Wellington Management). No minimum rating
standard is required for a purchase by the Portfolio. The high yield sovereign
debt securities in which the Portfolio will invest are described above under
"Strategic Income Fund." Domestic and foreign high yield debt securities
involve comparatively greater risks, including price volatility and risk of
default in the payment of interest and principal, than higher-quality
securities. See "RISK FACTORS -- High Yield/High Risk Securities."
The Investment Quality Bond Fund may also invest in debt securities
carrying the fourth highest quality rating ("Baa" by Moody's or "BBB" by S&P)
and unrated securities of comparable quality as determined by Wellington
Management. While such securities are considered investment grade and are
viewed to have adequate capacity for payment of principal and interest,
investments in such securities involve a higher degree of risk than that
associated with investments in debt securities in the higher rating categories
and such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. For example, changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. While the Investment Quality Bond Fund may only invest up to 20% of its
assets in bonds rated below "Baa" by Moody's or "BBB" by S&P (or, if unrated, of
comparable quality as determined by Wellington Management) at the time of
investment, it is not required to dispose of downgraded bonds that cause the
Investment Quality Bond Fund to exceed this 20% maximum.
The Investment Quality Bond Fund will be subject to certain risks as a
result of its ability to invest up to 20% of its assets in foreign securities.
These risks are described under the caption "RISK FACTORS -- Foreign Securities"
in this Prospectus. Moreover, substantial investments in foreign securities may
have adverse tax implications as described under "GENERAL INFORMATION -- Taxes"
in this Prospectus. The Investment Quality Bond Fund may also invest in forward
commitments and warrants. See "RISK FACTORS -- Warrants" and "-- When-Issued
Securities ("Forward Commitments")."
Use of Hedging and Other Strategic Transactions. The Investment Quality
Bond Fund is currently authorized to use all of the various investment
strategies referred to under "RISK FACTORS -- Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description
of these strategies and of certain risks associated therewith.
National Municipal Bond Fund
The National Municipal Bond Fund's investment objective is to achieve a
high level of current income which is exempt from regular federal income taxes,
consistent with the preservation of capital, by investing primarily in a
portfolio of municipal obligations. SBAM manages the National Municipal Bond
Fund and as a matter of fundamental policy, the Portfolio will invest under
normal circumstances, at least 80% of its net assets in municipal obligations
the interest on which is exempt from regular federal income tax. A portion of
the Portfolio's dividends paid in respect of its shares may be subject to the
federal alternative minimum tax. For a discussion on taxation of the National
Municipal Bond Fund, see "GENERAL INFORMATION -- National Municipal Bond Fund --
Taxation."
The Portfolio will not invest in municipal obligations that are rated below
investment grade at the time of investment. However, the
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Portfolio may retain in its portfolio a municipal obligation whose rating drops
below "Baa" or "BBB" after its acquisition by the Portfolio, if SBAM considers
the retention of such obligation advisable. The Portfolio intends to emphasize
investments in municipal obligations with long-term maturities and expects to
maintain an average portfolio maturity of 20 to 30 years and an average
portfolio duration of 8 to 11 years. The average portfolio maturity and
duration, however, may be shortened from time to time depending on market
conditions.
The types of obligations in which the National Municipal Bond Fund may
invest include the following:
Municipal Bonds
The Portfolio may invest in municipal bonds that are rated at the time of
purchase within the four highest ratings assigned by Moody's, S&P or Fitch, or
determined by SBAM to be of comparable quality. The four highest ratings
currently assigned by Moody's to municipal bonds are "Aaa", "Aa", "A" and "Baa";
the four highest ratings assigned by S&P and Fitch to municipal bonds are "AAA",
"AA", "A" and "BBB". A more complete description of the debt security ratings
used by the Portfolio assigned by Moody's, S&P and Fitch is included in Appendix
I to this Prospectus.
Although municipal obligations rated in the fourth highest rating category
by Moody's (i.e., "Baa") or S&P or Fitch (i.e., "BBB") are considered investment
grade, they may be subject to greater risks than other higher rated investment
grade securities. Municipal obligations rated "Baa" by Moody's, for example,
are considered medium grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well. Municipal
obligations rated "BBB" by S&P and Fitch are regarded as having an adequate
capacity to pay principal and interest.
Municipal bonds are debt obligations that are typically issued to obtain
funds for various public purposes, such as construction of public facilities
(e.g., airports, highways, bridges and schools). Municipal bonds at the time of
issuance are generally long-term securities with maturities of as much as twenty
years or more, but may have remaining maturities of shorter duration at the time
of purchase by the Portfolio.
Municipal Notes
The Fund may invest in municipal notes rated at the time of purchase
"MIG1", "MIG2" (or "VMIG-1" or "VMIG-2", in the case of variable rate demand
notes), "P-2" or better by Moody's, "SP-2", "A-2" or better by S&P, or "F-2" or
better by Fitch, or if not rated, determined by SBAM to be of comparable
quality.
Municipal notes are issued to meet the short-term funding requirements of
local, regional and state governments. Municipal notes generally have
maturities at the time of issuance of three years or less. Municipal notes that
may be purchased by the Portfolio include, but are not limited to:
Tax Anticipation Notes. Tax anticipation notes ("TANs") are sold as
interim financing in anticipation of collection of taxes. An uncertainty in a
municipal issuer's capacity to raise taxes as a result of such factors as a
decline in its tax base or a rise in delinquencies could adversely affect the
issuer's ability to meet its obligations on outstanding TANs.
Bond Anticipation Notes. Bond anticipation notes ("BANs") are sold as
interim financing in anticipation of a bond sale. The ability of a municipal
issuer to meet its obligations on its BANs is primarily dependent on the
issuer's adequate access to the longer term municipal bond market and the
likelihood that the proceeds of such bond sales will be used to pay the
principal of, and interest on, BANs.
Revenue Anticipation Notes. Revenue anticipation notes ("RANs") are sold
as interim financing in anticipation of receipt of other revenues. A decline in
the receipt of certain revenues, such as anticipated revenues from another level
of government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs.
TANs, BANs and RANs are usually general obligations of the issuer.
Municipal Commercial Paper
The Portfolio may also purchase municipal commercial paper that is rated at
the time of purchase "P-2" or better by Moody's, "A-2" or better by S&P, or
"F-2" or better by Fitch, or if not rated, determined by SBAM to be of
comparable quality.
Municipal commercial paper that may be purchased by the Portfolio consists
of short term obligations of a municipality. Such paper is likely to be issued
to meet seasonal working capital needs of a municipality or as interim
construction financing. Municipal commercial paper, in many cases, is backed by
a letter of credit lending agreement, note repurchase agreement or other credit
facility
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agreement offered by banks or other institutions.
Characteristics of Municipal Obligations
Municipal obligations are debt obligations issued by or on behalf of
states, cities, municipalities and other public authorities. The two principal
classifications of municipal obligations that may be held by the Portfolio are
"general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of a facility being financed. Revenue
securities may include private activity bonds. Such bonds may be issued by or
on behalf of public authorities to finance various privately operated facilities
and are not payable from the unrestricted revenues of the issuer. As a result,
the credit quality of private activity bonds is frequently related directly to
the credit standing of private corporations or other entities. In addition, the
interest on private activity bonds issued after August 7, 1986 is subject to the
federal alternative minimum tax. The Portfolio will not be restricted with
respect to the proportion of its assets that may be invested in such
obligations. Accordingly, the Portfolio may not be a suitable investment
vehicle for individuals or corporations that are subject to the federal
alternative minimum tax.
The National Municipal Bond Fund's portfolio may also include "moral
obligation" securities, which are normally issued by special purpose public
authorities. If the issuer of moral obligation securities is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality that created the issuer.
In addition, the Portfolio may invest in municipal lease obligations
("MLOs"). MLOs are not fully backed by the municipality's credit and their
interest may become taxable if the lease is assigned. If the governmental user
does not appropriate sufficient funds for the following year's lease payments,
the lease will terminate, with the possibility of default on the MLO and loss to
the Portfolio. SBAM intends to invest more than 5% of the Portfolio's net
assets in municipal lease obligations and the Trustees of the Fund have
established procedures the Subadviser will use to examine certain factors in
evaluating the liquidity of such obligations. These factors include (i) the
frequency of trades and quotes for the MLO; (ii) the number of dealers willing
to purchase or sell such MLO and the number of other potential purchasers; (iii)
the willingness of dealers to undertake to make a market in the MLO; (iv) the
nature of the MLO and the nature of the marketplace trades (e.g., the time
- -
needed to dispose of the security and the method of soliciting offers); (v) the
nature of the offering of such MLO (e.g., the size of the issue and the number
- -
of anticipated holders); (vi) the ability of the MLO to maintain its
marketability throughout the time the instrument is held in the Portfolio; and
(vii) other factors, if any, which SBAM deems relevant to determining the
existence of a trading market for such MLO. The Portfolio also may invest in
resource recovery bonds, which may be general obligations of the issuing
municipality or supported by corporate or bank guarantees. The viability of the
resource recovery project, environmental protection regulations and project
operator tax incentives may affect the value and credit quality of resource
recovery bonds.
Other Permitted Investments
The Portfolio currently intends to invest substantially all of its assets
in obligations the interest on which is exempt from regular federal income
taxes. However, in order to maintain liquidity, the Portfolio may invest up to
20% of its assets in taxable obligations, including taxable high-quality short-
term money market instruments. The Portfolio may invest in the following
taxable high-quality short-term money market instruments: obligations of the
U.S. Government or its agencies or instrumentalities; commercial paper of
issuers rated, at the time of purchase, "A-2" or better by S&P, "P-2" or better
by Moody's, or "F-2" or better by Fitch or which if unrated, in the opinion of
SBAM, are of comparable quality; certificates of deposit, bankers' acceptances
or time deposits of U.S. banks with total assets of at least $1 billion
(including obligations of foreign branches of such banks) and of the 75 largest
foreign commercial banks in terms of total assets (including domestic branches
of such banks), and repurchase agreements with respect to such obligations.
If at some future date, in the opinion of SBAM, adverse conditions prevail
in the market for obligations the interest on which is exempt from regular
federal income taxes, the Portfolio may invest its assets without limit in
taxable high-quality short-term money market instruments. Dividends paid by the
Portfolio that are attributable to interest derived from taxable money market
instruments will be taxable to investors.
From time to time, the Portfolio may invest more than 25% of its assets in
obligations whose interest payments are from revenues of similar projects (such
as utilities or hospitals) or whose issuers share the same geographic location.
As a result, the Portfolio may be more susceptible to a single economic,
political or regulatory development than would a portfolio of securities with a
greater variety of issuers. These developments include proposed legislation or
pending court decisions affecting the financing of such projects and market
factors affecting the demand for their services or products.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from regular federal income tax
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are rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Portfolio nor SBAM will review the proceedings relating to the
issuance of municipal obligations or the basis for such opinions.
Additional Investment Activities
Floating and Variable Rate Obligations. Certain of the obligations that
the National Municipal Bond Fund may purchase may have a floating or variable
rate of interest. Floating or variable rate obligations bear interest at rates
that are not fixed, but vary with changes in specified market rates or indices,
such as the prime rate, and at specified intervals. Certain of the floating or
variable rate obligations that may be purchased by the Portfolio may carry a
demand feature that would permit the holder to tender them back to the issuer of
the underlying instrument or to a third party at par value prior to maturity.
Such obligations include variable rate demand notes, which are instruments
issued pursuant to an agreement between the issuer and the holder that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate.
Participation Certificates. The instruments that may be purchased by the
Portfolio include participation certificates issued by a bank, insurance company
or other financial institution in obligations owned by such institutions or
affiliated organizations that may otherwise be purchased by the Portfolio. A
participation certificate gives the Portfolio an undivided interest in the
underlying obligations in the proportion that the Portfolio's interest bears to
the total principal amount of such obligations. Certain of such participation
certificates may carry a demand feature that would permit the holder to tender
them back to the issuer or to a third party prior to maturity.
Variable Rate Auction Securities and Inverse Floaters. The National
Municipal Bond Fund may invest in variable rate auction securities and inverse
floaters which are instruments created when an issuer or dealer separates the
principal portion of a long-term, fixed-rate municipal bond into two long-term,
variable-rate instruments. The interest rate on the variable rate auction
portion reflects short-term interest rates, while the interest rate on the
inverse floater portion is typically higher than the rate available on the
original fixed-rate bond. Changes in the interest rate paid on the portion of
the issue relative to short-term interest rates inversely affect the interest
rate paid on the latter portion of the issue. The latter portion therefore is
subject to greater price volatility than the original fixed-rate bond. Since
the market for these instruments is new, the holder of one portion may have
difficulty finding a ready purchaser. Depending on market availability, the two
portions may be recombined to form a fixed-rate municipal bond.
Use of Hedging and Other Strategic Transactions
The National Municipal Bond Fund is currently authorized to use only
certain of the various investment strategies referred to under "RISK FACTORS --
Hedging and Other Strategic Transactions." Specifically, the Portfolio may
purchase or sell futures contracts on (a) debt securities that are backed by the
full faith and credit of the U.S. Government, such as long-term U.S. Treasury
Bonds and Treasury Notes and (b) municipal bond indices. Currently, at least
one exchange trades futures contracts on an index of long-term municipal bonds,
and the Portfolio reserves the right to conduct futures transactions based on an
index which may be developed in the future to correlate with price movements in
municipal obligations. It is not presently anticipated that any of these
strategies will be used to a significant degree by the Portfolio. The Statement
of Additional Information contains a description of these strategies and of
certain risks associated therewith.
U.S. Government Securities Fund
The investment objective of the U.S. Government Securities Fund is to
obtain a high level of current income consistent with preservation of capital
and maintenance of liquidity. SBAM manages the U.S. Government Securities Fund
and seeks to attain its objective by investing under normal circumstances 100%
of its assets in debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The
securities in which the U.S. Government Securities Fund may invest are:
(1) mortgage-backed securities guaranteed by the Government National
Mortgage Association ("GNMA"), popularly known as "Ginnie Maes," that are
supported by the full faith and credit of the U.S. Government and which are the
"modified pass-through" type of mortgage-backed security ("GNMA Certificates").
Such securities entitle the holder to receive all interest and principal
payments due whether or not payments are actually made on the underlying
mortgages;
(2) U.S. Treasury obligations;
(3) obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government which are backed by their own credit and may not be backed
by the full faith and credit of the U.S. Government;
(4) mortgage-backed securities guaranteed by agencies or instrumentalities
of the U.S. Government which are supported by their own credit but not the full
faith and credit of the U.S. Government, such as the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association; and
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(5) collateralized mortgage obligations issued by private issuers for which
the underlying mortgage-backed securities serving as collateral are backed (i)
by the credit alone of the U.S. Government agency or instrumentality which
issues or guarantees the mortgage-backed securities, or (ii) by the full faith
and credit of the U.S. Government.
The mortgage-backed securities in which the U.S. Government Securities Fund
invests represent participating interests in pools of residential mortgage loans
which are guaranteed by the U.S. Government, its agencies or instrumentalities
of the U.S. Government. However, the guarantee of these types of securities
runs only to the principal and interest payments and not to the market value of
such securities. In addition, the guarantee only runs to the portfolio
securities held by the U.S. Government Securities Fund and not to the purchase
of shares of the Portfolio.
Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks, and savings and loan associations. Such securities differ
from conventional debt securities which provide for periodic payment of interest
in fixed amounts (usually semiannually) with principal payments at maturity or
specified call dates. Mortgage-backed securities provide monthly payments which
are, in effect, a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans. Principal prepayments result from the sale of the underlying
property or the refinancing or foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based on the average life of the
underlying pool of mortgage loans, which is computed on the basis of the
maturities of the underlying instruments. The actual life of any particular
pool may be shortened by unscheduled or early payments of principal and
interest. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors and, accordingly, it is not possible to
accurately predict the average life of a particular pool. For pools of fixed
rate 30-year mortgages, it has been common practice to assume that prepayments
will result in a 12-year average life. The actual prepayment experience of a
pool of mortgage loans may cause the yield realized by the U.S. Government
Securities Fund to differ from the yield calculated on the basis of the average
life of the pool. In addition, if any of these mortgage-backed securities are
purchased at a premium, the premium may be lost in the event of early prepayment
which may result in a loss to the Portfolio.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. Reinvestment by the U.S. Government Securities Fund of scheduled
principal payments and unscheduled prepayments may occur at higher or lower
rates than the original investment, thus affecting the yield of the Portfolio.
Monthly interest payments received by the Portfolio have a compounding effect
which will increase the yield to shareholders as compared to debt obligations
that pay interest semiannually. Because of the reinvestment of prepayments of
principal at current rates, mortgage-backed securities may be less effective
than Treasury bonds of similar maturity at maintaining yields during periods of
declining interest rates. Also, although the value of debt securities may
increase as interest rates decline, the value of these pass-through type of
securities may not increase as much due to the prepayment feature.
While the Portfolio seeks a high level of current income, it cannot invest
in instruments such as lower grade corporate obligations which offer higher
yields but are subject to greater risks. The Portfolio will not knowingly invest
in a high risk mortgage security. The term "high risk mortgage security" is
defined generally as any mortgage security that exhibits greater price
volatility than a benchmark security, the Federal National Mortgage Association
current coupon 30-year mortgage-backed pass through security. Shares of the
Portfolio are neither insured nor guaranteed by the U.S. Government, its
agencies or instrumentalities.
In order to make the U.S. Government Securities Fund an eligible investment
for federal credit unions ("FCUs"), federal savings and loan institutions and
national banks, the Portfolio will invest in U.S. Government securities that are
eligible for investment by such institutions without limitation, and will also
generally be managed so as to qualify as an eligible investment for such
institutions. The Portfolio will comply with all investment limitations
applicable to FCUs including (i) the requirement that a FCU may only purchase
collateralized mortgage obligations which would meet the high risk securities
test of Part 703 of the National Credit Union Administration Rules and
Regulations or would be held solely to reduce interest rate risk and (ii) the
requirement that a FCU may not purchase zero coupon securities having maturities
greater than ten years.
The ability of the U.S. Government Securities Fund to provide a high level
of current income is restrained because that Portfolio invests predominantly in
U.S. Government bonds; debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; and U.S.
dollar-denominated money market instruments, respectively.
Use of Hedging and Other Strategic Transactions. The U.S. Government
Securities Fund is not currently authorized to use any of the various investment
strategies referred to under "RISK FACTORS -- Hedging and Other Strategic
Transactions." However, such strategies may be used in the future by the
Portfolio. The Statement of Additional Information contains a description of
these strategies and of certain risks associated therewith.
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Money Market Fund
The investment objective of the Money Market Fund is to obtain maximum
current income consistent with preservation of principal and liquidity as is
available from short-term investments. MAC manages the Money Market Fund and
seeks to achieve this objective by investing in high quality, U.S. dollar-
denominated money market instruments of the following types:
(1) obligations issued or guaranteed as to principal or interest by the
U.S. Government, or any agency or authority controlled or supervised by and
acting as an instrumentality of the U.S. Government pursuant to authority
granted by Congress (hereinafter "U.S. Government securities");
(2) certificates of deposit, bank notes, time deposits, Eurodollars,
Yankee obligations and bankers' acceptances of U.S. banks, foreign branches of
U.S. banks, foreign banks and U.S. savings and loan associations which at the
date of investment have capital, surplus and undivided profits as of the date of
their most recent published financial statements in excess of $100,000,000 (or
less than $100,000,000 if the principal amount of such bank obligations is
insured by the Federal Deposit Insurance Corporation or the Savings Association
Insurance Fund);
(3) commercial paper which at the date of investment is rated (or
guaranteed by a company whose commercial paper is rated) within the two highest
rating categories by any nationally recognized statistical rating organization
("NRSRO") (such as "P-1" or "P-2" by Moody's or "A-1" or "A-2" by S&P) or, if
not rated, is issued by a company which MAC, acting pursuant to guidelines
established by the Trustees, has determined to be of minimal credit risk and
comparable quality;
(4) corporate obligations maturing in 397 days or less which at the date
of investment are rated within the two highest rating categories by any NRSRO
(such as "Aa" or higher by Moody's or "AA" or higher by S&P);
(5) short-term obligations issued by state and local governmental issuers;
(6) obligations of foreign governments, including Canadian and Provincial
Government and Crown Agency Obligations;
(7) securities that have been structured to be eligible money market
instruments such as participation interests in special purpose trusts that meet
the quality and maturity requirements in whole or in part due to arrangements
for credit enhancement or for shortening effective maturity; and
(8) repurchase agreements with respect to any of the foregoing obligations
(without limitation).
Commercial paper may include variable amount master demand notes, which are
obligations that permit investment of fluctuating amounts at varying rates of
interest. Such notes are direct lending arrangements between the Money Market
Fund and the note issuer, and MAC will monitor the creditworthiness of the
issuer and its earning power and cash flow, and will also consider situations in
which all holders of such notes would redeem at the same time. Variable amount
master demand notes are redeemable on demand.
The Money Market Fund will invest only in U.S. dollar-denominated
instruments. All of the Money Market Fund's investments will mature in 397 days
or less and the Portfolio will maintain a dollar-weighted average portfolio
maturity of 90 days or less. By limiting the maturity of its investments, the
Money Market Fund seeks to lessen the changes in the value of its assets caused
by fluctuations in short-term interest rates. Due to the short maturities of
its investments, the Money Market Fund will tend to have a lower yield than, and
the value of its underlying investments will be less volatile than the
investments of, portfolios that invest in longer-term securities. In addition,
the Money Market Fund will invest only in securities the Trustees determine to
present minimal credit risks and which at the time of purchase are "eligible
securities" as defined by Rule 2a-7 under the 1940 Act. Generally, eligible
securities must be rated by a NRSRO in one of the two highest rating categories
for short-term debt obligations or be of comparable quality. The Money Market
Fund also intends to maintain a stable per share net asset value of $1.00,
although there is no assurance that it will be able to do so.
The Money Market Fund will be subject to certain risks as a result of its
ability to invest up to 20% of its assets in foreign securities. These risks
are described under the caption "RISK FACTORS -- Foreign Securities" in this
Prospectus.
Use of Hedging and Other Strategic Transactions. The Money Market Fund is
not authorized to use any of the various investment strategies referred to under
"RISK FACTORS --Hedging and Other Strategic Transactions."
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RISK FACTORS
Investment Restrictions Generally
The Fund is subject to a number of restrictions in pursuing its
investment objectives and policies. Such restrictions generally serve to limit
investment practices that may subject the Fund to investment and market risk.
The following is a brief summary of certain restrictions that may be of interest
to investors. Some of these restrictions are subject to exceptions not stated
here. Such exceptions and a complete list of the investment restrictions
applicable to the individual Portfolios and to the Fund are set forth in the
Statement of Additional Information under the caption "INVESTMENT RESTRICTIONS."
Except for the restrictions specifically identified as fundamental,
all investment restrictions described in this Prospectus and in the Statement of
Additional Information are not fundamental, so that the Trustees of the Fund may
change them without shareholder approval. Fundamental policies may not be
changed without the affirmative vote of a majority of the outstanding voting
securities.
Fundamental policies applicable to all Portfolios include prohibitions
on (i) investing more than 25% of the total assets of any Portfolio in the
securities of issuers having their principal activities in any particular
industry (with exceptions for U.S. Government securities and, with respect to
the Money Market Fund, obligations of domestic branches of U.S. banks, and with
respect to the National Municipal Bond Fund, obligations issued or guaranteed by
any state or territory, and possession of the United States, the District of
Columbia, or any of their authorities, agencies, instrumentalities or political
subdivisions) (for purposes of this restriction, supranational issuers will be
considered to comprise an industry as will each foreign government that issues
securities purchased by a Portfolio); (ii) borrowing money, except for temporary
or emergency purposes (but not for leveraging) and then not in excess of 33 1/3%
of the value of the total assets of the Portfolio at the time the borrowing is
made (as a nonfundamental investment policy, a Portfolio will not purchase
additional securities at any time its borrowings exceed 5% of total assets) and
except in connection with reverse repurchase agreements, mortgage dollar rolls
and other similar transactions, and (iii) purchasing securities of any issuer if
the purchase would cause more than 5% of the value of a Portfolio's total assets
to be invested in the securities of any one issuer (excluding U.S. Government
securities and bank obligations) or cause more than 10% of the voting securities
of the issuer to be held by a Portfolio, except that up to 25% of the value of
each Portfolio's total assets (except the Money Market Fund) may be invested
without regard to this restriction.
Restrictions that apply to all Portfolios and that are not fundamental
include prohibitions on (i) knowingly investing more than 10% of the net assets
of any Portfolio in "illiquid" securities (including repurchase agreements
maturing in more than seven days but excluding master demand notes) (ii)
pledging, hypothecating, mortgaging or transferring more than 10% of the total
assets of any Portfolio as security for indebtedness (except that the applicable
percent is 33 1/3% in the case of the Equity-Income Fund, 15% in the case of the
International Small Cap, Growth Equity and Balanced Funds) and (iii) purchasing
securities of other investment companies, other than in connection with a
merger, consolidation or reorganization, if the purchase would cause more than
10% of the value of a Portfolio's total assets to be invested in investment
company securities.
Finally, the Money Market Fund is subject to certain restrictions
required by Rule 2a-7 under the 1940 Act. In order to comply with such
restrictions, the Money Market Fund will, among other things, not purchase the
securities of any issuer if it would cause (i) more than 5% of its total assets
to be invested in the securities of any one issuer (excluding U.S. Government
securities and repurchase agreements fully collateralized by U.S. Government
securities), except as permitted by Rule 2a-7 for certain securities for a
period of up to three business days after purchase, (ii) more than 5% of its
total assets to be invested in "second tier securities," as defined by Rule 2a-
7, or (iii) more than the greater of $1 million or 1% of its total net assets to
be invested in the second tier securities of that issuer.
High Yield/High Risk Securities
General. The Strategic Income Fund may invest without limitation, the
Investment Quality Bond Fund may invest up to 20% of its assets, the Equity-
Income Fund may invest up to 10% of its assets, and the Balanced, International
Small Cap and Growth Equity Funds may each invest up to 5% of its assets, in
"high yield" securities (commonly known as "junk bonds"). High yield securities
include debt instruments that have an equity security attached to it. In
addition, the International Small Cap, Strategic Income and Investment Quality
Bond Funds expect that a significant portion of their assets may be invested in
Brady Bonds. Securities rated below investment grade and comparable unrated
securities offer yields that fluctuate over time, but generally are superior to
the yields offered by higher rated securities. However, securities rated below
investment grade also involve greater risks than higher rated securities. Under
rating agency guidelines, medium- and lower-rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Certain of the debt securities in
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which the Portfolios may invest may have, or be considered comparable to
securities having, the lowest ratings for non-subordinated debt instruments
assigned by Moody's or S&P (i.e., rated C by Moody's or CCC or lower by S&P).
These securities are considered to have extremely poor prospects of ever
attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or
economic conditions, and/or to be in default or not current in the payment of
interest or principal. Such securities are considered speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by the
Portfolio with a commensurate effect on the value of the Portfolio's shares. The
Strategic Income Fund may invest without limitation in high yield debt
securities, and accordingly, should not be considered as a complete investment
program for all investors.
Because the Strategic Income and Investment Quality Bond Funds will
invest primarily in fixed-income securities, the net asset value of each
Portfolio's shares can be expected to change as general levels of interest rates
fluctuate, although the market values of securities rated below investment grade
and comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities. Except to the extent that
values are affected independently by other factors such as developments relating
to a specific issuer, when interest rates decline, the value of a fixed-income
portfolio can generally be expected to rise. Conversely, when interest rates
rise, the value of a fixed-income portfolio can generally be expected to
decline.
The secondary markets for high yield corporate and sovereign debt
securities are not as liquid as the secondary markets for higher rated
securities. The secondary markets for high yield debt securities are
concentrated in relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield debt securities is generally lower than that for higher-rated
securities and the secondary markets could contract under adverse market or
economic conditions independent of any specific adverse changes in the condition
of a particular issuer. These factors may have an adverse effect on a Fund's
ability to dispose of particular portfolio investments and may limit the ability
of those Portfolios to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Portfolio is not able to
obtain precise or accurate market quotations for a particular security, it will
become more difficult for the Trustees to value such Portfolio's investment
portfolio and the Fund's Trustees may have to use a greater degree of judgment
in making such valuations. Less liquid secondary markets may also affect a
Portfolio's ability to sell securities at their fair value. In addition, each
Portfolio may invest up to 10% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield debt securities are
affected by adverse economic conditions, the proportion of a Portfolio's assets
invested in illiquid securities may increase.
Corporate Debt Securities. While the market values of securities
rated below investment grade and comparable unrated securities tend to react
less to fluctuations in interest rate levels than do those of higher-rated
securities, the market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, such securities generally
present a higher degree of credit risk. Issuers of these securities are often
highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default by such issuers is
significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
Foreign Sovereign Debt Securities. Investing in foreign sovereign
debt securities will expose a Portfolio to the direct or indirect consequences
of political, social or economic changes in the developing and emerging
countries that issue the securities. The ability and willingness of sovereign
obligors in developing and emerging countries or the governmental authorities
that control repayment of their external debt to pay principal and interest on
such debt when due may depend on general economic and political conditions
within the relevant country. Countries such as those in which the Portfolios
may invest have historically experienced, and may continue to experience, high
rates of inflation, high interest rates, exchange rate trade difficulties and
extreme poverty and unemployment. Many of these countries are also
characterized by political uncertainty or instability. Additional factors which
may influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely payments on
its external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of
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foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on
its obligations. If such an event occurs, the Portfolio may have limited legal
recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of the
holder of foreign sovereign debt securities to obtain recourse may be subject to
the political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have
in the past experienced substantial difficulties in servicing their external
debt obligations, which led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign sovereign debt securities in
which the Portfolios may invest will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely affect a
Portfolio's holdings. Furthermore, certain participants in the secondary market
for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to other
market participants.
In addition to high yield foreign sovereign debt securities, many of
the Portfolios may also invest in investment grade foreign securities. For a
discussion of such securities and their associated risks, see "Foreign
Securities" below.
Foreign Securities
Each of the portfolios, other than the U.S. Government Securities and
National Municipal Bond Funds, may invest in securities of foreign issuers.
Such foreign securities may be denominated in foreign currencies, except with
respect to the Money Market Fund which may only invest in U.S. dollar-
denominated securities of foreign issuers. The International Small Cap, Global
Equity, International Growth and Income and Strategic Income Funds may each,
without limitation, invest up to 100% of its assets in securities issued by
foreign entities and/or denominated in foreign currencies. The Balanced and
Growth Equity Funds may each invest up to 30% of its assets, the Equity-Income
Fund up to 25% of its assets, and each of the other portfolios (other than the
U.S. Government Securities and National Municipal Bond Funds) up to 20% of its
assets in securities issued by foreign entities and/or denominated in foreign
currencies. (In the case of the Small/Mid Cap, Growth Equity and Balanced
Funds, ADRs and U.S. dollar denominated securities are not included in the
percentage limitation.). The types of foreign securities in which the Money
Market Fund may invest are set forth above under "INVESTMENT PORTFOLIOS - Money
Market Fund." The U.S. Government Securities and National Municipal Bond Funds
may not invest in foreign securities.
Securities of foreign issuers include obligations of foreign branches
of U.S. banks and of foreign banks, common and preferred stocks, debt securities
issued by foreign governments, corporations and supranational organizations, and
American Depository Receipts, European Depository Receipts and Global Depository
Receipts ("ADRs", "EDRs" and "GDRs", respectively). ADRs are U.S. dollar-
denominated securities backed by foreign securities deposited in a U.S.
securities depository. ADRs are created for trading in the U.S. markets. The
value of an ADR will fluctuate with the value of the underlying security,
reflect any changes in exchange rates and otherwise involve risks associated
with investing in foreign securities. ADRs in which the Portfolios may invest
may be sponsored or unsponsored. There may be less information available about
foreign issuers of unsponsored ADRs. EDRs and GDRs are receipts evidencing an
arrangement with a non-U.S. bank similar to that for ADRs and are designed for
use in non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in
the same currency as the underlying security.
Foreign securities may be subject to foreign government taxes which
reduce their attractiveness. See "GENERAL INFORMATION -- Taxes." In addition,
investing in securities denominated in foreign currencies and in the securities
of foreign issuers, particularly non-governmental issuers, involves risks which
are not ordinarily associated with investing in domestic issuers. These risks
include political or economic instability in the country involved and the
possibility of imposition of currency controls. Since certain
53
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Portfolios may invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates may affect the
value of investments in the Portfolio and the unrealized appreciation or
depreciation of investments insofar as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets. These forces are, in turn, affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. The Portfolios may incur
transaction charges in exchanging foreign currencies.
There may be less publicly available information about a foreign
issuer than about a domestic issuer. Foreign issuers, including foreign
branches of U.S. banks, are subject to different accounting and reporting
requirements which are generally less extensive than the requirements applicable
to domestic issuers. Foreign stock markets (other than Japan) have
substantially less volume than the U.S. exchanges and securities of foreign
issuers are generally less liquid and more volatile than those of comparable
domestic issuers. These risks are heightened in the case of emerging markets.
There is frequently less governmental regulation of exchanges, broker-dealers
and issuers than in the United States, and brokerage costs may be higher. In
addition, investments in foreign companies may be subject to the possibility of
nationalization, withholding of dividends at the source, expropriation or
confiscatory taxation, currency blockage, political or economic instability or
diplomatic developments that could adversely affect the value of those
investments. Finally, in the event of a default on any foreign obligation, it
may be difficult for the Fund to obtain or to enforce a judgment against the
issuer.
Foreign markets, especially emerging markets, may 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.
Delays in settlement could result in temporary periods when a portion of the
assets of a Portfolio is uninvested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
could cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to a Portfolio due to subsequent declines in values of the
portfolio securities or, if the Portfolio has entered into a contract to sell
the security, possible liability to the purchaser. Certain foreign markets,
especially emerging markets, may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. A Portfolio could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Portfolio of any
restrictions on investments.
In addition to the foreign securities listed above, the International
Small Cap, Strategic Income, Investment Quality Bond, Growth Equity and Balanced
Funds may also invest in foreign sovereign debt securities, which involve
certain additional risks. See "RISK FACTORS -- High Yield/High Risk Securities
- -- Foreign Sovereign Debt Securities" above.
Warrants
Subject to certain restrictions, each of the Portfolios except the
National Municipal Bond and Money Market Funds may purchase warrants, including
warrants traded independently of the underlying securities. It is a non-
fundamental investment restriction of each Portfolio not to purchase warrants if
as a result that Portfolio would then have more than 10% of its total net assets
invested in warrants, or if more than 5% of the value of the Portfolio's total
net assets would be invested in warrants which are not listed on a recognized
United States or foreign stock exchange, except for warrants included in units
or attached to other securities.
Lending Portfolio Securities
To attempt to increase its income, each Portfolio may lend its
portfolio securities in amounts up to 33% of its total non-cash assets to
brokers, dealers and other financial institutions, provided such loans are
callable at any time by the Portfolio and are at all times fully secured by
cash, cash equivalents or securities issued or guaranteed by the U.S. government
or its agencies or instrumentalities, marked to market to the value of loaned
securities on a daily basis. As with any extensions of credit, there may be
risks of delay in recovery and in some cases even loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Subadvisers to be creditworthy.
When-Issued Securities ("Forward Commitments")
In order to help ensure the availability of suitable securities, each
of the Portfolios may purchase debt securities on a "when-issued" or on a
"forward delivery" basis, which means that the obligations will be delivered to
the Portfolio at a future date, which may be a month or more after the date of
commitment (referred to as "forward commitments"). It is expected that, under
normal circumstances, a Portfolio purchasing securities on a when-issued or
forward delivery basis will take delivery of the securities, but the Portfolio
may sell the securities before the settlement date, if such action is deemed
advisable. In general, a Portfolio does not pay for the securities or start
earning interest on them until the purchase of the obligation is scheduled to be
settled, but it does, in the meantime, record the transaction and reflect the
value each day of the securities in determining its net asset value. At the
time delivery is made, the value of when-issued or forward delivery securities
may be more or less than the transaction price, and the yields then available in
the market may be higher than those obtained in the
54
<PAGE>
transaction. While awaiting delivery of the obligations purchased on such bases,
a Portfolio will establish a segregated account consisting of cash or liquid
high quality debt securities equal to the amount of the commitments to purchase
when-issued or forward delivery securities. The availability of liquid assets
for this purpose and the effect of asset segregation on a Portfolio's ability to
meet its current obligations, to honor requests for redemption and to have its
investment portfolio managed properly will limit the extent to which the
Portfolio may purchase when-issued or forward delivery securities. Except as may
be imposed by these factors, there is no limit on the percentage of a
Portfolio's total assets that may be committed to such transactions.
Hedging and Other Strategic Transactions
Individual Portfolios may be authorized to use a variety of investment
strategies described below for hedging purposes only, including hedging various
market risks (such as interest rates, currency exchange rates and broad or
specific market movements), and managing the effective maturity or duration of
debt instruments held by the Portfolio. The description in this Prospectus of
each Portfolio indicates which, if any, of these types of transactions may be
used by the Portfolio. Limitations on the portion of a Portfolio's assets that
may be used in connection with the investment strategies described below are set
out in the Statement of Additional Information.
Subject to the constraints described above, an individual Portfolio
may (if and to the extent so authorized) purchase and sell (or write) exchange-
listed and over-the-counter put and call options on securities, index futures
contracts, financial futures contracts and fixed-income indices and other
financial instruments, enter into financial futures contracts, enter into
interest rate transactions, and enter into currency transactions (collectively,
these transactions are referred to in this Prospectus as "Hedging and Other
Strategic Transactions"). Other Strategic Transactions are also referred to as
derivative transactions. A "derivative" is generally defined as an instrument
whose value is based upon, or derived from, some underlying index, reference
rate (e.g. interest rate or currency exchange rate, security, commodity or other
asset). Portfolio's interest rate transactions may take the form of swaps, caps,
floors and collars, and a Portfolio's currency transactions may take the form of
currency forward contracts, currency futures contracts, currency swaps and
options on currencies or currency futures contracts.
Hedging and Other Strategic Transactions may generally be used to
attempt to protect against possible changes in the market value of securities
held or to be purchased by a Portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect a Portfolio's unrealized gains
in the value of its securities, to facilitate the sale of those securities for
investment purposes, to manage the effective maturity or duration of a
Portfolio's securities or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities. A
Portfolio may use any or all types of Hedging and Other Strategic Transactions
which it is authorized to use at any time; no particular strategy will dictate
the use of one type of transaction rather than another, as use of any authorized
Hedging and Other Strategic Transaction will be a function of numerous
variables, including market conditions. The ability of a Portfolio to utilize
Hedging and Other Strategic Transactions successfully will depend on, in
addition to the factors described above, the Subadviser's ability to predict
pertinent market movements, which cannot be assured. These skills are different
from those needed to select a Portfolio's securities. None of the Portfolios is
a "commodity pool" (i.e., a pooled investment vehicle which trades in commodity
futures contracts and options thereon and the operator of which is registered
with the Commodity Futures Trading Commission (the "CFTC")). Futures contracts
and options on futures contracts will be purchased, sold or entered into only
for bona fide hedging to the extent permitted by CFTC regulations. The use of
certain Hedging and Other Strategic Transactions will require that a Portfolio
segregate cash, liquid high grade debt obligations or other assets to the extent
a Portfolio's obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. Risks associated with
Hedging and Other Strategic Transactions are described in "HEDGING AND OTHER
STRATEGIC TRANSACTIONS -- Risk Factors" in the Statement of Additional
Information. A detailed discussion of various Hedging and Other Strategic
Transactions, including applicable regulations of the CFTC and the requirement
to segregate assets with respect to these transactions, also appears in the
Statement of Additional Information.
Illiquid Securities
Each of the portfolios is precluded from investing in excess of 10% of
its net assets in securities that are not readily marketable. Excluded from the
10% limitation are securities that are restricted as to resale but for which a
ready market is available pursuant to exemption provided by Rule 144A adopted
under the Securities Act of 1933, as amended (the "1933 Act") or other
exemptions from the registration requirements of the 1933 Act. Whether
securities sold pursuant to Rule 144A are readily marketable for purposes of the
Fund's investment restriction is a determination to be made by the Subadvisers,
subject to the Trustees' oversight and for which the Trustees are ultimately
responsible. The Subadvisers will also monitor the liquidity of Rule 144A
securities held by the Portfolios for which they are responsible. To the extent
Rule 144A securities held by a Portfolio should become illiquid because of a
lack of interest on the part of qualified institutional investors, the overall
liquidity of the Portfolio could be adversely affected. In addition, the Money
Market Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the 1933 Act. Section 4(2)
commercial paper is restricted as to the disposition under federal securities
law, and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be made in an
exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the
55
<PAGE>
Money Market Fund through or with the assistance of the issuer or investment
dealers who make a market in Section 4(2) commercial paper, thus providing
liquidity. The Money Market Fund's subadviser believes that Section 4(2)
commercial paper meets its criteria for liquidity and is quite liquid. The Money
Market Fund intends, therefore, to treat Section 4(2) commercial paper as liquid
and not subject to the investment limitation applicable to illiquid securities.
The Money Market Fund's subadviser will monitor the liquidity of Section 4(2)
commercial paper held by the Money Market Fund, subject to the Trustees'
oversight and for which the Trustees are ultimately responsible.
Repurchase Agreements and Reverse Repurchase Agreements
Each of the Fund's Portfolios may enter into repurchase agreements and
reverse repurchase agreements. Repurchase agreements involve the acquisition by
a Portfolio of debt securities subject to an agreement to resell them at an
agreed-upon price. Under a repurchase agreement, at the time the Portfolio
acquires a security, it agrees to resell it to the original seller (a financial
institution or broker/dealer which meets the guidelines established by the
Trustees) and must deliver the security (and/or securities that may be added to
or substituted for it under the repurchase agreement) to the original seller on
an agreed-upon date in the future. The repurchase price is in excess of the
purchase price. The arrangement is in economic effect a loan collateralized by
securities.
The Trustees have adopted procedures that establish certain
creditworthiness, asset and collateralization requirements for the
counterparties to a Portfolio's repurchase agreements. The Trustees will
regularly monitor the use of repurchase agreements and the Subadvisers will,
pursuant to procedures adopted by the Trustees, continuously monitor the amount
of collateral held with respect to a repurchase transaction so that it equals or
exceeds the amount of the obligation.
A Portfolio's risk in a repurchase transaction is limited to the
ability of the seller to pay the agreed-upon sum on the delivery date. In the
event of bankruptcy or other default by the seller, there may be possible delays
and expenses in liquidating the instrument purchased, decline in its value and
loss of interest. Securities subject to repurchase agreements will be valued
every business day and additional collateral will be requested if necessary so
that the value of the collateral is at least equal to the value of the
repurchase obligation, including the interest accrued thereon.
Each Portfolio of the Fund may enter into "reverse" repurchase
agreements. Under a reverse repurchase agreement, a Portfolio may sell a debt
security and agree to repurchase it at an agreed upon time and at an agreed upon
price. The Portfolio retains record ownership of the security and the right to
receive interest and principal payments thereon. At an agreed upon future date,
the Portfolio repurchases the security by remitting the proceeds previously
received, plus interest. The difference between the amount the Portfolio
receives for the security and the amount it pays on repurchase is deemed to be
payment of interest. The Portfolio will maintain in a segregated custodial
account cash, Treasury bills or other U.S. Government securities having an
aggregate value equal to the amount of such commitment to repurchase including
accrued interest, until payment is made. In certain types of agreements, there
is no agreed-upon repurchase date and interest payments are calculated daily,
often based on the prevailing overnight repurchase rate.
Mortgage Dollar Rolls
Each Portfolio of the Fund (except the Money Market Fund) may enter
into mortgage dollar rolls. Under a mortgage dollar roll, a Portfolio sells
mortgage-backed securities for delivery in the future (generally within 30 days)
and simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Portfolio forgoes principal and interest paid on the mortgage-backed
securities. A Portfolio is compensated by the difference between the current
sale price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A Portfolio may also be compensated by receipt of a commitment
fee. A Portfolio may only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash or cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction. Dollar roll transactions involve the risk
that the market value of the securities sold by the Portfolio may decline below
the repurchase price of those securities.
MANAGEMENT OF THE FUND
Under Massachusetts law and the Fund's Declaration of Trust and By-
Laws, the business and affairs of the Fund are managed under the direction of
the Trustees.
Advisory Arrangements
NASL Financial Services, Inc., ("NASL Financial" or, in its capacity
as investment adviser to the Fund, the "Adviser"), a Massachusetts corporation
whose principal offices are located at 116 Huntington Avenue, Boston,
Massachusetts 02116, is the investment adviser to the Fund. NASL Financial is
a wholly-owned subsidiary of North American Security Life Insurance Company
("Security Life"), a Delaware stock life insurance company, the controlling
ultimate parent of which is The Manufacturers Life Insurance Company
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<PAGE>
("Manulife"), a Canadian mutual life insurance company based in Toronto, Canada.
Prior to January 1, 1996, Security Life was a wholly owned subsidiary of North
American Life Assurance Company ("NAL"), a Canadian mutual life insurance
company. On January 1, 1996 NAL and Manulife merged with the combined company
retaining the name Manulife.
Pursuant to its Advisory Agreement with the Fund (the "Advisory
Agreement"), the Adviser oversees the administration of all aspects of the
business and affairs of the Fund; selects, contracts with and compensates
subadvisers to manage the assets of the Fund's Portfolios; and reimburses the
Fund if the total of certain expenses allocated to any Portfolio exceeds certain
limitations. The Adviser serves as investment adviser to one other investment
company, NASL Series Trust. NASL Series Trust is a mutual fund that serves as
the underlying investment medium for variable annuity contracts issued by
Security Life and its wholly-owned subsidiary, First North American Life
Assurance Company. At November 30, 1996, NASL Series Trust had assets of
approximately $6.8 billion.
Under the terms of the Advisory Agreement, the Adviser selects,
contracts with and compensates subadvisers to manage the investment and
reinvestment of the assets of all Portfolios of the Fund. The Adviser monitors
the compliance of such subadvisers with the investment objectives and related
policies of each Portfolio and reviews the performance of such subadvisers and
reports periodically on such performance to the Trustees. The Fund has filed an
application with the Securities and Exchange Commission seeking exemptive relief
to permit the appointment of a subadviser pursuant to an agreement that is not
approved by shareholders. If granted, the Fund would be able to change
subadvisers from time to time without the expense and delays associated with
obtaining shareholder approval of the new subadviser. There is no assurance that
the requested relief will be granted.
The Adviser oversees all aspects of the Fund's business and affairs.
In that connection, the Adviser permits its directors, officers and employees to
serve as Trustees or President, Vice President, Treasurer or Secretary of the
Fund, without cost to the Fund. The Adviser also provides certain services, and
the personnel to perform such services, to the Fund for which the Fund
reimburses the Adviser's costs of providing such services and personnel. Such
services include maintaining certain records of the Fund and performing all
administrative, financial, accounting, bookkeeping and recordkeeping functions
of the Fund, except for any of those functions performed by the Fund's custodian
or transfer and shareholder servicing agents. The reimbursement paid by the
Fund to the Adviser for personnel costs include employee compensation and
allocated portions of the Adviser's related personnel expenses of office space,
utilities, office equipment and miscellaneous office expenses.
The Adviser has agreed to reduce a Portfolio's advisory fee, or if
necessary to reimburse the Fund, in order to prevent the expenses of a Portfolio
from exceeding either the most restrictive expense limitation imposed by
applicable state law or a fixed expense limitation contained in the Advisory
Agreement, whichever results in the lowest expenses to the Fund. The fixed
limitation may be terminated by the Adviser at any time on 30 days' written
notice. The most restrictive state law provision limits a Portfolio's annual
expenses, excluding taxes, portfolio brokerage commissions, interest, certain
litigation and indemnification expenses, extraordinary expenses and a portion of
the Portfolio's distribution fees, to 2.5% of the first $30,000,000 of the
average net assets of the Portfolio, 2.0% of the next $70,000,000 and 1.5% of
the remaining average net assets of the Portfolio. The fixed limitation
contained in the Advisory Agreement, and as of the date of this Prospectus the
operative limitation on the Fund's expenses, limits a Portfolio's annual
expenses, excluding taxes, portfolio brokerage commissions, interest, certain
litigation and indemnification expenses, extraordinary expenses and all of the
Portfolio's distribution fees as a percentage of average net assets to the
following percents:
<TABLE>
<CAPTION>
Portfolio Percent
<S> <C>
International Small Cap Fund 1.55%
Small/Mid Cap Fund 1.325%
Global Equity Fund 1.40%
Growth Equity Fund 1.30%
International Growth and Income Fund 1.40%
Growth and Income Fund .99%
Equity-Income Fund .99%
Balanced Fund .99%
Strategic Income Fund 1.15%
Investment Quality Bond .90%
U.S. Government Securities Fund .90%
National Municipal Bond Fund .85%
Money Market Fund. .50%
</TABLE>
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<PAGE>
As compensation for its services, the Adviser receives a fee from the
Fund computed separately for each Portfolio. The fee for each Portfolio is
stated as an annual percentage of the current value of the net assets of the
Portfolio. The fee, which is accrued daily and payable monthly, is calculated
for each day by multiplying the fraction of one over the number of calendar days
in the year by the annual percentage prescribed for a Portfolio, and multiplying
this product by the value of the net assets of the Portfolio at the close of
business on the previous business day of the Fund. The following is a schedule
of the management fees each Portfolio currently is obligated to pay the Adviser
under the Advisory Agreement (prior to the application of any fee waivers):
<TABLE>
<CAPTION>
Between Between
$ 50,000,000 $200,000,000
First and and Excess over
Funds $50,000,000 $200,000,000 $500,000,000 $500,000,000
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Small Cap Fund............. 1.050% 1.000% .900% .800%
Small/Mid Cap Fund........................... .925% .900% .875% .850%
Global Equity Fund........................... .900% .900% .700% .700%
Growth Equity Fund......................... .900% .850% .825% .800%
International Growth and Income Fund......... .900% .850% .800% .750%
Growth and Income Fund..................... .725% .675% .625% .550%
Equity-Income Fund......................... .800% .700% .600% .600%
Balanced Fund................................ .775% .725% .675% .625%
Strategic Income Fund........................ .750% .700% .650% .600%
Investment Quality Bond Fund................. .600% .600% .525% .475%
National Municipal Bond Fund............... .600% .600% .600% .600%
U.S. Government Securities Fund............ .600% .600% .525% .475%
Money Market Fund.......................... .200% .200% .200% .145%
</TABLE>
As of March 16, 1993, August 1, 1994 and November 23, 1992, respectively, the
Equity-Income, Growth and Income and Balanced Funds reached sufficient size to
realize a reduction in the fee as a percent of excess net assets.
A more comprehensive statement of the terms of the Advisory Agreement
appears in the Statement of Additional Information and this agreement is on file
with and is available from the Commission
Subadvisory Arrangements
Wellington Management Company
Wellington Management Company LLP ("Wellington Management"), the Subadviser
to the Growth and Income and Investment Quality Bond Funds, founded in 1933, is
a Massachusetts limited liability partnership whose principal business address
is 75 State Street, Boston, Massachusetts 02109. Wellington Management is a
professional investment counseling firm which provides investment services to
investment companies, employee benefit plans, endowments, foundations and other
institutions and individuals. As of September 30, 1996, Wellington Management
had investment management authority with respect to approximately $123 billion
of assets. The managing partners of Wellington Management are Robert W. Doran,
Duncan M. McFarland, and John R. Ryan.
Matthew E. Megargel, Senior Vice President of Wellington Management, has
served as portfolio manager to the Growth and Income Fund since February 1992.
Mr. Megargel also serves as the portfolio manager for NASL Series Trust's Growth
and Income Trust. Mr. Megargel joined Wellington Management in 1983 as a
research analyst and took on additional responsibilities as a portfolio manager
in 1988. In 1991, he became solely a portfolio manager with Wellington
Management.
Thomas L. Pappas, Vice President of Wellington Management, has served as
portfolio manager to the Investment Quality Bond Fund since March 1994. Mr.
Pappas also serves as portfolio manager for NASL Series Trust's Investment
Quality Bond Trust. Mr. Pappas has been a portfolio manager with Wellington
Management since 1987.
J.P. Morgan Investment Management, Inc.
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J.P. Morgan Investment Management, Inc. ("J.P. Morgan") is the Subadviser
to the International Growth and Income Fund. J.P. Morgan, with principal
offices at 522 Fifth Avenue, New York, New York 10036, is a wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan & Co."), a bank
holding company organized under the laws of Delaware which is located at 60 Wall
Street, New York, New York 10260. Through offices in New York City and abroad,
J.P. Morgan & Co., through J.P. Morgan and other subsidiaries, offers a wide
range of services to governmental, institutional, corporate and individual
customers and acts as investment adviser to individual and institutional clients
with combined assets under management of approximately $197 billion as of
September 30, 1996. J.P. Morgan has managed international securities for
institutional investors since 1974. As of September 30, 1996, the non-U.S.
securities under J.P. Morgan's management was approximately $65 billion. J.P.
Morgan provides investment advice and portfolio management services to the
Portfolio. Subject to the supervision of the Fund's Trustees, J.P. Morgan makes
the Portfolio's day-to-day investment decisions, arranges for the execution of
portfolio transactions and generally manages the Portfolio's investments.
J.P. Morgan uses a sophisticated, disciplined, collaborative process for
managing the Portfolio. The following persons are primarily responsible for the
day-to-day management and implementation of J.P. Morgan's process for the
Portfolio (their business experience for the past 5 years is indicated
parenthetically): Paul A. Quinsee, Vice President (employed by J.P. Morgan since
February 1992, previously Vice President, Citibank), and Gareth A. Fielding,
Assistant Vice President (employed by J.P. Morgan since February 1992,
previously he received his MBA from Imperial College at London University, while
he was a self-employed trader on the London International Financial Futures
Exchange). Mr. Quinsee has been managing the International Growth and Income
Fund since the portfolio's inception (January, 1995) and Mr. Fielding has been
managing the portfolio since May, 1995.
Mr. Quinsee is primarily responsible for the day-to-day management of
several other institutional and investment company accounts that invest in
international securities constituting approximately $5 billion of assets. Since
July 1994, Mr. Fielding has been responsible for the day-to-day management (in
some cases with another person) of 10 institutional and investment company
portfolios that invest primarily in international fixed income securities,
constituting approximately $3.3 billion of assets. Mr. Fielding is a specialist
in mortgage and asset-backed securities. Prior to July 1994, Mr. Fielding
traded global fixed income products on J.P. Morgan's London trading desk.
Salomon Brothers Asset Management Inc.
Salomon Brothers Asset Management Inc ("SBAM"), the subadviser to the U.S.
Government Securities Fund and Strategic Income Fund (collectively, the "Funds")
is a wholly-owned subsidiary of Salomon Brothers Holding Company Inc, which is
in turn wholly-owned by Salomon Inc ("SI"). SBAM was incorporated in 1987 and,
together with affiliates in London, Frankfurt and Hong Kong, provides a full
range of fixed income and equity investment advisory services for individual and
institutional clients around the world, including European and Far East central
banks, pension funds, endowments, insurance companies, and services as
investment adviser to various investment companies. In providing such
investment advisory services, SBAM and it affiliates have access to SI's more
than 250 economists, mortgage, bond, sovereign and equity analysts. As of
October 31, 1996, SBAM and its worldwide investment advisory affiliates managed
approximately $17.8 billion in assets. SBAM's business offices are located at 7
World Trade Center, New York, New York 10048.
In connection with SBAM's service as subadviser to the Strategic Bond Fund,
SBAM's London-based affiliate, Salomon Brothers Asset Management Limited ("SBAM
Limited"), whose business address is Victoria Plaza, 111 Buckingham Palace Road,
London SW1W OSB, England, provides certain advisory services to SBAM with regard
to currency transactions and investments in non-dollar denominated debt
securities for the benefit of the Strategic Bond Fund. SBAM Limited is
compensated by SBAM at no additional expense to the Strategic Bond Fund. SBAM
Limited is an indirect, wholly-owned subsidiary of Salomon Brothers Holding
Company Inc. SBAM Limited is a member of the Investment Management Regulatory
Organization Limited in the United Kingdom and is registered as an investment
adviser in the United States pursuant to the Investment Advisers Act of 1940, as
amended.
Steven Guterman and Roger Lavan are jointly responsible for the day-to-day
management of the mortgage-backed securities and U.S. government securities
components of the U.S. Government Securities Fund portfolio since December 1991
and the Strategic Income Fund portfolio since February 1993. Mr. Guterman, who
joined SBAM in 1990, is a Managing Director of Salomon Brothers Inc and a
managing Director and Senior Portfolio Manager of SBAM, responsible for SBAM's
investment company and institutional portfolios which invest primarily in
mortgage-backed securities and U.S. government issues. Mr. Guterman also serves
as portfolio manager for two offshore mortgage funds and a number of
institutional clients. Mr. Guterman joined Salomon Brothers Inc in 1983 working
initially in the mortgage research group where he became a Research Director and
later traded derivative mortgage-backed securities.
Mr. Lavan joined SBAM in 1990 and is a Portfolio Manager and Quantitative
Fixed Income Analyst, responsible for working with senior portfolio managers to
monitor and analyze market relationships and identify and implement relative
value transactions in SBAM's investment company and institutional portfolios
which invest in mortgage-backed securities and U.S.
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<PAGE>
government securities. Prior to joining SBAM, Mr. Lavan spent four years
analyzing portfolios for Salomon Brothers' Fixed Income Sales Group and Product
Support Divisions.
Mssrs. Guterman and Lavan are assisted in the management of the Strategic
Income Funds by Peter Wilby since February 1993 and David Scott since January
1995. Mr. Wilby, who joined SBAM in 1989, is a Managing Director of Salomon
Brothers Inc and SBAM and a Senior Portfolio Manager of SBAM, responsible for
investment company and institutional portfolio investments in high yield U.S.
corporate debt securities and high yield foreign sovereign debt securities. From
1984 to 1989, Mr. Wilby was employed by Prudential Capital Management Group
("Prudential"), where he served as Director of Prudential's credit research unit
and as a corporate and sovereign credit analyst. Mr. Wilby also managed high
yield bonds and leveraged equities for Prudential mutual funds and institutional
portfolios.
David Scott is a Senior Portfolio Manager with SBAM Limited in London with
primary responsibility for managing long-term global bond portfolios. He also
plays an integral role in developing strategy. Mr. Scott manages currency
transactions and investments in non-dollar denominated securities for the
Strategic Income Fund. Prior to joining Salomon Brothers in April 1994, Mr.
Scott worked at J.P. Morgan Investment Management ("J.P. Morgan") from 1990 to
1994 where he had responsibility for global and non-dollar portfolios for
clients including departments of various governments, pension funds and
insurance companies. Before joining J.P. Morgan, from 1987 to 1990, Mr. Scott
worked for Mercury Asset Management managing captive insurance portfolios and
products.
Fred Alger Mangement, Inc.
Investment decisions for the Small/Mid Cap Fund are made by its Subadviser,
Fred Alger Management, Inc. ("Alger"). Alger, located at 75 Maiden Lane, New
York, New York 10038, has been in the business of providing investment advisory
services since 1964 and as of September 30, 1996 had approximately $6.8 billion
under management, including $4.8 billion in mutual fund accounts and $2.0
billion in other advisory accounts. Alger is wholly owned by Fred Alger &
Company, Incorporated which in turn is wholly owned by Alger Associates, Inc., a
financial services holding company. Fred M. Alger, III and his brother, David
D. Alger, are the majority shareholders of Alger Associates, Inc. and may be
deemed to control that company and its subsidiaries.
David D. Alger, President of Alger Management, is primarily responsible for
the day-to-day management of the Small/Mid Cap Fund since the portfolio's
inception (March 1996). He has been employed by Alger as Executive Vice
President and Director of Research since 1971 and as President since 1995 and he
serves as portfolio manager for other mutual funds and investment accounts
managed by Alger Management. Also participating in the management of the
Small/Mid Cap Fund since the portfolio's inception are Ronald Tartaro and Seilai
Khoo. Mr. Tartaro has been employed by Alger Management since 1990 and he serves
as a Senior Vice President. Prior to 1990, he was a member of the technical
staff at AT&T Bell Laboratories. Ms. Khoo has been employed by Alger Management
since 1989 and she serves as a Senior Vice President.
Founders Asset Management, Inc.
Investment decisions for the Growth Equity, International Small Cap and
Balanced Funds are made by its Subadviser, Founders Asset Management, Inc.
("Founders"), located at 2930 East Third Avenue, Denver, Colorado 80206, a
registered investment adviser first established as an asset manager in 1938.
Bjorn K. Borgen, Chairman, Chief Executive Officer and Chief Investment Officer
of Founders, owns 100% of the voting stock of Founders. As of October 31, 1996,
Founders had over $4.5 billion of assets under management, including
approximately $3.4 billion in mutual fund accounts and $1.1 billion in other
advisory accounts.
Founders is a "growth-style" manager of equity portfolios and gives
priority to the selection of individual securities that have the potential to
provide superior results over time, despite short-term volatility. Under normal
circumstances, Founders' approach to investment management gives greater
emphasis to the fundamental financial, marketing and operating strengths of the
companies whose securities it buys, and is less concerned with the short-term
impact of changes in macroeconomic and market conditions. Founders focuses on
purchasing the stocks of companies with strong management and market positions
that have earnings prospects that are significantly above the average for their
market sectors.
To facilitate the day-to-day investment management of the Growth Equity,
International Small Cap and Balanced Funds, Founders employs a unique team-and-
lead-manager system. The management team is composed of several members of the
Investment Department, including Founders' Chief Investment Officer, lead
portfolio managers, assistant portfolio managers, portfolio traders and research
analysts. Team members share responsibility for providing ideas, information,
knowledge and expertise in the management of the portfolios. Each team member
has one or more areas of expertise that is applied to the management of the
Portfolio. Daily decisions on portfolio selection for the portfolio rests with
a lead portfolio manager assigned to the portfolio.
Michael W. Gerding, Vice President of Investments, has been the lead
portfolio manager for the International Small Cap Fund since the portfolio's
inception (March, 1996). Mr.
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Gerding is a chartered financial analyst who has been part of Founders'
investment department since 1990. Prior to joining Founders, Mr. Gerding served
as a portfolio manager and research analyst with NCNB Texas for several years.
Mr. Gerding earned a BBA in finance and an MBA from Texas Christian University.
Edward F. Keely, Vice President of Investments, has been the lead portfolio
manager for the Growth Equity Fund since the portfolio's inception (March,
1996). Mr. Keely is a chartered financial analyst who joined Founders in 1989. A
graduate of The Colorado College, Mr. Keely holds a Bachelor of Arts degree in
economics.
Brian F. Kelly, Portfolio Manager, is the lead portfolio manager for the
Balanced Fund. Mr. Kelly joined Founders in 1996. Prior to joining Founders, Mr.
Kelly served as portfolio manager for Invesco Trust Company (1993-1996) and as a
senior investment analyst for Sears Investment Management Company (1986-1993). A
graduate of the University of Notre Dame, Mr. Kelly received his MBA and JD from
the University of Iowa. He is also a Certified Public Accountant.
T. Rowe Price Associates, Inc.
T. Rowe Price, whose address is at 100 East Pratt Street, Baltimore,
Maryland 21202, is the subadviser for the Equity-Income Fund. Founded in 1937
by the late Thomas Rowe Price, Jr., T. Rowe Price and its affiliates managed
over $90 billion for over four million individual and institutional investor
accounts as of November 30, 1996.
The investment advisory committee for the Equity-Income Fund is comprised
of the following members: Brian C. Rogers, Chairman, Stephen W. Boese, Richard
P. Howard, and William J. Stromberg. Mr. Rogers joined T. Rowe Price in 1982 and
has been managing investments since 1983. He has been chairman of the Equity
Income Fund investment advisory committee since October 1, 1996.
Morgan Stanley Asset Management, Inc.
Morgan Stanley, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, has been the subadviser to the Global Equity Fund since
October 1, 1996. Morgan Stanley, a wholly-owned subsidiary of Morgan Stanley
Group, Inc. conducts a worldwide portfolio management business, providing a
broad range of portfolio management services to customers in the United States
and abroad. At September 30, 1996, Morgan Stanley, together with its affiliated
asset management companies, (including MAS) managed investments totaling
approximately $103.5 billion, including approximately $86.9 billion under active
management and $16.6 billion as named fiduciary or fiduciary adviser.
Frances Campion has been primarily responsible for the portfolio management
of the Global Equity Fund since October, 1996. Ms. Campion joined Morgan Stanley
in January 1990 as a global equity fund manager and is now a Principal of Morgan
Stanley & Co. Incorporated. Her responsibilities include day to day management
of the Global Equity Portfolio of Morgan Stanley Institutional Fund, Inc. Prior
to joining Morgan Stanley, Ms. Campion was a U.S. equity analyst with Lombard
Odler Limited where she had responsibility for the management of global
portfolios. Ms. Campion has ten years global investment experience. She is a
graduate of University of College, Dublin.
Manufacturers Adviser Corporation
MAC, a Colorado corporation, is the subadviser of the Money Market Fund.
Its principal business at the present time is to provide investment management
services to these portfolios and comparable portfolios of NASL Series Trust. MAC
is an indirect wholly-owned subsidiary of Manulife. The address of MAC is 200
Bloor Street East, Toronto, Ontario, Canada M4W 1E5. As of October 31, 1996, MAC
together with Manulife had approximately $15 billion of assets under management.
Management of the above portfolios is provided by a team of investment
professionals each of whom plays an important role in the management process of
each portfolio. Team members work together to develop investment strategies and
select securities for a portfolio. They are supported by research analysts,
traders and other investment specialists who work alongside the investment
professionals in an effort to utilize all available resources to benefit the
shareholders.
* * *
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Under the terms of each of the subadvisory agreements between the Adviser
and a Subadviser (the "Subadvisory Agreements"), the Subadviser assigned to a
Portfolio manages the investment and reinvestment of the assets of such
Portfolio, subject to the supervision of the Trustees. The Subadviser
formulates a continuous investment program for such Portfolio consistent with
its investment objectives and policies outlined in this Prospectus. The
Subadviser implements such programs by purchases and sales of securities and
regularly reports to the Adviser and the Trustees with respect to their
implementation. The factors considered by the Subadvisers in allocating
brokerage among broker/dealers are described in the Statement of Additional
Information under the caption "PORTFOLIO BROKERAGE." Among the factors that may
be considered is the willingness of broker/dealers to sell shares of the Fund.
As compensation for their services, the Subadvisers receive fees from the
Adviser computed separately for each Portfolio. The fee for each Portfolio is
stated as an annual percentage of the current value of the net assets of the
Portfolio. The fee, which is accrued daily and payable monthly, is calculated
for each day by multiplying the fraction of one over the number of calendar days
in the year by the annual percentage prescribed for a Portfolio, and multiplying
this product by the value of the net assets of the Portfolio at the close of
business on the previous business day of the Fund. Once the average net assets
of a Portfolio exceed specified amounts, the fee is reduced with respect to the
excess. Absent any applicable fee waivers, the following is a schedule of the
management fees the Adviser is obligated to pay the Subadvisers for each
Portfolio under the Subadvisory Agreements. These fees are paid out of the
advisory fees described above and are not additional charges to the Portfolios
or their shareholders.
<TABLE>
<CAPTION>
Between Between
$ 50,000,000 $200,000,000
First and and Excess over
Funds $50,000,000 $200,000,000 $500,000,000 $500,000,000
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Small Cap.................. .650% .600% .500% .400%
Small/Mid Cap Fund....................... .525% .500% .475% .450%
Global Equity Fund.......................... .500% .450% .375% .325%
Growth Equity Fund...................... .500% .450% .425% .400%
International Growth and Income Fund......... .500% .450% .400% .350%
Growth and Income Fund................... .325% .275% .225% .150%
Equity-Income Fund....................... .400% .300% .200% .200%
Balanced Fund............................. .375% .325% .275% .225%
Strategic Income Fund*...................... .350% .300% .250% .200%
Investment Quality Bond Fund.............. .225% .225% .150% .100%
National Municipal Bond Fund............. .250% .250% .250% .250%
U.S. Government Securities Fund.......... .225% .225% .150% .100%
Money Market Fund........................ .075% .075% .075% .020%
</TABLE>
*In connection with the subadvisory consulting agreement between SBAM and
SBAM Limited, SBAM will pay SBAM Limited, as full compensation for all services
provided under the subadvisory consulting agreement, a portion of its
subadvisory fee, such amount being an amount equal to the fee payable under
SBAM's subadvisory agreement multiplied by portion of the assets of the
Strategic Income Fund that SBAM Limited has been delegated to manage divided by
the current value of the net assets of the Portfolio.
As of March 16, 1993, August 1, 1994 and November 23, 1992, respectively,
the Equity-Income, Growth and Income and Balanced Funds reached sufficient size
to realize a reduction in the fee as a percent of excess net assets.
A more comprehensive statement of the terms of the Subadvisory Agreements
appears in the Statement of Additional Information and these agreements are on
file with and are available from the Commission.
All or a portion of Fund brokerage commissions may be paid to affiliates of
Salomon, J.P. Morgan, Alger, Morgan Stanley and Oechsle. Information on the
amount of these commissions is set forth in the Statement of Additional
Information under "PORTFOLIO BROKERAGE."
Fund Expenses
Subject to the expense limitations discussed above, the Fund is responsible
for the payment of all expenses of its organization, operations and business,
except for those expenses the Adviser has agreed to bear pursuant to the
Advisory Agreement or its Distribution Agreement with the Fund or the
Subadvisers have agreed to pay pursuant to the Subadvisory Agreements. Among the
expenses to be borne by the Fund, in addition to certain expenses incurred by
the Adviser as described above, are the expense of the advisory and distribution
fees;
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all charges and expenses relating to the transfer, safekeeping, servicing
and accounting for the Fund's property, including charges of depositories,
custodians and other agents; all expenses of maintaining and servicing
shareholder accounts, including charges of the Fund's transfer, dividend
disbursing, shareholder recordkeeping, redemption and other agents; costs of
shareholder reports and other communications to current shareholders; the
expenses of meetings of the Fund's shareholders and the solicitation of
management proxies in connection therewith; all expenses of preparing Fund
Prospectuses and Statements of Additional Information; the expenses of
determining the Portfolios' net asset value per share; the compensation of
Trustees who are not directors, officers or employees of the Adviser and all
expenses of meetings of the Trustees; all charges for services and expenses of
the Fund's legal counsel and independent auditors; all fees and expenses of
registering and qualifying, and maintaining the registration and qualification
of, the Fund and its shares under all federal and state laws applicable to the
Fund and its business activities; all expenses associated with the issue,
transfer and redemption of Fund shares; brokers' and other charges incident to
the purchase, sale or lending of the Fund's securities; taxes and other
governmental fees payable by the Fund; and any nonrecurring expenses including
litigation expenses and any expenses the Fund may incur as a result of its
obligation to indemnify its Trustees, officers and agents. All expenses are
accrued daily and deducted from total income before dividends are paid.
Each Fund's portfolio turnover rate is set forth under the "Financial
Highlights" section of the Prospectus. A high rate of portfolio turnover (in
excess of 100%) generally involves correspondingly greater commission expenses,
which must be borne directly by the Fund. The portfolio turnover rate of each of
the Fund's portfolios may vary from year to year, as well as within a year. See
"PORTFOLIO BROKERAGE" in the Statement of Additional Information.
GENERAL INFORMATION
Net Asset Value
The net asset value of the shares of each class of each Portfolio is
calculated separately and, except as described below, is determined once daily
as of the close of regularly scheduled trading on the New York Stock Exchange
(the "Exchange"), Monday through Friday. Net asset value per share of each
class of each Portfolio (other than the Money Market Fund, as described below)
is calculated by dividing the value of the portion of the Portfolio's securities
and other assets attributable to that class, less the liabilities attributable
to that class, by the number of shares of that class outstanding. No
determination is required on (i) days on which changes in the value of such
Portfolio's securities holdings will not materially affect the current net asset
value of the shares of the Portfolio, (ii) days during which no shares of such
Portfolio are tendered for redemption and no order to purchase or sell such
shares is received by the Fund, or (iii) the following business holidays or the
days on which such holidays are observed by the Exchange: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Generally, trading in non-U.S. securities,
as well as U.S. Government securities and money market instruments, is
substantially completed each day at various times prior to the close of
regularly scheduled trading on the Exchange. The values of such securities used
in computing the net asset value of the shares of a class of a Portfolio are
generally determined as of such times. Occasionally, events which affect the
values of such securities may occur between the times at which they are
generally determined and the close of regularly scheduled trading on the
Exchange and would therefore not be reflected in the computation of a class's
net asset value. If events materially affecting the value of such securities
occur during such period, then these securities will be valued at their fair
value as determined in good faith by the Subadvisers under procedures
established and regularly reviewed by the Trustees.
Securities held by each of the Portfolios other than the Money Market Fund,
except for money market instruments with remaining maturities of 60 days or
less, are valued as follows: securities which are traded on stock exchanges are
valued at the last sales price as of the close of the Exchange, or lacking any
sales, at the closing bid prices. Securities traded only in the "over-the-
counter" market are valued at the last bid prices quoted by brokers that make
markets in the securities at the close of trading on the Exchange. Securities
and assets for which market quotations are not readily available or not obtained
from a pricing service are valued at fair value as determined in good faith by
the Trustees, although the actual calculations may be made by persons acting
pursuant to the direction of the Trustees. If approved by the Trustees, the
Fund may make use of a pricing service or services in determining the net asset
value of the classes of the Portfolios.
The Trustees have authorized the Portfolios to value certain debt
securities by reference to valuations obtained from pricing services which take
into account appropriate factors such as institution-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data in determining valuations of such
securities, without extensive reliance upon quoted prices, since such valuations
are believed by the Trustees to more accurately reflect the fair value of such
securities.
All instruments held by the Money Market Fund and money market instruments
with a remaining maturity of 60 days or less held by the other Portfolios are
valued on an amortized cost basis. With respect to each class of shares of the
Money Market Fund, this method of calculation facilitates maintaining a constant
net asset value of $1.00 per share. However, there can be no assurance that the
$1.00 net asset value will be maintained at all times. The Trustees have
determined that the amortized cost method of valuation fairly reflects a market
based net asset value.
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Dividends and Distributions
Except for the National Municipal Bond Fund, each Portfolio's dividends
from net investment income (i.e., its net investment company taxable income as
that term is defined in the Internal Revenue Code of 1986 (the "Code"),
determined without regard to the deduction for dividends paid) which includes
short-term capital gains (collectively "ordinary income dividends") are taxable
as ordinary income to shareholders whether paid in additional shares or in cash.
Any net capital gain (i.e., the excess of a Portfolio's net realized long-term
capital gain over its net realized short-term capital loss) distributed to
shareholders as "capital gain dividends" is treated as long-term capital gain by
the shareholders, whether paid in cash or additional shares, regardless of the
length of time a shareholder has owned his or her shares. Shareholders are
provided annually with full information on dividends and capital gains
distributions for tax purposes. Shareholders may not have to pay state or local
taxes on dividends derived from interest on U.S. Government obligations.
Shareholders should consult their tax advisers regarding the applicability of
state and local taxes to dividends and distributions. Each Portfolio will send
shareholders a statement after the end of every calendar year stating the amount
of dividends derived from interest on U.S. Government obligations.
The International Small Cap, Small/Mid Cap, Global Equity, Growth Equity,
Equity-Income and Balanced Funds declare and pay any income dividends annually;
the Growth and Income and International Growth and Income Funds declare and pay
any income dividends semiannually; and the Strategic Income, Investment Quality
Bond, U.S. Government Securities, National Municipal Bond and Money Market Funds
declare income dividends daily and pay them monthly. See "PURCHASE OF SHARES --
General Methods of Purchasing Shares." Each of the Portfolios, other than the
Money Market Fund, declares and pays any capital gains dividends annually.
Generally, income dividends of Portfolios other than the Strategic Income,
Investment Quality Bond, U.S. Government Securities, National Municipal Bond and
Money Market Funds and capital gains dividends of Portfolios other than the
Money Market Fund paid shortly after a purchase of shares prior to the record
date, although in effect a return of capital, will be subject to income tax.
The maximum distribution and service fees payable by the Class B shares and
Class C shares of each Portfolio (other than the Money Market Fund, which bears
no such fees) are more than the maximum fees payable by each such Portfolio's
Class A shares. In addition, certain incremental expenses which are
specifically allocable to a particular class of shares in a Portfolio are
separately allocated to that class of shares. As a result, the per share
dividend on Class B and Class C shares will generally be lower than the per
share dividend on Class A shares of a Portfolio.
For the convenience of shareholders, all income dividends and capital gains
distributions are paid in full and fractional shares of the same class of a
Portfolio on the payment date unless a shareholder has requested payment in
cash. Shareholders may elect to have dividends and distributions from a class
of a Portfolio invested in shares of the same class of another Portfolio at the
respective net asset value. See SHAREHOLDER SERVICES -- Automatic Dividend
Diversification."
Taxes
It is expected that each Portfolio of the Fund will qualify as a "regulated
investment company" under the Code. If it so qualifies, a Portfolio will not be
subject to United States federal income taxes on its net investment inocme and
net capital gain, if any, that it distributes to its shareholders in each
taxable year, provided that it distributes to its shareholders (i) at least 90%
of its net investment income for such taxable year, and (ii) with respect to the
National Municipal Bond Fund at least 90% of its net tax-exempt interest income
for such taxable year. If in any year a Portfolio fails to qualify as a
regulated investment company, such Portfolio would incur regular corporate
federal income tax on its taxable income for that year and be subject to certain
additional distribution requirements upon requalification. Each Portfolio will
be subject to a 4% nondeductible excise tax on its taxable income to the extent
it does not meet certain distribution requirements by the end of each calendar
year. Each Portfolio intends to make sufficient distributions to avoid
application of the corporate income and excise taxes.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest. The
investment yield of the Portfolios investing in foreign securities or currencies
will be reduced by these foreign taxes. Shareholders will bear the cost of any
foreign taxes, but may not be able to claim a foreign tax credit or deduction
for these foreign taxes. If a Portfolio is eligible for and makes an election to
allow the shareholders of that Portfolio to claim a foreign tax credit or
deduction for these taxes for any taxable year, the shareholders will be
notified. In addition, Portfolios investing in securities of passive foreign
investment companies may be subject to U.S. federal income taxes (and interest
on such taxes) as a result of such investments. The investment yield of the
Portfolios making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of Fund shares (including the exchange of
shares of one Portfolio for shares of another) is a taxable event and may result
in a gain or loss. Gain or loss, if any, recognized on the sale or other
disposition of shares of the Fund will be
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<PAGE>
taxed as capital gain or loss if the shares are capital assets in the
shareholder's hands. Generally, a shareholder's gain or loss will be a long-term
gain or loss if the shares have been held for more than one year. If a
shareholder sells or otherwise disposes of a share of the Fund before holding it
for more than six months, any loss on the sale or other disposition of such
share shall be (i) treated as a long-term capital loss to the extent of any
capital gain dividends received by the shareholder with respect to such share or
(ii) in the case of the National Municipal Bond Fund, disallowed to the extent
of any exempt-interest dividend received by the shareholder with respect to such
shares. A loss realized on a sale or exchange of shares may be disallowed if
other shares are acquired within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of.
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Unless a shareholder of any Portfolio includes his or her taxpayer
identification number (social security number for individuals) in the
Shareholder Application and certifies that he or she is not subject to backup
withholding, the Fund is required to withhold and remit to the U.S. Treasury 31%
from dividends other than exempt-interest dividends and other reportable
payments to the shareholder.
Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or witholding taxes.
Most states provide that a regulated investment company may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. government securities Thus,
for residents of these states, distributions derived from a Portfolio's
investment in certain types of U.S. government securities should be free from
state and local income taxes to the extent that the interest income from such
investments would have been exempt from state and local income taxes if such
securities had been held directly by the respective shareholders themselves.
National Municipal Bond Fund - Taxation
The National Municipal Bond Fund also intends to satisfy conditions under
the Code that will enable interest from municipal obligations, which is exempt
from regular federal income taxes in the hands of each Portfolio, to qualify as
"exempt-interest dividends" when distributed to such Portfolio's shareholders.
Except as discussed below, such dividends are exempt from regular federal income
taxes.
Although exempt-interest dividends paid by the National Municipal Bond Fund
will be excluded by shareholders of the Portfolios from their gross income for
regular federal income tax purposes, under the Code all or a portion of such
dividends may be (i) a preference item for purposes of the alternative minimum
tax, (ii) a component of the "ACE" adjustment for purposes of determining the
amount of corporate alternative minimum tax or (iii) a factor in determining the
extent to which a shareholder's Social Security benefits are taxable. Moreover,
the receipt of exempt-interest dividends from each of the Portfolios affect the
federal tax liability of certain foreign corporations, S Corporations and
insurance companies. Furthermore, under the Code, interest on indebtedness
incurred or continued to purchase or carry portfolio shares, which interest is
deemed to relate to exempt-interest dividends, will not be deductible by
shareholders of the Portfolio for federal income tax purposes.
The exemption of exempt-interest dividend income from regular federal
income taxation does not necessarily result in similar exemptions for such
income under tax laws of state or local taxing authorities. In general, states
exempt from state income tax only that portion of any exempt-interest dividend
that is derived from interest received by a regulated investment company on its
holdings of obligations issued by that state or its political subdivisions and
instrumentalities.
A notice detailing the tax status of dividends and distributions paid by
the National Municipal Bond Fund will be mailed annually to its shareholders.
As part of this notice, the Portfolio will report to its shareholders the
percentage of interest income earned by the Portfolio during the preceding year
on tax-exempt obligations indicating, on a state-by-state basis, the source of
such income.
------------------------------
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide.
Investors should consult their tax advisers concerning a prospective investment
in the Fund.
Performance Information
From time to time the Fund may advertise certain information about the
performance of all classes of one or more of the Portfolios. Such performance
information may include time periods prior to the establishment of the multi-
class distribution system, as described more fully in the Statement of
Information under the caption "PERFORMANCE INFORMATION." Information about
performance of a class of shares of a Portfolio is not intended to indicate
future performance. The Fund's annual report to shareholders, which is
available without charge upon request, contains further discussions of Fund
performance.
The Fund may advertise the yield and/or total return performance for all
classes of one or more of the Portfolios in accordance with the rules of the
Commission. The National Municipal Bond Fund may also present from time to time
yield, tax-equivalent yield and standardized and nonstandardized total return in
advertisements. When yield is used in sales literature, the total return
figures will also be included. The Commission has issued rules setting forth
the uniform calculation of both yield and total return, but shareholders' actual
experience may be more or less than the figures produced by these formulas.
Each Portfolio may include the total return for all classes of shares in
advertisements or other written material. Each such piece will include at least
the average annual total return quotations for one year, five years, ten years
(if available) and/or from the commencement of operations. Total return is
measured by comparing the value of an investment at the beginning of the
relevant period to the redemption value of the investment at the end of the
period; the calculation assumes the initial investment is made at the current
maximum net offering
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price, assumes immediate reinvestment of any dividends or capital gains
distributions and adjusts for the current maximum sales charge of 4.75% for
Class A shares and the applicable CDSC imposed on a redemption of Class B shares
or Class C shares held for the period indicated. Yield and total return are
calculated separately for each class of a Portfolio.
Each of the Portfolios may advertise yield for all classes, accompanied by
total return. The yield will be computed by dividing the net investment income
per share earned during a recent one month period (after deducting expenses net
of reimbursements applicable to each class) by the maximum offering price
(including the maximum front end sales charge or applicable CDSC) on the last
day of the period, and annualizing the result (assuming compounding of interest)
in order to arrive at annual percentage rate. The National Municipal Bond Fund
may also present from time to time the tax-equivalent yield of all classes. The
tax-equivalent yield is calculated by determining the portion of yield which is
tax-exempt and calculating the equivalent taxable yield and adding to such
amount any fully taxable yield.
The Money Market Fund may advertise yield and effective yield for all
classes. The yield is based upon the income earned by the Portfolio over a
seven-day period and is then annualized, i.e., the income earned in the period
is assumed to be earned every seven days over a 365 day period and is stated as
a percentage of the investment. Effective yield is calculated similarly, but
when annualized the income earned by the investment is assumed to be reinvested
weekly in shares of the same class and thus compounded in the course of a 365
day period. The effective yield will be higher than the yield because of the
compounding effect of this assumed reinvestment.
All performance information may be compared with data published by Lipper
Analytical Services, Inc. or to unmanaged indices of performance, including, but
not limited to, the Dow Jones Industrial Average, Standard & Poor's 500, Value
Line Composite, Lehman Brothers Bond, Government Corporate, Corporate and
Aggregate Indices, Merrill Lynch Government & Agency and Intermediate Agency
Indices, the EAFE Index or the Morgan Stanley Capital International World Index.
In addition, during certain time periods the yield and total return of a class
and/or a Portfolio may be affected by expense waivers and/or expense
reimbursements. When so affected, the yield and total return figures will be
accompanied by a statement regarding such waiver and/or reimbursement. While
performance information may be helpful in evaluating whether a Portfolio may be
fulfilling its objective, past performance should not be regarded as
representative of future results. Yields and net asset values will fluctuate
with market conditions and the value of shares redeemed may be more or less than
their cost. The Money Market Fund operates under procedures designed to
stabilize the net asset value of all classes at $1.00 per share. The Fund will
include performance data for each class of a Portfolio in any advertisement or
information including performance data of such Portfolio. The Fund may also
utilize performance information in hypothetical illustrations provided in
narrative form.
Organization of the Fund
The Fund was organized as a Massachusetts business trust on September 28,
1988. The Equity-Income, U.S. Government Securities and Money Market Funds
commenced operations on August 28, 1989 with the acquisition of substantially
all the assets of the corresponding portfolios of Hidden Strength Funds. The
Global Equity Fund became available to investors on November 7, 1990, and the
Growth and Income and Investment Quality Bond Funds became available to
investors on May 1, 1991. The Balanced Fund (formerly the Asset Allocation
Fund) became available July 13, 1992, following the combination of the former
Conservative, Moderate and Aggressive Asset Allocation Trusts into the Balanced
Fund. The former asset allocation trusts commenced operations August 28, 1989
with the acquisition of substantially all the assets of the corresponding
portfolios of Hidden Strength Funds. The National Municipal Bond Fund became
available to investors on June 30, 1993. The Strategic Income Fund became
available to investors on November 30, 1993. The International Growth and
Income Fund became available to investors on January 9, 1995. The Small/Mid
Cap, International Small Cap and Growth Equity Funds became available to
investors on March 4, 1996.
All shares of beneficial interest, $.001 par value per share, of each
Portfolio have equal voting rights (except as described below with respect to
matters specifically affecting a class of shares) and have no pre-emptive or
conversion rights. At a meeting of the Board of Trustees held on December 16,
1993, the Trustees, including each Trustee who is not an "interested person," as
such term is defined under the 1940 Act, unanimously approved amendments to the
Fund's Declaration of Trust to permit implementation of the Multiple Pricing
System. Shareholders of the Fund approved these amendments at a special meeting
held on February 18, 1994. The Multiple Pricing System was implemented on April
1, 1994. An order dated February 28, 1994 was issued to the Fund and NASL
Financial by the Commission permitting the issuance and sale of multiple classes
of shares representing interests in the Fund's existing Portfolios. Shares of
each class of a Portfolio represent interests in that Portfolio in proportion to
each share's net asset value. The per share net asset value of each class of
shares in a Portfolio is calculated separately and may differ as between classes
as a result of the differences in distribution and service fees payable by the
classes and the allocation of certain incremental class-specific expenses to the
appropriate class to which such expenses apply.
All shares of the Fund have equal voting rights and will be voted in the
aggregate, and not by series (Portfolio) or class, except where voting by series
or class is required by law or where the matter involved affects only one series
or class (for example, matters pertaining to the plan of distribution relating
to Class A shares will only be voted on by Class A shares). Matters required by
the 1940 Act to be voted upon by each affected series include changes to (i) the
Advisory Agreement, (ii) a Subadvisory Agreement and (iii) fundamental
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<PAGE>
investment objectives and policies. (The Fund has filed an application with the
Securities and Exchange Commission seeking exemptive relief to permit the
appointment of a subadviser pursuant to an agreement that is not approved by
shareholders. If granted, the Fund would be able to change subadvisers from
time to time without the expense and delays associated with obtaining
shareholder approval of the new subadviser. There is no assurance that the
requested relief will be granted.)
The Fund is not generally required to hold annual meetings of shareholders.
However, the Trustees may call special meetings of shareholders for action by
shareholder vote as may be requested in writing by the holders of 25% or more of
the outstanding shares of the Fund (10% in the case of a meeting requested for
the purpose of removing a Trustee) or as may be required by applicable laws.
Shareholders seeking to call a meeting for the purpose of removing a Trustee
will be assisted by the Fund in communicating with other shareholders, provided
the shareholders seeking to call a meeting are at least ten in number, have been
shareholders for at least six months and hold in the aggregate at least one
percent of the outstanding shares or shares having a value of at least $25,000,
whichever is less. Also, Trustees may be removed by action of the holders of
two-thirds or more of the outstanding shares of the Fund. The Trustees are
authorized to create additional series and classes of shares at any time without
approval by shareholders.
Under Massachusetts law, shareholders of a business trust may, in certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust pursuant to which the Fund was
organized contains an express disclaimer of shareholder liability for acts or
obligations of each Portfolio of the Fund and requires that notice of such
disclaimer be given in each instrument entered into or executed by the Fund. The
Declaration of Trust also provides for indemnification out of a Portfolio's
property for any shareholder of such Portfolio held personally liable for any of
the Portfolio's obligations. Thus, the risk of a shareholder being personally
liable as a partner for obligations of a Portfolio is limited to the unlikely
circumstance in which the Portfolio itself would be unable to meet its
obligations.
Custodian and Transfer and Dividend Disbursing Agents
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110, currently acts as Custodian of all the Portfolios'
assets, as well as the bookkeeping, transfer and dividend disbursing agent for
all of the Portfolios of the Fund. State Street has selected various banks and
trust companies in foreign countries to maintain custody of certain foreign
securities. State Street is authorized to use the facilities of the Depository
Trust Company, the Participants Trust Company and the book-entry system of the
Federal Reserve Banks.
Independent Accountants
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109 serves as the Fund's independent accountant. The audited financial
statements of the Fund at October 31, 1996, incorporated by reference into the
Statement of Additional Information and the Financial Highlights for the period
from the commencement of operations through October 31, 1996, included in this
Prospectus have been audited by Coopers & Lybrand L.L.P. as indicated in their
reports incorporated by reference into the Statement of Additional Information
and are included therein in reliance upon such reports and upon the authority of
such firm as experts in accounting and auditing.
PURCHASE OF SHARES
Introduction
The Fund offers three classes of shares in each Portfolio to the general
public. Purchases of Class A shares of less than $1 million are sold with a
front end sales charge. Purchases of Class A shares of $1 million or more made
on or after May 1, 1995 are offered for sale at net asset value without a front
end sales charge but may be subject to a CDSC upon redemption. Class B shares
are sold without a front end sales charge but may be subject to a CDSC upon
redemption. Class C shares are sold without a front end sales charge, but may
be subject to a CDSC upon redemption. Shares of all classes of the Money Market
Fund are sold at net asset value (without the imposition of a front end sales
charge or CDSC). See "MULTIPLE PRICING SYSTEM" for a discussion of factors to
consider in selecting which class of shares to purchase.
Shares are offered continuously for sale through securities dealers and
banks which have executed an agreement (a "Dealer Agreement") with NASL
Financial, the distributor of the Fund's shares (in such capacity, the
"Distributor"). Certain States require that purchases of shares of the Fund be
made only through a broker-dealer registered in the State.
The initial purchase of any class of shares in any Portfolio must be at
least $1,000, with the exception that the initial purchase to a retirement plan
account may be made with a minimum of $50. In addition, an account can be
established with a minimum of $50 if the account will be receiving periodic,
regular investments through programs such as Automatic Investment Plans,
Automatic Dividend Diversification, and Systematic Investing (see "SHAREHOLDER
SERVICES -- Additional Shareholder Privileges" for a description of these
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programs). The minimum for subsequent investments is $50.
When purchasing shares of any Portfolio of the Fund, investors must specify
whether the purchase is for Class A, Class B or Class C shares.
General Methods of Purchasing Shares
1. By Mail. To make an initial account purchase, mail a check made
payable in U.S. dollars to "North American Funds" with a completed New Account
Application (copy enclosed with this Prospectus) to:
North American Funds
P.O. Box 8505
Boston, MA 02266-8505
Third party checks which are payable to an existing shareholder of the Fund who
is a natural person (as opposed to a corporation or partnership) and endorsed
over to the Fund will be accepted.
To make a purchase of shares to an existing North American Funds account,
please note your account number on the check and forward it with an account
investment slip to the above address.
Note: To establish certain tax deferred retirement plan accounts, such as IRAs,
you will be required to complete a separate application which may be obtained
from the Distributor or a securities dealer who has a Dealer Agreement with the
Distributor.
2. By Federal Funds Wire. Shares may be purchased in any Portfolio by
wire transfer. To obtain instructions for Federal Funds Wire purchases, please
contact the Customer Service Department at (800) 872-8037.
3. Through a Securities Dealer. You may purchase shares by contacting a
securities dealer who has a Dealer Agreement with the Distributor.
Orders for shares of all Portfolios except the Money Market Fund will be
assigned the next closing price after receipt of the order. Orders for the
Money Market Fund will be assigned the next closing price after the payment has
been converted to Federal Funds and dividends will begin to accrue on the
business day after such conversion. While orders for shares of the Strategic
Income, Investment Quality Bond, U.S. Government Securities and National
Municipal Bond Funds are assigned the next closing price after receipt of the
order, dividends will begin to accrue on the business day after the purchase has
been converted into Federal Funds.
Share Price
The public offering price of the Class A shares of each Portfolio is the
net asset value per share (next determined following receipt of an order) plus,
in the case of all Portfolios except the Money Market Fund, a front end sales
charge, if applicable. The share price for Class B shares and Class C shares is
the net asset value per share (next determined following receipt of an order).
Class A Shares
The public offering price for purchases of Class A shares of less than $1
million is the net asset value per share plus a front end sales charge,
expressed as a percentage of the offering price as set forth in the table below.
No front end sales charge is imposed on the purchase of Class A shares of the
Money Market Fund. However, when Class A shares of the Money Market Fund on
which no sales charge has been paid or waived are exchanged for Class A shares
of another Portfolio, the sales charge applicable to purchases of Class A shares
will be assessed at that time. Purchases of Class A shares of $1 million or
more are offered for sale at net asset value subject to a CDSC of 1% of the
dollar amount subject thereto if redeemed within one year of purchase. See
"PURCHASES OF SHARES --Contingent Deferred Sales Charge" below. The CDSC may be
waived on certain redemptions of shares. See "PURCHASES OF SHARES - Waiver of
CDSC."
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<PAGE>
<TABLE>
<CAPTION>
Class A Sales Charge Table
Concession to
Percentage of Broker Dealer as
Amount of Percentage of the Net Amount a Percentage of
Purchase Payment the Offering Price Invested Offering Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000...... 4.75% 4.99% 4.00%
$100,000 but less than
$250,000................ 4.00% 4.17% 3.25%
$250,000 but less than
$500,000................ 3.00% 3.09% 2.50%
$500,000 but less than
1 million............... 2.25% 2.30% 1.75%
$1 million or more...... none* none* See below**
</TABLE>
*A contingent deferred sales charge may apply. See "PURCHASES OF SHARES -
Contingent Deferred Sales Charge."
**For purchases of Class A shares of $1 million or more the Distributor will pay
a commission to dealers as follows: 1.00% on sales up to $5 million (0.50% for
sales of the National Municipal Bond Fund), plus 0.50% of the amount in excess
of $5 million; provided, however, that the Distributor may pay a commission on
sales in excess of $5 million of up to 1.00% to certain dealers which, at the
Distributor's invitation, enter into an agreement with the Distributor in which
the dealer agrees to return any commission paid to it on the sale (or a pro rata
portion thereof) if the shareholder redeems his shares within a period of time
after purchase as specified by the Distributor. Purchases of $1 million or more
for each shareholder account will be aggregated over a 12 month period
(commencing from the date of the first such purchase) for purposes of
determining the level of commission to be paid during that period with respect
to such account.
The Distributor may reallow concessions to securities dealers with whom it
has agreements and retain the balance over such concessions, and at times the
Distributor may reallow the entire front end sales charge to such dealers. In
such circumstances, dealers may be deemed to be underwriters under the 1933 Act.
Also, during an initial offering period following the introduction of a new
portfolio, and from time to time thereafter, additional amounts may be paid by
the Distributor or its promotional agent that would result in total dealer
concessions exceeding the offering price.
The Distributor may also pay banks and other financial service firms
("Service Organizations") that provide services for their clients to facilitate
transactions in Class A shares of a Portfolio, a transaction fee up to an amount
equal to the greater of the full applicable front end sales charge or the
"Concession to a Broker Dealer as a Percentage of Offering Price" as shown in
the above table. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. If banking firms
are prohibited from acting in any capacity or providing any of the described
services, management will consider what action, if any, is appropriate. It is
not anticipated that termination of a relationship with a bank would result in
any material adverse consequences to a Portfolio. In addition, State securities
laws may differ from federal laws regarding Service Organizations which may be
required to register under State securities laws as brokers and/or dealers.
Reduced Sales Charges
Investors purchasing Class A shares may be able to benefit from a reduction
or elimination of the front end sales charge through several purchase plans.
Right of Accumulation. For the purposes of determining which sales charge
level in the table above is applicable to a purchase of Class A shares,
investors may combine the total of the value of the shares being purchased with
the amount equal to the current net asset value of the investor's holdings of
shares in all Portfolios of the Fund, including holdings in Class B and Class C
shares, but excluding shares purchased or held in the Money Market Fund. Also,
for purposes of the foregoing calculation, shares (including holdings in Class B
and Class C shares, but excluding shares purchased or held in the Money Market
Fund) beneficially owned by the investor's spouse and the investor's children
under the age of 21 may, upon written notice to the transfer agent, also be
included in the investor's beneficial holdings at
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the current net asset value to reach a level specified in the above table. The
investor must notify the transfer agent in writing of all share accounts to be
considered in exercising the right of accumulation described above.
Statement of Intention. For the purposes of determining which sales charge
level in the table above is applicable to a purchase of Class A shares,
investors may also establish a total investment goal in shares of the Fund to be
achieved over a thirteen-month period and may purchase Class A shares during
such period at the applicable reduced front end sales charge. All shares,
including Class B shares and Class C shares (but excluding shares purchased or
held in the Money Market Fund), previously purchased and still beneficially
owned by the investor and his or her spouse and children under the age of 21
may, upon written notice to the transfer agent, also be included at the current
net asset value to reach a level specified in the table above.
Shares totaling 5% of the dollar amount of the Statement of Intention will
be held in escrow by the Transfer Agent in the name of the purchaser. The
effective date of a Statement of Intention may be back-dated up to 90 days, in
order that any investments made during this 90-day period, valued at the
purchaser's cost, can be applied to the fulfillment of the Statement of
Intention goal.
The Statement of Intention does not obligate the investor to purchase, nor
the Fund to sell, the indicated amount. In the event the investment goal is not
achieved within the thirteen-month period, the purchaser is required to pay the
front end sales charge that would otherwise have applied to the purchases of
Class A shares made during this period. If a payment is due under the preceding
sentence, it must be made directly to the Distributor within twenty days of
notification or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain such difference. Certain transitional rules apply to
shareholders who had a statement of intention in effect prior to April 1, 1994.
For additional information, shareholders should contact the Fund, Wood Logan or
eligible securities dealers.
Group Purchases. Subject to applicable regulations, reduced front end
sales charges as set forth in the "Class A Sales Charge Schedule" are available
on the purchase of Class A shares when sales are made to a group of individuals
in such a manner as results in a savings of sales expenses. Approval of group
purchase reduced front end sales charge plans is subject to the discretion of
the Distributor.
Certain Qualified Purchasers. No front end sales charge or CDSC is
applicable to any sale of Class A shares to a Trustee or officer of the Fund, or
to the immediate families (i.e., the spouse, children, mother or father) of such
persons, or any full-time employee or registered representative of
broker/dealers having Dealer Agreements with the Distributor ("Selling Broker")
and their immediate families (or any trust, pension, profit sharing or other
benefit plan for the benefit of such persons), or any full-time employee of a
bank, savings and loan, credit union or other financial institution that
utilizes a Selling Broker to clear purchases of Fund shares, and their immediate
families. In addition, no front end sales charge or CDSC is applicable on any
sale to North American Security Life Insurance Company or any of its affiliates,
the Subadvisers or Wood Logan, or to a director, officer, full-time employee or
sales representative of North American Security Life Insurance Company or any of
its affiliates, the Subadvisers or any of their affiliates or of Wood Logan, or
to the immediate families of such persons, or any trust, pension, profit-sharing
or other benefit plan for the benefit of such persons.
No front end sales charge or CDSC on Class A shares is applicable to
continuing purchase payments made in connection with Code Section 401 qualified
plans that were invested in the Fund prior to April 1, 1994.
A qualified retirement plan that is currently a shareholder of the Fund may
make additional purchases of Class A shares at net asset value (i.e., without
the imposition of a front end sales load or CDSC). A commission or transaction
fee of 1.00% will be paid by the Distributor to broker-dealers, banks and other
financial service firms subject to a chargeback to the firm for redemptions made
within one year from the date of purchase.
Class A shares may be purchased at net asset value by certain broker-
dealers and other financial institutions which have entered into an agreement
with the Distributor, which includes a requirement that such shares be sold for
the benefit of clients participating in a "wrap account" or a similar account
program under which such clients pay a fee to such broker-dealer or other
financial institution. Class A shares may also be purchased at net asset value
by registered investment advisers for the benefit of client accounts if the
adviser charges a fee (other than brokerage commissions) for his services.
Class B Shares Class B shares are offered for sale at net asset value, and are
offered for purchases of $250,000 or less. Class B shares which are redeemed
within six years of purchase are subject to a CDSC at the rates set forth in the
table below, charged as a percentage of the dollar amount subject thereto. See
"PURCHASES OF SHARES - Contingent Deferred Sales Charge."
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<TABLE>
<CAPTION>
Class B CDSC Table
CDSC
as a Percentage of
Year(s) Since Purchase Order Dollar Amount Subject to Charge
- --------------------------------------------------------------------
<S> <C>
Up to 2 years 5%
2 years or more but less than 3 years 4%
3 years or more but less than 4 years 3%
4 years or more but less than 5 years 2%
5 years or more but less than 6 years 1%
6 or more years 0%
</TABLE>
The CDSC may be waived on certain redemption of shares. See "PURCHASES OF
SHARES - Waiver of CDSC"
Class C Shares
Class C shares are offered for sale at net asset value and are offered for
purchases of less than $1 million. Class C shares are sold without a front end
sales charge. Class C shares purchased on or after May 1, 1995 are subject to a
CDSC of 1% of the dollar amount subject thereto during the first year after
purchase. Shares purchased prior to May 1, 1995 are not subject to a CDSC. See
"PURCHASES OF SHARES - Contingent Deferred Sales Charge"
The CDSC may be waived on certain redemptions of shares. See "PURCHASES OF
SHARES - Waiver of CDSC."
Contingent Deferred Sales Charge
Class A shares (purchases of $1 million or more) and Class C shares
purchased on or after May 1, 1995 which are redeemed within one year of purchase
are subject to a CDSC at the rate of 1% of the dollar amount subject thereto.
Class B shares which are redeemed within six years of purchase are subject to a
CDSC at the rates set forth above under "PURCHASES OF SHARES - Class B Shares."
The CDSC generally is not applicable with respect to redemption of shares of the
Money Market Fund. However, in the case of shares of the Money Market Fund
which were obtained through an exchange of the same class of shares of another
Portfolio, such shares will be subject to any applicable CDSC due at redemption.
Similarly, shares initially purchased as shares of the Money Market Fund which
are subsequently exchanged for the same class of shares of other Portfolios will
be subject to any applicable CDSC due at redemption. See "SHAREHOLDER SERVICES
- - Exchange Privilege." The CDSC is assessed on an amount equal to the lesser of
the net asset value at redemption or the initial purchase price of the shares
being redeemed. Solely for purposes of determining the amount of time from the
purchase of shares until redemption, all orders accepted during a month are
aggregated and deemed to have been made on the last business day of that month.
In determining the amount of the CDSC that may be applicable to a
redemption, any shares in the redeeming shareholder's account that may be
redeemed without charge will be assumed to be redeemed prior to those subject to
a charge . In addition, if the CDSC is determined to be applicable to redeemed
shares, it will be assumed that shares held for the longest duration are
redeemed first. No CDSC is imposed on (i) amounts representing increases in the
net asset value per share; or (ii) shares acquired through reinvestment of
income dividends or capital gains distributions. Because shares of the Money
Market Fund are not subject to any distribution or service fees, the CDSC period
is tolled for any period of time in which shares are held in that Portfolio.
For example, if Class C shares of a Portfolio other than the Money Market Fund
are exchanged for the same class of shares of the Money Market Fund six months
after purchase and are subsequently redeemed one year later, these shares are
subject to a CDSC since the CDSC period is tolled during the period of time the
shares are in the Money Market Fund. Furthermore, when Money Market Fund shares
are exchanged for the same class of shares of any other Portfolio, the CDSC
becomes (or, in the case of Money Market Fund shares which were subject to a
CDSC prior to a previous exchange for Money Market Fund shares, again becomes)
applicable to those shares commencing at the time of exchange. If such shares
are subsequently redeemed, only time of ownership spent in Portfolios other than
the Money Market Fund counts toward determining the applicable CDSC.
Waiver of CDSC
Systematic Withdrawal Plan. The CDSC on Class A, Class B and Class C
shares may be waived in connection with a Systematic Withdrawal Plan. See
"SHAREHOLDER SERVICES - Systematic Withdrawal Plan." For account opened after
May 1, 1995, up to 12% of
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the value of an account (i.e., up to 1% per month of the value of the account at
the time the systematic withdrawal is taken) may be withdrawn without the
imposition of CDSC. If distributions (dividends and capital gains) are
reinvested into an account and systematic withdrawals are also taken from the
account, the distributions (which are never assessed a CDSC) will be included in
the calculation of the 1% per month that may be withdrawn without the imposition
of a CDSC.
Qualified Retirement Plans. The CDSC on Class A, Class B and Class C
shares may be waived in connection with redemptions from qualified retirement
plans (other than Individual Retirement Accounts ("IRAs")) in the case of (i)
death or disability (as defined in section 72(m)(7) of the Code, as amended from
time to time) of the participant in the retirement plan, (ii) required minimum
distributions from the retirement plan due to attainment of age 70 1/2, (iii)
tax-free return of an excess contribution to the retirement plan, (iv)
retirement of the participant in the retirement plan, (v) a loan from the
retirement plan (repayment of a loan, however, will constitute a new sale for
purposes of assessing the CDSC), (vi) "financial hardship" of the participant in
the retirement plan, as that term is defined in Treasury Regulation 1.401(k)-
1(d)(2), as amended from time to time, (vii) termination of employment of the
participant in the plan (excluding, however, a partial or other termination of
the retirement plan), and (viii) the plan participant obtaining age 59 1/2.
Other Waivers. The CDSC on Class A, Class B and Class C shares may be
waived in connection with (i) redemptions made following the death of a
shareholder, (ii) redemptions effected pursuant to the Fund's right to liquidate
a shareholder's account if the aggregate net asset value of the shares held in
the account is less than the applicable minimum account size and (iii) a tax-
free return of an excess contribution to any retirement plan.
Other Dealer Compensation
The Distributor may, either directly or through Wood Logan, from time to
time assist dealers by, among other things, providing sales literature to, and
holding educational programs for the benefit of, dealers' registered
representatives. Participation of registered representatives in such
informational programs may require the sale of minimum dollar amounts of shares
of the Portfolios of the Fund. The Distributor and/or Wood Logan will also
provide additional promotional incentives to dealers in connection with sales of
shares of all classes of the Portfolios of the Fund. These incentives shall
include payment for travel expenses, including lodging (which may be at a luxury
resort), incurred in connection with trips taken by qualifying registered
representatives and members of their families within or outside the United
States. Incentive payments will be provided for out of the front end sales
charges and CDSCs retained by the Distributor, any applicable Distribution Plan
payments or the Distributor's other resources. Other than Distribution Plan
payments, the Fund does not bear distribution expenses. The staff of the SEC
has indicated that dealers who receive more than 90% of the sales charge may be
considered underwriters.
Distribution Expenses
In addition to the front-end sales charge which may be deducted at the time
of purchase of Class A shares of less than $1 million and the CDSC which may
apply on redemptions of Class A shares (purchases of $1 million or more), Class
B shares, and Class C shares, each class of shares of each Portfolio is
authorized under the Distribution Plan applicable to that class of shares (the
"Class A Plan," the "Class B Plan" and the "Class C Plan," collectively, the
"Plans") adopted pursuant to Rule 12b-1 under the 1940 Act to use the assets
attributable to such class of shares of the Portfolio to finance certain
activities relating to the distribution of shares to investors. The Plans are
"compensation" plans providing for the payment of a fixed percentage of average
net assets to finance distribution expenses. The Plans provide for the payment
by each class of shares of each Portfolio of the Fund, other than the Money
Market Fund, of a monthly distribution and service fee to the Distributor, as
principal underwriter for the Fund. Portions of the fees prescribed below are
used to provide payments to the Distributor, to promotional agents, to brokers,
dealers or financial institutions (collectively, "Selling Agents") and to
Service Organizations for ongoing account services to shareholders and are
deemed to be "service fees" as defined in paragraph (b)(9) of Section 26 of the
Rules of Fair Practice of the NASD.
Under the Class A Plan, Class A shares of each Portfolio (except as
described in the next sentence) are subject to a fee of up to .35% of their
respective average annual net assets, five-sevenths of which (.25%) constitutes
a "service fee." Class A shares of the Money Market Fund bear no such fees and
Class A shares of the National Municipal Bond Fund are subject to a fee of up to
.15% of Class A average annual net assets, the entire amount of which
constitutes a "service fee." Under the Class B Plan, Class B shares of each
Portfolio (with the exception of the Money Market Fund) are subject to a fee of
up to 1.00% of their respective average annual net assets, one-fourth (.25%) of
which constitutes a "service fee." Under the Class C Plan, Class C shares of
each Portfolio (with the exception of the Money Market Fund) are subject to a
fee of up to 1.00% of their respective average annual net assets, one-fourth
(.25%) of which constitutes a "service fee."
Payments under the Plans are used primarily to compensate the Distributor
for distribution services provided by it in connection with the offering and
sale of the applicable class of shares, and related expenses incurred, including
payments by the Distributor to compensate or reimburse Selling Agents for sales
support services provided and related expenses incurred by such Selling Agents.
Such services and expenses may include the development, formulation and
implementation of marketing and promotional activities, the
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preparation, printing and distribution of prospectuses and reports to recipients
other than existing shareholders, the preparation, printing and distribution of
sales literature, expenditures for support services such as telephone facilities
and expenses and shareholder services as the Fund may reasonably request,
provision to the Fund of such information, analyses and opinions with respect to
marketing and promotional activities as the Fund may, from time to time,
reasonably request, commissions, incentive compensation or other compensation
to, and expenses of, account executives or other employees of the Distributor or
Selling Agents, attributable to distribution or sales support activities,
respectively, overhead and other office expenses of the Distributor or Selling
Agents, attributable to distribution or sales support activities, respectively,
and any other costs and expenses relating to distribution or sales support
activities. The Distributor may pay directly Selling Agents and may provide
directly the distribution services described above, or it may arrange for such
payment or the performance of some or all of such services by Wood Logan, the
Fund's exclusive promotional agent, at such level of compensation as may be
agreed to by the Distributor and Wood Logan.
The Distributor currently pays a trail commission to securities dealers,
with respect to accounts that such dealers continue to service for shares sold
after April 1, 1994 as follows: Class A shares - .25% annually, commencing from
the date the purchase order is accepted, for all Portfolios (except the National
Municipal Bond Fund, for which the trail commission is .15%, and the Money
Market Fund, for which no trail commission is paid); Class B shares - .25%
annually, for all Portfolios (except the National Municipal Bond Fund, for which
the trail commission is .15%, and the Money Market Fund, for which no trail
commission is paid); and Class C shares - 1.0% annually, for all Portfolios
other than the Investment Quality Bond, U.S. Government Securities, National
Municipal Bond and Money Market Funds and .90% annually, for the Investment
Quality Bond, U.S. Government Securities and National Municipal Bond Fund (no
trail commission is paid on the Money Market Fund). The trail commission payable
following conversion of Class B and Class C shares to Class A shares will be in
accordance with the amounts paid for Class A shares. For Class B and Class C
shares sold on or after May 1, 1995, trail commissions commence 13 months after
purchase. For Class B and Class C shares sold prior to May 1, 1995, trail
commissions commence the date the purchase order is accepted. Trail
commissions for shares sold prior to April 1, 1994 will be paid as noted below.
In the case of Class B shares and Class C shares sold on or after May 1,
1995, the Distributor will advance to securities dealers the first year service
fee at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefor, the Distributor may retain the service fee paid by the
Fund with respect to such shares for the first year after purchase. In the case
of sales of Class B shares, the Distributor will pay each dealer a fee of 4% of
the amount of Class B shares purchased (0.25% is the advancement of the first
year service fee and the remainder is a commission or transaction fee). No
commission or transaction fee is paid for sales of shares of Class B of the
Money Market Fund. In the case of sales of Class C shares, the Distributor will
pay each securities dealer a fee of 1% (0.90% in the case of the Investment
Quality Bond, U.S. Government Securities and National Municipal Bond Fund of the
purchase price of Class C shares purchased through such securities dealer (0.25%
is the advancement of the first year service fee and the remainder is a
commission or transaction fee). No commission or transaction fee is paid for
sales of shares of Class C of the Money Market Fund.
The Distributor will also pay a trail commission to securities dealers,
with respect to accounts that such dealers continue to service for shares sold
prior to April 1, 1994, as follows: (i) for the Equity-Income, Growth and
Income, Global Equity and Balanced Funds, 0.90%, (ii) for the U.S. Government
Securities, Investment Quality Bond and Strategic Income Funds, 0.35% and for
the National Municipal Bond Fund, 0.15%. No trail commission will be paid on
shares of the Money Market Fund. The trail commission above will be paid on
shares purchased prior to April 1, 1994 provided the shares remain in the same
Portfolio. If the shares are exchanged or transferred from the Portfolio at any
time on or after April 1, 1994, then the trail commission for shares sold after
April 1, 1994 as stated above will be paid.
The distribution and service fees attributable to the Class B shares and
the Class C shares are designed to permit an investor to purchase shares without
the assessment of a front end sales charge, and, with respect to the Class C
shares, without the assessment of a CDSC as well, and at the same time permit
the Distributor to compensate securities dealers with respect to sales of such
shares.
The Distributor is authorized by each Plan to retain any excess of the fees
it receives thereunder over its payments to selected dealers or Wood Logan and
its expenses incurred in connection with providing distribution services. Thus,
payments under a Plan may result in a profit to the Distributor. Each Plan also
provides that to the extent that any payments by any class of any Portfolio of
the Fund to the Distributor in its capacity as investment adviser to the Fund,
such as for investment management fees, may be deemed to be an indirect payment
of distribution expenses, those indirect payments are deemed to be authorized by
the Plans. Payments made under the Plans are subject to quarterly review by the
Trustees and the Plans are subject to annual review and approval by the
Trustees.
In adopting the Plans, the Trustees determined that the adoption of the
Plans is in the best interests of the Fund and its shareholders, that there is a
reasonable likelihood that the Plans will benefit the Fund and its shareholders,
and that the Plans are essential to, and an integral part of, the Fund's program
for financing the sale of shares of the various Portfolios of the Fund to the
public.
The Distributor, a wholly-owned subsidiary of North American Security Life
Insurance Company, is a broker/dealer registered under the Securities Exchange
Act of 1934, as amended (the "1934 Act") and is a member of the NASD. The
Distributor's address is the same as that of the Fund and the Distributor also
serves as the investment adviser to the Fund as described above under
"MANAGEMENT
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OF THE FUND." The Distributor has entered into an exclusive promotional agent
agreement with Wood Logan pursuant to which Wood Logan will solicit securities
dealers to sell Fund shares, offer sales training to registered representatives
of such dealers, prepare and distribute certain sales and promotional materials
and otherwise assist in the distribution of Fund shares. For providing such
services, the Distributor will pay Wood Logan such amounts as are agreed to from
time to time pursuant to the promotional agent agreement. Wood Logan, a
broker/dealer registered under the 1934 Act and a member of the NASD, is a
subsidiary of Wood Logan Associates, Inc., a corporation which is a wholly owned
subsidiary of a holding company that is 85% owned by Manulife and approximately
15% owned by principals of Wood Logan Associates. The address of Wood Logan is
1455 East Putnam Avenue, Old Greenwich, Connecticut 06870.
SHAREHOLDER SERVICES
Further information on any of the programs described in the following
sections may be obtained from the Fund, Wood Logan and eligible securities
dealers. For additional information, shareholders should contact the Fund, Wood
Logan or eligible securities dealers.
Automatic Investment Plan
Shareholders who open an account who wish to make subsequent monthly
investments in a Portfolio may establish an Automatic Investment Plan as part of
the initial Application or subsequently by submitting an Application. Under
this plan, on or about the tenth day of each month the Transfer Agent will debit
the shareholder's bank account in the amount specified by the shareholder (which
monthly amount may not be less than $50). The proceeds will be invested in
shares of the specified class of a Portfolio of the Fund at the applicable
offering price determined on the date of the debit. In the event of a full
exchange, this plan will follow into the new Portfolio unless otherwise
specified. Participation in the Automatic Investment Plan may be discontinued
upon 30 days' written notice to the Transfer Agent, or if a debit is not
honored.
Exchange Privilege
Shares of any Portfolio may be exchanged for shares of the same class of
any other Portfolio with the same account registration at the relative net asset
value per share without the imposition of any front end sales charge or CDSC,
except as described below. Shares of one class may not be exchanged for shares
of any other class of any Portfolio.
Class A Shares - Class A shares of any Portfolio may be exchanged for Class
A shares of any other Portfolio at the relative net asset value per share
without the imposition of a front end sales charge or CDSC which would be due
upon redemption with respect to the shares being exchanged. However, a front
end sales charge will be imposed with respect to Class A shares (purchases of
less than $1 million) which are issued upon an exchange from Class A Money
Market Fund shares and as to which no front end sales charge had been previously
paid or waived. See "SHAREHOLDER SERVICES - Money Market Fund - Assessment of
CDSC."
Class B Shares - Class B shares of any Portfolio may be exchanged for Class
B shares of any other Portfolio, including the Money Market Fund, at the
relative net asset value per share without the imposition at that time of any
CDSC which would be due upon redemption with respect to the shares being
exchanged. See "SHAREHOLDER SERVICES - Money Market Fund - Assessment of CDSC."
Class C Shares - Class C shares of any Portfolio may be exchanged for Class
C shares of any other Portfolio, including the Money Market Fund, at the
relative net asset value per share without the imposition at that time of any
CDSC which would be due upon redemption with respect to the shares being
exchanged. See "SHAREHOLDER SERVICES - Money Market Fund - Assessment of CDSC."
Money Market Fund - Assessment of CDSC - The CDSC period for Class A shares
(purchases of $1 million or more), Class B shares and Class C shares is tolled
for any period of time in which they are held in the Money Market Fund. For
example, if Class C shares of a Portfolio, other than the Money Market Fund, are
exchanged for Class C shares of the Money Market Fund six months after purchase
and are subsequently redeemed one year later, these Class C shares are subject
to a CDSC since the CDSC period is tolled during the period of time the shares
are in the Money Market Fund. Furthermore, when Money Market Fund shares are
exchanged for shares of any other Portfolio, the CDSC becomes (or, in the case
of Money Market Fund shares which were subject to a CDSC prior to a previous
exchange for Money Market Fund shares, again becomes) applicable to those shares
commencing at the time of exchange. If such shares are subsequently redeemed,
only time of ownership spent in Portfolios other than the Money Market Fund
counts toward determining the applicable CDSC.
General Information - Exchanges are regarded as sales for federal and
state income tax purposes and could result in a gain or loss, depending on the
original cost of shares exchanged. If the exchanged shares were acquired within
the previous 90 days, the gain or loss may have to be computed without regard to
any sales charges incurred on the exchanged shares (except to the extent those
sales charges exceed the sales charges waived in connection with the exchange).
See "GENERAL INFORMATION -- Taxes." Exchanges are free and unlimited in number
and will usually occur on the same day as requested. The terms of the foregoing
exchange privilege are subject to change and the
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<PAGE>
privilege may be terminated at any time. The exchange privilege is only
available where the exchange may legally be made.
By mail - an exchange will be honored by a written letter of request to the
Fund if signed by all registered owners of the account.
By telephone - All accounts are eligible for the telephone exchange
privilege. See "-- ADDITIONAL SHAREHOLDER PRIVILEGES -- Telephone Exchanges."
Transfer of Shares
Shareholders may transfer fund shares to family members and others at any
time without incurring a front end sales charge (Class A shares purchases of
less than $1 million) and without a CDSC being imposed at that time (Class A
shares purchases of $1 million or more, Class B shares and Class C shares).
Shareholders should consult their tax adviser concerning such transfers.
Redemption of Shares
You may redeem shares of your account in any amount and at any time at the
applicable net asset value next determined after the request for redemption is
received in proper order by the Fund. As described under "PURCHASE OF SHARES,"
redemptions of Class A shares purchases of $1 million or more, Class B shares
and Class C shares and may subject to a CDSC. The Fund will normally send the
proceeds from a redemption (less any applicable CDSC) on the next business day,
but if making immediate payment could adversely affect the Fund, it may take up
to seven days for payment to be made. Payment may also be delayed if the shares
to be redeemed were purchased by check and that check has not cleared.
General Methods of Redeeming Shares
1. By Mail. You may redeem shares by mail by sending a written request for
the redemption to the Fund. The request will be processed after receipt of all
required documents in proper order: certificates of beneficial interest (if
issued); a stock power signed by all account owners exactly as the account is
registered specifying the number of shares or dollars to be redeemed; and in the
case of a redemption to be paid to a person or address other than the person or
address of record and/or in an amount greater than $50,000, a guarantee of the
stock power signatures(s) without restriction, condition or qualification by an
officer of a commercial bank, Trust Company, Federal savings and loan
institution, member firm of a national securities exchange or NASD member. If
shares are held in the name of a corporation, trust, estate, custodianship,
partnership or pension or profit sharing plan, additional documentation may be
necessary.
2. Through a Securities Dealer. You may sell your shares by contacting a
securities dealer who has a Dealer Agreement with the Distributor. (See
"GENERAL -- Repurchase of Shares" in the Statement of Additional Information for
more details.) The dealer may assess a nominal fee for this service.
Reinstatement Privilege
With regard to Class A shares (purchases of less than $1 million), you may
reinstate at net asset value any portion of shares which have been previously
redeemed if the redemption occurred within 90 days of the request. With regard
to Class A shares (purchases of $1 million or more), Class B shares and Class C
shares and, if an investor redeems these shares and pays a CDSC upon redemption,
and then uses those proceeds to purchase the same class of shares of any
Portfolio within 90 days, the shares purchased will be credited with any CDSC
paid in connection with the prior redemption.
Any gain recognized on a redemption or repurchase is taxable despite the
reinstatement in the Portfolio. Any loss realized as a result of the redemption
or repurchase may not be allowed as a deduction for federal income tax purposes
but may be applied, depending on the amount reinstated, to adjust the cost basis
of the shares acquired upon reinstatement. In addition, if the shares redeemed
or repurchased had been acquired within the 90 days preceding the redemption or
repurchase, the amount of any gain or loss on the redemption or repurchase may
have to be computed without regard to any sales charges incurred on the redeemed
or repurchased shares (except to the extent those sales charges exceed the sales
charges waived in connection with the reinstatement). See "GENERAL INFORMATION
- -- Taxes."
Minimum Account Balance
The Fund reserves the right to involuntarily redeem your account any time
the value of your account falls below $500 as a result of redemption, with the
exception of a retirement plan account and with respect to an account
established with a minimum of $50 pursuant to programs such as Automatic
Investment Plans, Automatic Dividend Diversification, and Systematic Investing.
You will be notified in writing prior to the redemption and be allowed 30 days
to make additional investments before the redemption is processed.
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<PAGE>
Redemption In Kind
The Trustees of the Fund reserve the right to redeem proceeds in whole or
in part by a distribution in kind of marketable securities held by a Portfolio
of the Fund. See "GENERAL -- Redemption in Kind" in the Statement of Additional
Information for more details.
Additional Shareholder Privileges
Certain privileges listed in this section may not be offered by the Fund if you
hold shares with the Fund in the "street name" of a financial institution, or if
the account is networked through National Securities Clearing Corporation
(NSCC).
Automatic Investment Plan
If you open an account and wish to make subsequent, periodic investments in
a Portfolio by electronic funds transfer from a bank account, you may establish
an Automatic Investment Plan on your account. The bank at which your account is
maintained must be a member of the Automated Clearing House (ACH). The
frequency with which the investments occur is specified by you (monthly, every
alternate month, quarterly, etc.) with the exception that no more than one
investment will be processed each month. On or about the tenth of the month,
the Fund will debit your bank account in the specified amount (minimum of $50
per draft) and the proceeds will be invested at the applicable offering price
determined on the date of the debit. In the event of a full exchange, this plan
will follow into the new Portfolio unless otherwise specified.
Automatic Dividend Diversification (ADD)
The ADD program allows you to have all dividends and any other
distributions from a Portfolio automatically used to purchase shares of the same
class of any other Portfolio of the Fund. The receiving account must be in the
same name as your existing account. The purchase of shares to the Portfolio
receiving the cross-investment of the dividends will be using the net asset
value at the close of business of the dividend payable date.
Systematic Investing
You may request that your shares of any class of the Money Market, U.S.
Government Securities or National Municipal Bond Fund be exchanged monthly for
shares of the same class of up to three other Portfolios. A predetermined
dollar amount of at least $50 per exchange will then occur on or about the 15th
of each month in accordance with the instructions you provided on the initial
account application or on the Systematic Investing application. This Systematic
Investing program is also referred to as "Dollar Cost Averaging."
Systematic Withdrawal Plan
You may establish a plan for redemptions to be made automatically at
monthly, quarterly, semiannual or annual intervals with payments sent directly
to you or to persons designated by you as recipients of the withdrawals. Up to
12% of the value of an account (i.e., up to 1% per month of the value of the
account at the time the Systematic Withdrawal is taken) may be withdrawn without
the imposition of CDSC. See "PURCHASES OF SHARES - Waiver of CDSC." Requests
for this service not made on the initial application require signature
guarantees unless the payments are to be made to you and mailed to the address
of record on your account. You are required to have a minimum account value of
$10,000 per Portfolio in order to establish this plan. Maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares may
be disadvantageous to you because of the sales charges on certain purchases and
redemptions.
The redemptions will occur on or about the 25th day of the month and the
checks will generally be mailed within two days after the redemption occurs. No
redemption will occur if the account balance falls below the amount required to
meet the requested withdrawal amount. This service may be terminated at any
time, and, while no fee is currently charged (although a CDSC may be
applicable), the Distributor reserves the right to initiate a fee of up to $5
per withdrawal upon 30 days' written notice to the shareholder.
Checkwriting
Checkwriting is available only to Class A and Class C shareholders of the
U.S. Government Securities, National Municipal Bond and Money Market Funds. You
will be issued a book of blank checks if the request is indicated on the account
application and is accompanied by a correctly completed and endorsed signature
card. The checks may be made payable to the order of anyone in any amount not
less than $250. You should not attempt to close your account by check.
Checks which exceed the value of the account at the time of receipt by the
Fund will not be honored. In addition, the privilege will be invalid when your
account is closed.
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When a check is presented for payment, a sufficient number of shares will
be redeemed to cover the amount of the check and any applicable CDSC. If the
amount of the check plus any applicable CDSC is greater than the value of the
shares held in the shareholder's account, the check will be returned unpaid.
This privilege cannot be used for the redemption of shares held in
certificate form.
Telephone Transactions
Shareholders are permitted to request exchanges and/or redemptions by
telephone. The Fund will not be liable for following instructions communicated
by telephone that it reasonably believes to be genuine. The Fund will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine and may only be liable for any losses due to unauthorized or fraudulent
instructions where it fails to employ its procedures properly. Such procedures
include the following. Upon telephoning a request, shareholders will be asked
to provide their account number, and if not available, their social security
number. For the shareholder's and Fund's protection, all conversations with
shareholders will be tape recorded. All telephone transactions will be followed
by a confirmation statement of the transaction.
Telephone Exchanges. You are automatically authorized to effect telephone
exchanges by calling the Fund, unless you elect not to authorize telephone
exchanges in the Application (if you initially elect not to allow telephone
exchanges in the Application, you may request authorization by executing an
appropriate authorization form provided by the Fund upon request.) Exchanges
will only be made if proper account identification is given by the dealer or
shareholder of record. Requests will be processed on the same day as receipt of
the telephone call if the request is made before the close of the regularly
scheduled trading on the Exchange (normally 4:00 p.m. New York time).
This privilege cannot be used for the exchange of shares held in
certificate form.
Telephone Redemptions. You may request the option to redeem shares of any
Portfolio by telephone by completing the "Expedited Telephone Redemptions"
portion of the account application. In order to obtain that day's closing net
asset value on the redemption, the telephone call must be received by the Fund
prior to the close of the regularly scheduled trading on the Exchange (normally
4:00 p.m. New York time).
Payment for shares will be made by federal wire or by mail as specified by
you in the Application. Payment will normally be sent on the business day
following the date of receipt of the request. Payment by wire to your bank
account must be in amounts of $1000 or more. Although the Fund does not assess
a charge for wire transfers, your bank may assess a charge for the transaction.
Payments by mail may only be sent to your account address of record and may only
be payable to the registered owner(s).
This privilege cannot be used for the redemption of shares held in
certificate form.
Certificates
Although the Fund does not recommend the issuance of certificates, shares
will be issued in certificate form if specifically requested by the shareholder.
How to Obtain Information on Your Investment
1. Confirmation of Share Transactions and Dividend Payments. Share
transactions in all Portfolios, other than trans-actions pursuant to a
Systematic Withdrawal Plan, Automatic Investment Plan, and Systematic Investing
Plan, will be confirmed immediately in the form of an account confirmation
statement which will be mailed to the account address of record.
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The Fund will confirm all account activity occurring within a calendar
quarter, including the payment of dividend and capital gain distributions and
transactions made as a result of a Systematic Withdrawal Plan, Automatic
Investment Plan, and Systematic Investing Plan, shortly after the end of each
calendar quarter.
The Fund also reserves the right to confirm, with respect to certain tax
qualified plans and certain group plans, purchases and sales of Fund shares on a
quarterly basis. Transactions in shares of the Money Market Fund, other than
those confirmed quarterly as set forth above, will be confirmed monthly.
A copy of all confirmation statements will be sent to the securities dealer
firm listed on your account.
2. Shareholder Inquiries. Please direct any questions or requests that
you may have concerning the Fund or your account by writing to North American
Funds, P.O. Box 8505, Boston, Massachusetts 02266-8505, or by calling the Mutual
Fund Customer Service Department at 1-800-872-8037.
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APPENDIX I
DEBT SECURITY RATINGS
Standard & Poor's Ratings Group ("S&P")
- -------------------------------
Commercial Paper:
A-1 The rating A-1 is the highest rating assigned by S&P to commercial
paper. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high for issuers
designated "A-1".
Bonds:
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB-B-
CCC-CC Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D Bonds rated D are in default. The D category is used when interest
payments or principal payments are not made on the date due even if
the applicable grace period has not expired. The D rating is also
used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
<TABLE>
<CAPTION>
Moody's Investors Service, Inc. ("Moody's")
- -------------------------------
<S> <C>
Commercial Paper:
P-1 The rating P-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated P-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory
obligations. P-1 repayment capacity will normally be evidenced by the
following characteristics: (1) leading market positions in
established industries; (2) high rates of return on funds employed;
(3) conservative capitalization structures with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
and (5) well established access to a range of financial markets and
assured sources of alternate liquidity.
P-2 Issuers rated P-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
</TABLE>
A-1
<PAGE>
================================================================================
<TABLE>
<CAPTION>
Bonds:
<S> <C>
Aaa Bonds which are rated Aaa by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge". Interest payments are protected
by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa by Moody's 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 which are rated A by Moody's 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 which are rated Baa by Moody's are considered as medium grade
obligations, that is, they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during other good and bad times over the
future. Uncertainty of position characterizes bond in this class.
B Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of
maintenance and other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
</TABLE>
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a mid-
range ranking; and the modifier "3" indicates that the issue ranks in the lower
end of its generic rating category.
<TABLE>
<CAPTION>
Fitch Investors Service, Inc. ("Fitch")
- -----------------------------
Commercial Paper:
<S> <C>
F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
F-2 Issues assigned this rating have a satisfactory degree of assurance
for timely payment but the margin of safety is not as great as for
issues assigned "F-1+" or "F-1".
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Bonds:
<S> <C>
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA".
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-
term debt of these issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD-DD- Bonds are in default on interest and/or principal payments. Such
and D bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the lowest
potential for recovery.
</TABLE>
Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the "AAA" category.
<TABLE>
<CAPTION>
Additional Moody's and S&P Municipal Bond Ratings
Moody's Ratings of State and Municipal Notes
<S> <C>
MIG-1/VMIG-1 Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior
liquidity support or broad-based access to the market for
refinancing.
MIG-2/VMIG-2 Notes which are rated MIG-2/VMIG-2 are of high quality. Margins
of protection are ample though not so large as in the preceding
group.
S&P Ratings of State and Municipal Notes
SP-1 Notes which are rated SP-1 have a very strong or strong capacity
to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2 Notes which are rated SP-2 have a satisfactory capacity to pay
principal and interest.
</TABLE>
A-3
<PAGE>
APPENDIX II
STRATEGIC INCOME FUND DEBT RATINGS
The average distribution of investments in corporate and government
bonds by ratings for the fiscal year ended October 31, 1996, calculated monthly
on a dollar-weighted basis, for the Strategic Income Fund, was as follows:
<TABLE>
<CAPTION>
Unrated but
of Comparable
Moody's Standard & Poor's Quality Percentage
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Aaa AAA 0% 36%
Aa AA 0% 2%
A A 0% 1%
Baa BBB 0% 3%
Ba BB 3% 8%
B B 3% 44%
Caa CCC 0% 0%
Ca CC 0% 0%
C C 0% 0%
D 0% 0%
Unrated as a Group: 6%
U.S. Government Securities* 0%
----
Total 100%
</TABLE>
The actual distribution of the Strategic Income Fund's corporate and
government bond investments by ratings on any given date will vary. In
addition, the distribution of the Portfolio's investments by ratings as set
forth above should not be considered as representative of the Portfolio's future
portfolio composition.
*Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
A-4
<PAGE>
INVESTMENT QUALITY BOND FUND DEBT RATINGS
The average distribution of investments in corporate and government bonds
by ratings for the fiscal year ended October 31, 1996, calculated monthly on a
dollar-weighted basis, for the Investment Quality Bond Fund, was as follows:
<TABLE>
<CAPTION>
Unrated but
of Comparable
Moody's Standard & Poor's Quality Percentage
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Aaa AAA 0% 6%II
Aa AA 0% 3%II
A A 0% 16%II
Baa BBB 0% 5%II
Ba BB 0% 4%II
B B 0% 6%II
Caa CCC 0% 0%II
Ca CC 0% 0%II
C C 0% 0%II
D 0% 0%II
Unrated as a Group: 0%II
U.S. Government Securities* 60%II
Total 100%
</TABLE>
The actual distribution of the Investment Quality Bond Fund's corporate and
government bond investments by ratings on any given date will vary. In
addition, the distribution of the Portfolio's investments by ratings as set
forth above should not be considered as representative of the Portfolio's future
portfolio composition.
*Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
A-5
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NORTH AMERICAN FUNDS
North American Funds (the "Fund") is a professionally managed open-end
investment company that currently has thirteen investment portfolios: the the
International Small Cap Fund, the Small/Mid Cap Fund, the Global Equity Fund
(formerly the Global Growth Fund), the Growth Equity Fund, the International
Growth and Income Fund, the Growth and Income Fund, the Equity-Income Fund
(formerly, the Value Equity Fund and prior thereto the Growth Fund), the
Balanced Fund (formerly the Asset Allocation Fund), the Strategic Income Fund,
the Investment Quality Bond Fund, the National Municipal Bond Fund, the U.S.
Government Securities Fund and the Money Market Fund (the "Portfolios"). The
investment objective of each Portfolio is described in the Fund's Prospectus
dated December 31, 1996 (the "Prospectus") under the caption "Investment
Portfolios." Each Portfolio currently offers three classes of shares: "Class A"
shares, "Class B" shares and "Class C" shares, all as described in the
Prospectus under the caption "Multiple Pricing System."
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Prospectus, which may be obtained from
North American Funds, 116 Huntington Avenue, Boston, Massachusetts, 02116.
The date of this Statement of Additional Information is December 31, 1996.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT POLICIES......................................................... 3
MONEY MARKET INSTRUMENTS.................................................... 3
OTHER INSTRUMENTS........................................................... 5
Mortgage Securities......................................................... 5
Asset-Backed Securities..................................................... 7
Zero Coupon Securities and Pay-in-Kind Bonds................................ 8
High Yield/High Risk Domestic Corporate Debt Securities..................... 9
High Yield/High Risk Foreign Sovereign Debt Securities...................... 9
Municipal Lease Obligations................................................. 10
Hybrid Instruments.......................................................... 10
HEDGING AND OTHER STRATEGIC TRANSACTIONS.................................... 11
General Characteristics of Options.......................................... 11
General Characteristics of Futures Contracts and Options on Futures
Contracts.................................................................. 13
Options on Securities Indices and Other Financial Indices................... 13
Currency Transactions....................................................... 14
Combined Transactions....................................................... 14
Swaps, Caps, Floors and Collars............................................. 14
Eurodollar Instruments...................................................... 15
Municipal Bond Index Futures Contracts...................................... 15
Risk Factors................................................................ 16
Risks of Hedging and Other Strategic Transactions Outside the United States. 16
Use of Segregated and Other Special Accounts................................ 16
Other Limitations........................................................... 17
Warrant Transactions and Risks.............................................. 17
INVESTMENT RESTRICTIONS..................................................... 18
PORTFOLIO TURNOVER.......................................................... 20
MANAGEMENT OF THE FUND...................................................... 21
Compensation of Trustees.................................................... 23
Principal Holders of Securities............................................. 23
INVESTMENT MANAGEMENT ARRANGEMENTS.......................................... 24
Advisory and Subadvisory Agreements......................................... 24
DISTRIBUTION PLANS.......................................................... 27
Underwriters................................................................ 31
PORTFOLIO BROKERAGE......................................................... 32
DETERMINATION OF NET ASSET VALUE............................................ 36
PERFORMANCE INFORMATION..................................................... 37
TAXES....................................................................... 43
National Municipal Bond Fund - Taxation Issues.............................. 45
SHAREHOLDER SERVICES........................................................ 46
GENERAL..................................................................... 46
Adviser's Rationale for Multi-Manager Fund.................................. 46
Fund Shares................................................................. 49
Redemption in Kind.......................................................... 50
Repurchase of Shares........................................................ 50
Payment for the Shares Presented............................................ 50
Transfer Agent.............................................................. 50
Reports to Shareholders..................................................... 50
Independent Accountants..................................................... 50
</TABLE>
2
<PAGE>
INVESTMENT POLICIES
The following discussion supplements the description of the Fund's
Portfolios set forth in the Prospectus under the caption "INVESTMENT
PORTFOLIOS."
MONEY MARKET INSTRUMENTS
The Money Market Fund will be invested in the types of money market
instruments described below. Certain of the instruments listed below may also
be purchased by the other Portfolios in accordance with their investment
policies and all Portfolios may purchase such instruments to invest otherwise
idle cash or for defensive purposes, except that the U.S. Government Securities
Fund may not invest in the instruments described in 2 and 7 below.
1. U.S. Government and Government Agency Obligations. U.S.
Government obligations are debt securities issued or guaranteed as to principal
or interest by the U.S. Treasury. These securities include treasury bills,
notes and bonds. U.S. Government agency obligations are debt securities issued
or guaranteed as to principal or interest by an agency or instrumentality of the
U.S. Government pursuant to authority granted by Congress. U.S. Government
agency obligations include, but are not limited to, the Student Loan Marketing
Association, Federal Home Loan Banks, Federal Intermediate Credit Banks and the
Federal National Mortgage Association. U.S. instrumentality obligations
include, but are not limited to, the Export-Import Bank and Farmers Home
Administration. Some obligations issued or guaranteed by U.S. Government
agencies or instrumentalities are supported by the right of the issuer to borrow
from the U.S. Treasury or the Federal Reserve Banks, such as those issued by
Federal Intermediate Credit Banks; others, such as those issued by the Federal
National Mortgage Association, are supported by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality.
There are also separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. No assurance can be given that the U.S.
Government will provide financial support to such U.S. Government sponsored
agencies or instrumentalities in the future, since it is not obligated to do so
by law. The foregoing types of instruments are hereafter collectively referred
to as "U.S. Government securities."
2. Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are certificates issued against funds deposited in a bank or a savings
and loan association. They are for a definite period of time and earn a
specified rate of return. Bankers' acceptances are short-term credit
instruments evidencing the obligation of a bank to pay a draft which has been
drawn on it by a customer. These instruments reflect the obligation both of the
bank and of the drawer to pay the face amount of the instrument upon maturity.
They are primarily used to finance the import, export, transfer or storage of
goods. They are termed "accepted" when a bank guarantees their payment at
maturity.
Fund Portfolios may acquire obligations of foreign banks and foreign
branches of U.S. banks. These obligations are not insured by the Federal
Deposit Insurance Corporation.
3. Commercial Paper. Commercial paper consists of unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is issued in bearer form with maturities generally not
exceeding nine months. Commercial paper obligations may include variable amount
master demand notes. Variable amount master demand notes are obligations that
permit the investment of fluctuating amounts at varying rates of interest
pursuant to direct arrangements between a Portfolio, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. A
Portfolio has the right to increase the amount under the note at any time up to
the full amount provided by the note agreement, or to decrease the amount, and
the borrower may prepay up to the full amount of the note without penalty.
Because variable amount master demand notes are direct lending arrangements
between the lender and borrower, it is not generally contemplated that such
instruments will be traded, and there is no secondary market for these notes,
although they are redeemable (and thus immediately repayable by the borrower) at
face value, plus accrued interest, at any time. A Portfolio will only invest in
variable amount master demand notes issued by companies which at the date of
investment have an outstanding debt issue rated "Aaa" or "Aa" by Moody's or
"AAA" or "AA" by S&P and which the applicable Subadviser has determined present
minimal risk of loss to the Portfolio. A Subadviser will look generally at the
financial strength of the issuing company as "backing" for the note and not to
any security interest or supplemental source such as a bank letter of credit. A
variable amount master demand note will be valued each day as a Portfolio's net
asset value is determined, which value will generally be equal to the face value
of the note plus accrued interest unless the financial position of the issuer is
such that its ability to repay the note when due is in question.
3
<PAGE>
4. Corporate Obligations. Corporate obligations include bonds and
notes issued by corporations to finance longer-term credit needs than those
supported by commercial paper. While such obligations generally have maturities
of ten years or more, the Money Market Fund will only purchase obligations which
have remaining maturities of thirteen months or less from the date of purchase
and which are rated "AA" or higher by Standard & Poor's or "Aa" or higher by
Moody's.
5. Repurchase Agreements. Repurchase agreements are arrangements
involving the purchase of obligations by a Portfolio and the simultaneous
agreement to resell the same obligations on demand or at a specified future date
and at an agreed upon price. The majority of repurchase transactions run from
day to day and delivery pursuant to the resale provision typically will occur
within one to five business days of the purchase. A repurchase agreement can be
viewed as a loan made by a Portfolio to the seller of the obligation with such
obligation serving as collateral for the seller's agreement to repay the amount
borrowed with interest. Such transactions afford an opportunity for a Portfolio
to earn a return on cash which is only temporarily available. Repurchase
agreements entered into by the Portfolio will be with banks, brokers or dealers.
However, a Portfolio will enter into a repurchase agreement with a broker or
dealer only if the broker or dealer agrees to deposit additional collateral
should the value of the obligation purchased by the Portfolio decrease below the
resale price.
The Trustees have adopted procedures that establish certain
creditworthiness, asset and collateralization requirements for the
counterparties to a Portfolio's repurchase agreements. These procedures limit
the counterparties to repurchase transactions to those financial institutions
which are members of the Federal Reserve System and/or a primary government
securities dealer reporting to the Federal Reserve Bank of New York's Market
Reports Division or a broker/dealer which meet certain creditworthiness criteria
or which report U.S. Government securities positions to the Federal Reserve
Board. However, the Trustees reserve the right to change the criteria used to
select such financial institutions and broker/dealers. The Trustees will
regularly monitor the use of repurchase agreements and the Subadvisers will,
pursuant to procedures adopted by the Trustees, continuously monitor the amount
of collateral held with respect to a repurchase transaction so that it equals or
exceeds the amount of the obligations.
Should an issuer of a repurchase agreement fail to repurchase the
underlying obligation, the losses to the Portfolio, if any, would be the
difference between the repurchase price and the underlying obligation's market
value. A Portfolio might also incur certain costs in liquidating the underlying
obligation. Moreover, if bankruptcy or other insolvency proceedings should be
commenced with respect to the seller, realization upon the underlying obligation
by the Portfolio might be delayed or limited. Generally, repurchase agreements
are of a short duration, often less than one week but on occasion for longer
periods.
6. Warrants, Rights, Preferred Stock and Convertible Securities.
Certain of the portfolios may invest in warrants, rights, preferred stock and
convertible securities to the extent noted in the Prospectus. A warrant is a
security, usually issued together with a bond or preferred stock, that entitles
the holder to buy a proportionate amount of common stock at a specified price,
usually higher than the market price at the time of issuance, for a period of
years or to perpetuity. (For additional information on warrants see "Hedging
and Other Strategic Transactions - Warrant Transactions and Risks.") In
contrast, rights, which also represent the right to buy common shares, normally
have a subscription price lower than the current market value of the common
stock and a life of two to four weeks. A warrant is usually issued as a
sweetener, to enhance the marketability of the accompanying fixed income
securities. Preferred stock is a class of capital stock that pays dividends at
a specified rate and that has preference over common stock in the payment of
dividends and the liquidation of assets. Preferred stock does not ordinarily
carry voting rights. Convertible securities are securities (usually preferred
shares or bonds) that are exchangeable for a set number of another form of
securities (usually common stock) at a prestated price. The convertible feature
is usually designed as a sweetener to enhance the marketability of the security.
7. Canadian and Provincial Government and Crown Agency Obligations.
Canadian Government obligations are debt securities issued or guaranteed as to
principal or interest by the Government of Canada pursuant to authority granted
by the Parliament of Canada and approved by the Governor in Council, where
necessary. These securities include treasury bills, notes, bonds, debentures
and marketable Government of Canada loans. Canadian Crown agency obligations
are debt securities issued or guaranteed by a Crown corporation, company or
agency ("Crown agencies") pursuant to authority granted by the Parliament of
Canada and approved by the Governor in Council, where necessary. Certain Crown
agencies are by statute agents of Her Majesty in right of Canada, and their
obligations, when properly authorized, constitute direct obligations of the
Government of Canada. Such obligations include, but are not limited to, those
issued or guaranteed by the Export Development Corporation, Farm Credit
Corporation, Federal Business Development Bank and Canada Post Corporation. In
addition, certain Crown agencies which are not by law agents of Her Majesty may
issue obligations which by statute the Governor in Council may authorize the
Minister of Finance to guarantee on behalf of the Government of Canada. Other
Crown agencies which are not by law agents of Her Majesty may issue or guarantee
obligations not entitled to be guaranteed by the Government of Canada. No
assurance can be given that the Government of Canada will support the
obligations of Crown agencies which are not agents of Her Majesty, which it has
not guaranteed, since it is not obligated to do so by law.
4
<PAGE>
Provincial Government obligations are debt securities issued or guaranteed
as to principal or interest by the government of any province of Canada pursuant
to authority granted by the Legislature of any such province and approved by the
Lieutenant Governor in Council of any such province, where necessary. These
securities include treasury bills, notes, bonds and debentures. Provincial Crown
agency obligations are debt securities issued or guaranteed by a provincial
Crown corporation, company or agency ("provincial Crown agencies") pursuant to
authority granted by a provincial Legislature and approved by the Lieutenant
Governor in Council of such province, where necessary. Certain provincial Crown
agencies are by statute agents of Her Majesty in right of a particular province
of Canada, and their obligations, when properly authorized, constitute direct
obligations of such province. Other provincial Crown agencies which are not by
law agents of Her Majesty in right of a particular province of Canada may issue
obligations which by statute the Lieutenant Governor in Council of such province
may guarantee, or may authorize the Treasurer thereof to guarantee, on behalf of
the government of such province. Finally, other provincial Crown agencies which
are not by law agencies of Her Majesty may issue or guarantee obligations not
entitled to be guaranteed by a provincial government. No assurance can be given
that the government of any province of Canada will support the obligations of
provincial Crown agencies which are not agents of Her Majesty, which it has not
guaranteed, as it is not obligated to do so by law. Provincial Crown agency
obligations described above include, but are not limited to, those issued or
guaranteed by a provincial railway corporation, a provincial hydroelectric or
power commission or authority, a provincial municipal financing corporation or
agency and a provincial telephone commission or authority.
Any Canadian obligation acquired by the Money Market Fund will be
denominated in U.S. dollars.
OTHER INSTRUMENTS
The following provides a more detailed explanation of some of the other
instruments that certain Portfolios may invest in.
1. Mortgage Securities
Mortgage securities differ from conventional bonds in that principal is
paid over the life of the securities rather than at maturity. As a result, a
Portfolio receives monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. When a Portfolio reinvests the payments and any
unscheduled prepayments of principal it receives, it may receive a rate of
interest which is higher or lower than the rate on the existing mortgage
securities. For this reason, mortgage securities may be less effective than
other types of debt securities as a means of locking in long-term interest
rates.
In addition, because the underlying mortgage loans and assets may be
prepaid at any time, if a Portfolio purchases mortgage securities at a premium,
a prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if a Portfolio purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected payments will reduce, yield to maturity.
Adjustable rate mortgage securities are similar to the mortgage securities
discussed above, except that unlike fixed rate mortgage securities, adjustable
rate mortgage securities are collateralized by or represent interests in
mortgage loans with variable rates of interest. These variable rates of
interest reset periodically to align themselves with market rates. Most
adjustable rate mortgage securities provide for an initial mortgage rate that is
in effect for a fixed period, typically ranging from three to twelve months.
Thereafter, the mortgage interest rate will reset periodically in accordance
with movements in a specified published interest rate index. The amount of
interest due to an adjustable rate mortgage holder is determined in accordance
with movements in a specified published interest rate index by adding a pre-
determined increment or "margin" to the specified interest rate index. Many
adjustable rate mortgage securities reset their interest rates based on changes
in the one-year, three-year and five-year constant maturity Treasury rates, the
three-month or six-month Treasury Bill rate, the 11th District Federal Home Loan
Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-
month, six-month or one-year London Interbank Offered Rate ("LIBOR") and other
market rates.
A Portfolio will not benefit from increases in interest rates to the extent
that interest rates rise to the point where they cause the current coupon of
adjustable rate mortgages held as investments to exceed any maximum allowable
annual or lifetime reset limits (or "cap rates") for a particular mortgage. In
this event, the value of the mortgage securities in a Portfolio would likely
decrease. Also, the Portfolio's net asset value could vary to the extent that
current yields on adjustable rate mortgage securities are different than market
yields during interim periods between coupon reset dates. During periods of
declining interest rates, income to a Portfolio derived from adjustable rate
mortgages which remain in a mortgage pool will decrease in contrast to the
income on fixed
5
<PAGE>
rate mortgages, which will remain constant. Adjustable rate mortgages also have
less potential for appreciation in value as interest rates decline than do fixed
rate investments.
Privately-Issued Mortgage Securities. Privately-issued pass through
securities provide for the monthly principal and interest payments made by
individual borrowers to pass through to investors on a corporate basis, and in
privately-issued collateralized mortgage obligations, as further described
below. Privately-issued mortgage securities are issued by private originators
of, or investors in, mortgage loans, including mortgage bankers, commercial
banks, investment banks, savings and loan associations and special purpose
subsidiaries of the foregoing. Since privately-issued mortgage certificates are
not guaranteed by an entity having the credit status of GNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. For a description of the types of credit enhancements that may
accompany privately-issued mortgage securities, see "Asset-Backed Securities--
Types of Credit Support" below. A Portfolio will not limit its investments to
asset-backed securities with credit enhancements.
Collateralized Mortgage Obligations ("CMOs"). CMOs generally are bonds or
certificates issued in multiple classes that are collateralized by or represent
an interest in mortgages. CMOs may be issued by single-purpose, stand-alone
finance subsidiaries or trusts of financial institutions, government agencies,
investment banks or other similar institutions. Each class of CMOs, often
referred to as a "tranche", may be issued with a specific fixed coupon rate
(which may be zero) or a floating coupon rate, and has a stated maturity or
final distribution date. Principal prepayments on the underlying mortgages may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates. Interest is paid or accrued on CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the underlying
mortgages may be allocated among the several classes of a series of a CMO in
many ways. The general goal sought to be achieved in allocating cash flows on
the underlying mortgages to the various classes of a series of CMOs is to create
tranches on which the expected cash flows have a higher degree of predictability
than the underlying mortgages. As a general matter, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or more
tranches generally must be created that absorb most of the volatility in the
cash flows on the underlying mortgages. The yields on these tranches are
relatively higher than on tranches with more predictable cash flows. Because of
the uncertainty of the cash flows on these tranches, and the sensitivity thereof
to changes in prepayment rates on the underlying mortgages, the market prices of
and yield on these tranches tend to be highly volatile.
CMOs purchased may be:
(1) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. Government;
(2) collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and the guarantee is collateralized by
U.S. Government securities; or
(3) securities for which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest is supported
by the credit of an agency or instrumentality of the U.S. Government.
STRIPS. In addition to the U.S. Government securities discussed above,
certain Portfolios may invest in separately traded interest components of
securities issued or guaranteed by the U.S. Treasury. The interest components
of selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ("STRIPS"). Under the
STRIPS program, the interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts independently.
Stripped Mortgage Securities. Stripped mortgage securities are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. Government, or by private issuers,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
mortgage securities have greater volatility than other types of mortgage
securities in which a Portfolio invests. Although stripped mortgage securities
are purchased and sold by institutional investors through several investment
banking firms acting as brokers or dealers, the market for such securities has
not yet been fully developed. Accordingly, stripped mortgage securities are
generally illiquid and to such extent, together with any other illiquid
investments, will not exceed 10% of a Portfolio's net assets.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving
6
<PAGE>
some of the interest and most of the principal from the mortgage assets, while
the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the interest
(the interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive not only to changes in prevailing interest rates
but also the rate of principal payments (including prepayments) on the related
underlying mortgage assets, and a rapid rate of principal payments may have a
material adverse effect on a Portfolio's yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Portfolio may fail to fully recoup its initial investment in these securities
even if the securities have received the highest rating by a nationally
recognized statistical rating organization.
As interest rates rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other mortgage securities
described in this Statement of Additional Information, like other debt
instruments, will tend to move in the opposite direction of interest rates.
Accordingly, the Fund believes that investing in IOs, in conjunction with the
other mortgage securities described herein, will contribute to a Portfolio's
relatively stable net asset value.
In addition to the stripped mortgage securities described above, the
Strategic Income may invest in similar securities such as Super POs and Levered
IOs which are more volatile than POs, IOs and IOettes. Risks associated with
instruments such as Super POs are similar in nature to those risks related to
investments in POs. Risks connected with Levered IOs and IOettes are similar in
nature to those associated with IOs. The Strategic Income Fund may also invest
in other similar instruments developed in the future that are deemed consistent
with the investment objective, policies and restrictions of the Portfolio.
Under the Internal Revenue Code of 1986, as amended (the "Code"), POs may
generate taxable income from the current accrual of original issue discount,
without a corresponding distribution of cash to a Portfolio. See "Taxes -- Pay-
in-kind Bonds, Zero Coupon Bonds and Discount Obligations."
Inverse Floaters. The Strategic Income and National Municipal Bond Funds
may invest in inverse floaters, which are also derivative mortgage securities.
Inverse floaters may be issued by agencies or instrumentalities of the U.S.
Government, or by private issuers, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Inverse floaters have greater volatility than
other types of mortgage securities in which a Portfolio invests (with the
exception of stripped mortgage securities). Although inverse floaters are
purchased and sold by institutional investors through several investment banking
firms acting as brokers or dealers, the market for such securities has not yet
been fully developed. Accordingly, inverse floaters are generally illiquid and
to such extent, together with any other illiquid investments, will not exceed
10% of a Portfolio's net assets.
Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Such
securities have the effect of providing a degree of investment leverage since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term debt obligations increase or decrease in response
to such changes. As a result, the market values of such securities will
generally be more volatile than the market value of fixed-rate obligations.
2. Asset-Backed Securities
The securitization techniques used to develop mortgage securities are also
being applied to a broad range of other assets. Through the use of trusts and
special purpose corporations, automobile and credit card receivables are being
securitized in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to the CMO structure.
Generally the issuers of asset-backed bonds, notes or pass-through certificates
are special purpose entities and do not have any significant assets other than
the receivables securing such obligations. In general, the collateral
supporting asset-backed securities is of a shorter maturity than mortgage loans.
As a result, investment in these securities should result in greater price
stability for a Portfolio's shares. Instruments backed by pools of receivables
are similar to mortgage-backed securities in that they are subject to
unscheduled prepayments of principal prior to maturity. When the obligations
are prepaid, a Portfolio must reinvest the prepaid amounts in securities the
yields of which reflect interest rates prevailing at the time. Therefore, a
Portfolio's ability to maintain a portfolio which includes high-yielding asset-
backed securities will be adversely affected to the extent that prepayments of
principal must be reinvested in securities which have lower yields than the
prepaid obligations. Moreover, prepayments of securities purchased at a premium
could result in a realized loss. A Portfolio will only invest in asset-backed
securities rated, at the time of purchase, "AA" or better by S&P or "Aa" or
better by Moody's or which, in the opinion of the applicable Subadviser, are of
comparable quality.
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As with mortgage securities, asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties and
use similar credit enhancement techniques. For a description of the types of
credit enhancement that may accompany privately-issued mortgage securities, see
"Types of Credit Support" below. A Portfolio will not limit its investments to
asset-backed securities with credit enhancements. Although asset-backed
securities are not generally traded on a national securities exchange, such
securities are widely traded by brokers and dealers, and to such extent will not
be considered illiquid securities for the purposes of the investment restriction
under "Investment Restrictions" below.
Types of Credit Support. Mortgage securities and asset-backed securities
are often backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failure by obligors on underlying
assets to make payments, such securities may contain elements of credit support.
Such credit support falls into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
pass-through of payments due on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The Fund will not pay any additional fees for
such credit support, although the existence of credit support may increase the
price of a security.
The ratings of mortgage securities and asset-backed securities for which
third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
3. Zero Coupon Securities and Pay-in-Kind Bonds
Zero coupon securities and pay-in-kind bonds involve special risk
considerations. Zero coupon securities are debt securities that do not provide
for the payment of cash income but are sold at substantial discounts from their
value at maturity. When a zero coupon security is held to maturity, its entire
return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference
is known at the time of purchase, so that investors holding zero coupon
securities until maturity know at the time of their investment what the return
on their investment will be. Certain zero coupon securities also are sold at
substantial discounts from their maturity value and provide for the commencement
of regular interest payments at a deferred date. The Portfolios also may
purchase pay-in-kind bonds. Pay-in-kind bonds are bonds that pay all or a
portion of their interest in the form of additional debt or equity securities.
The U.S. Government Securities Fund will not invest in zero coupon securities
having maturities of greater than ten years.
Zero coupon securities and pay-in-kind bonds tend to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The value of zero
coupon securities appreciates more during periods of declining interest rates
and depreciates more during periods of rising interest rates.
Zero coupon securities and pay-in-kind bonds may be issued by a wide
variety of corporate and governmental issuers. Although zero coupon securities
and pay-in-kind bonds are generally not traded on a national securities
exchange, such securities are widely traded by brokers and dealers and, to such
extent, will not be considered illiquid for the purposes of the investment
restriction under "Investment Restrictions" below.
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Current federal income tax law requires the holder of a zero coupon
security or certain pay-in-kind bonds to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its qualification
as a regulated investment company and avoid liability for federal income and
excise taxes, a Portfolio may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements. See "TAXES -- Pay-in-kind Bonds, Zero Coupon Bonds
and Discount Obligations" below.
4. High Yield/High Risk Domestic Corporate Debt Securities
The market for high yield U.S. corporate debt securities (commonly known as
"junk bonds") has undergone significant changes in the past decade. Issuers in
the U.S. high yield market originally consisted primarily of growing small
capitalization companies and larger capitalization companies whose credit
quality had declined from investment grade. During the mid-1980s, participants
in the U.S. high yield market issued high yield securities principally in
connection with leveraged buyouts and other leveraged recapitalizations. In
late 1989 and 1990, the volume of new issues of high yield U.S. corporate debt
declined significantly and liquidity in the market decreased. Since early 1991,
the volume of new issues of high yield U.S. corporate debt securities has
increased substantially and secondary market liquidity has improved. During the
same periods, the U.S. high yield debt market exhibited strong returns, as it
continues to be an attractive market in terms of yield and yield spread over
U.S. Treasury securities. Currently, most new offerings of U.S. high yield
securities are being issued to refinance higher coupon debt and to raise funds
for general corporate purposes.
High yield U.S. corporate debt securities include bonds, debentures, notes
and commercial paper and will generally be unsecured. Most of these debt
securities will bear interest at fixed rates. However, a Portfolio may also
invest in debt securities with variable rates of interest or which involve
equity features, such as contingent interest or participations based on
revenues, sales or profits (i.e., interest or other payments, often in addition
to a fixed rate of return, that are based on the borrower's attainment of
specified levels of revenues, sales or profits and thus enable the holder of the
security to share in the potential success of the venture).
5. High Yield/High Risk Foreign Sovereign Debt Securities
The Strategic Income, High Yield and Investment Quality Bond Funds expect
that a significant portion of their emerging market governmental debt
obligations will consist of "Brady Bonds." In addition, the International Small
Cap, and Balanced Funds may also invest in Brady Bonds. Brady Bonds are debt
securities, generally denominated in U.S. dollars, issued under the framework
of the "Brady Plan," an initiative announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external commercial bank indebtedness. The Brady Plan framework, as
it has developed, contemplates the exchange of external commercial bank debt for
newly issued bonds (Brady Bonds). Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the debt
restructuring. Investors should recognize that Brady Bonds have been issued
only recently, and accordingly do not have a long payment history. Brady Bonds
issued to date generally have maturities of between 15 and 30 years from the
date of issuance and have traded at a deep discount from their face value. The
Portfolios may invest in Brady Bonds of emerging market countries that have been
issued to date, as well as those which may be issued in the future. In addition
to Brady Bonds, the Portfolios may invest in emerging market governmental
obligations issued as a result of debt restructuring agreements outside of the
scope of the Brady Plan. A substantial portion of the Brady Bonds and other
sovereign debt securities in which the Portfolios invest are likely to be
acquired at a discount, which involves certain considerations discussed below
under "TAXES -- Pay-in-kind Bonds, Zero Coupon Bonds and Discount Obligations."
Agreements implemented under the Brady Plan to date are designed to achieve
debt and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of one
percent above the then current six month LIBOR rate. Regardless of the stated
face amount and stated interest rate of the various types of Brady Bonds, the
Portfolios will purchase Brady Bonds in secondary markets, as described below,
in which the price and yield to the investor reflect market conditions at the
time of purchase. Brady Bonds issued to date have traded at a deep discount
from their face value. Certain sovereign bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Certain Brady Bonds
have been collateralized as to principal due at maturity (typically 15 to 30
years from the date of issuance) by U.S. Treasury zero coupon bonds with a
maturity equal to the final maturity of such
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Brady Bonds, although the collateral is not available to investors until the
final maturity of the Brady Bonds. Collateral purchases are financed by the
International Monetary Fund (the "IMF"), the World Bank and the debtor nations'
reserves. In addition, interest payments on certain types of Brady Bonds may be
collateralized by cash or high-grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. The Portfolios
may purchase Brady Bonds with no or limited collateralization, and will be
relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds. Brady Bonds issued to date are purchased and sold in secondary
markets through U.S. securities dealers and other financial institutions and are
generally maintained through European transnational securities depositories.
6. Municipal Lease Obligations
The National Municipal Bond Fund may invest in municipal lease obligations.
Municipal lease obligations are secured by revenues derived from the lease of
property to state and local government units. The underlying leases typically
are renewable annually by the governmental user, although the lease may have a
term longer than one year. If the governmental user does not appropriate
sufficient funds for the following year's lease payments, the lease will
terminate, with the possibility of default on the lease obligations and
significant loss to the Portfolio. In the event of a termination, assignment or
sublease by the governmental user, the interest paid on the municipal lease
obligation could become taxable, depending upon the identity of the succeeding
user.
7. Hybrid Instruments
Hybrid instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those of
debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit or
other evidence of indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity, redemption or
retirement, is determined by reference to prices, changes in prices, or
differences between prices, of securities, currencies, intangibles, goods,
articles or commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as interest rates,
currency exchange rates, commodity indices, and securities indices (collectively
"Benchmarks"). Thus, Hybrid Instruments may take a variety of forms, including,
but not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
or securities index at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Portfolio may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transactions costs associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar- denominated Hybrid
Instrument whose redemption price is linked to the average three year interest
rate in a designated group of countries. The redemption price formula would
provide for payoffs of greater than par if the average interest rate was lower
than a specified level, and payoffs of less than par if rates were above the
specified level. Furthermore, the Portfolio could limit the downside risk of
the security by establishing a minimum redemption price so that the principal
paid at maturity could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to give the Portfolio
the desired European bond exposure while avoiding currency risk, limiting
downside market risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the Portfolio could lose
money if, for example, interest rates do not move as anticipated or credit
problems develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand for the Underlying Assets and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such
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volatility may be expected in the future. Reference is also made to the
discussion below of futures, options, and forward contracts for a description of
certain risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of principal
loss (or gain). The latter scenario may result if "leverage" is used to
structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
portfolio and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party or issuer of the Hybrid Instrument would be an additional risk
factor which the portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority. The various risks discussed above, particularly the market risk of
such instruments, may in turn cause significant fluctuations in the net asset
value of the Portfolio.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Hedging and Other Strategic
Transactions", an individual Portfolio may be authorized to use a variety of
investment strategies. These strategies will be used for hedging purposes only,
including hedging various market risks (such as interest rates, currency
exchange rates and broad or specific market movements), and managing the
effective maturity or duration of debt instruments held by the Portfolio, (such
investment strategies and transactions are referred to herein as "Hedging and
Other Strategic Transactions"). The description in the Prospectus of each
Portfolio indicates which, if any, of these types of transactions may be used by
the Portfolio.
A detailed discussion of Hedging and Other Strategic Transactions follows
below. No Portfolio which is authorized to use any of these investment
strategies will be obligated, however, to pursue any of such strategies and no
Portfolio makes any representation as to the availability of these techniques at
this time or at any time in the future. In addition, a Portfolio's ability to
pursue certain of these strategies may be limited by the Commodity Exchange Act,
as amended, applicable rules and regulations of the Commodity Futures Trading
Commission ("CFTC") thereunder and the federal income tax requirements
applicable to regulated investment companies which are not operated as commodity
pools.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging and Other Strategic
Transactions involving options require segregation of Portfolio assets in
special accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
A Portfolio's purchase of a put option on a security, for example, might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
of such instrument by giving the Portfolio the right to sell the instrument at
the option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to sell,
the underlying instrument at the exercise price. A Portfolio's purchase of a
call option on a security, financial futures contract, index, currency or other
instrument might be intended to protect the Portfolio against an increase
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in the price of the underlying instrument that it intends to purchase in the
future by fixing the price at which it may purchase the instrument. An
"American" style put or call option may be exercised at any time during the
option period, whereas a "European" style put or call option may be exercised
only upon expiration or during a fixed period prior to expiration. Exchange-
listed options are issued by a regulated intermediary such as the Options
Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to the options. The discussion below uses the OCC as
an example, but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Portfolio's ability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed by
an exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-
listed options, which generally have standardized terms and performance
mechanics, all of the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guaranties and security, are
determined by negotiation of the parties. It is anticipated that any Portfolio
authorized to use OTC options will generally only enter into OTC options that
have cash settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Subadviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A
Portfolio will enter into OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers," or broker-dealers, domestic or foreign banks, or other
financial institutions that are deemed creditworthy by the Subadviser. In the
absence of a change in the current position of the staff of the Securities and
Exchange Commission (the "Commission"), OTC options purchased by a Portfolio and
the amount of the Portfolio's obligation pursuant to an OTC option sold by the
Portfolio (the cost of the sell-back plus the in-the-money amount, if any) or
the value of the assets held to cover such options will be deemed illiquid.
If a Portfolio sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments held by the Portfolio or
will increase the Portfolio's income. Similarly, the sale of put options can
also provide Portfolio gains.
If and to the extent authorized to do so, a Portfolio may purchase and sell
call options on securities and on Eurodollar instruments that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Portfolio must
be "covered," that is, the Portfolio must own the securities subject to the
call, must own an offsetting option on a futures position, or must otherwise
meet the asset segregation requirements described below for
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so long as the call is outstanding. Even though a Portfolio will receive the
option premium to help protect it against loss, a call sold by the Portfolio
will expose the Portfolio during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Portfolio to hold a security or
instrument that it might otherwise have sold.
Each Portfolio reserves the right to purchase or sell options on
instruments and indices which may be developed in the future to the extent
consistent with applicable law, the Portfolio's investment objective and the
restrictions set forth herein.
If and to the extent authorized to do so, a Portfolio may purchase and sell
put options on securities (whether or not it holds the securities in its
portfolio) and on securities indices, currencies and futures contracts. A
Portfolio will not sell put options if, as a result, more than 50% of the
Portfolio's assets would be required to be segregated to cover its potential
obligations under put options other than those with respect to futures
contracts. In selling put options, a Portfolio faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures Contracts and Options on Futures Contracts
If and to the extent authorized to do so, a Portfolio may trade financial
futures contracts or purchase or sell put and call options on those contracts as
a hedge against anticipated interest rate, currency or market changes, for
duration management and for permissible non-hedging purposes. Futures contracts
are generally bought and sold on the commodities exchanges on which they are
listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by a Portfolio, as seller,
to deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to certain instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.
A Portfolio's use of financial futures contracts and options thereon will
in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC and generally will be entered
into only for bona fide hedging, risk management (including duration
management). Maintaining a futures contract or selling an option on a futures
contract will typically require a Portfolio to deposit with a financial
intermediary, as security for its obligations, an amount of cash or other
specified assets ("initial margin") that initially is from 1% to 10% of the face
amount of the contract (but may be higher in some circumstances). Additional
cash or assets ("variation margin") may be required to be deposited thereafter
daily as the mark-to-market value of the futures contract fluctuates. The
purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of a
Portfolio. If a Portfolio exercises an option on a futures contract it will be
obligated to post initial margin (and potentially variation margin) for the
resulting futures position just as it would for any futures position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
The value of all futures contracts sold by a Portfolio (adjusted for the
historical volatility relationship between such Portfolio and the contracts)
will not exceed the total market value of the Portfolio's securities. The
segregation requirements with respect to futures contracts and options thereon
are described below under "Use of Segregated and Other Special Accounts."
Options on Securities Indices and Other Financial Indices
If and to the extent authorized to do so, a Portfolio may purchase and sell
call and put options on securities indices and other financial indices. In so
doing, the Portfolio can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, options on indices
settle by cash settlement; that is, an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments comprising the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
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Currency Transactions
If and to the extent authorized to do so, a Portfolio may engage in
currency transactions with Counterparties to hedge the value of portfolio
securities denominated in particular currencies against fluctuations in relative
value. Currency transactions include currency forward contracts, exchange-
listed currency futures contracts and options thereon, exchange-listed and OTC
options on currencies, and currency swaps. A forward currency contract involves
a privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash
flows based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars". A Portfolio may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Subadviser.
A Portfolio's dealings in forward currency contracts and other currency
transactions such as futures contracts, options, options on futures contracts
and swaps will be limited to hedging and other non-speculative purposes,
including transaction hedging and position hedging. Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Portfolio, which will generally arise in connection with the
purchase or sale of the Portfolio's portfolio securities or the receipt of
income from them. Position hedging is entering into a currency transaction with
respect to portfolio securities positions denominated or generally quoted in
that currency. A Portfolio will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held by the Portfolio
that are denominated or generally quoted in or currently convertible into the
currency, other than with respect to proxy hedging as described below.
A Portfolio may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of its securities,
a Portfolio may also engage in proxy hedging. Proxy hedging is often used when
the currency to which a Portfolio's holdings is exposed is difficult to hedge
generally or difficult to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency, the changes in the value of
which are generally considered to be linked to a currency or currencies in which
some or all of a Portfolio's securities are or are expected to be denominated,
and to buy dollars. The amount of the contract would not exceed the market
value of the Portfolio's securities denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a Portfolio enters
into a currency hedging transaction, the Portfolio will comply with the asset
segregation requirements described below under "Use of Segregated and Other
Special Accounts."
Combined Transactions
If and to the extent authorized to do so, a Portfolio may enter into
multiple transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Other Strategic Transaction, as part of a single or combined strategy when,
in the judgment of the Subadviser, it is in the best interests of the Portfolio
to do so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
will normally be entered into by a Portfolio based on the Subadviser's judgment
that the combined strategies will reduce risk or otherwise more effectively
achieve the desired portfolio management goal, it is possible that the
combination will instead increase the risks or hinder achievement of the
portfolio management objective.
Swaps, Caps, Floors and Collars
A Portfolio may be authorized to enter into interest rate, currency and
index swaps, the purchase or sale of related caps, floors and collars and other
derivatives. A Portfolio will enter into these transactions primarily to seek
to preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities a
Portfolio anticipates purchasing at a later date. A Portfolio will use these
transactions for non-speculative purposes and will not sell interest rate caps
or floors if it does not own securities or other instruments providing the
income the Portfolio may be obligated to pay. Interest rate swaps involve the
exchange by a Portfolio with another party of their respective commitments to
pay or receive interest (for example, an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal). A currency
swap is an agreement to exchange cash flows on a
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notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling the cap to the extent that a specified
index exceeds a predetermined interest rate. The purchase of an interest rate
floor entitles the purchaser to receive payments of interest on a notional
principal amount from the party selling the interest rate floor to the extent
that a specified index falls below a predetermined interest rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specific
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return with a
predetermined range of interest rates or values.
A Portfolio will usually enter into interest rate swaps on a net basis,
that is, the two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Portfolio receiving
or paying, as the case may be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, collars and other similar derivatives are
entered into for good faith hedging or other non-speculative purposes, they do
not constitute senior securities under the Investment Company Act of 1940, as
amended (the "1940 Act"), and, thus, will not be treated as being subject to the
Portfolio's borrowing restrictions. A Portfolio will not enter into any swap,
cap, floor, collar or other derivative transaction unless the Counterparty is
deemed creditworthy by the Subadviser. If a Counterparty defaults, a Portfolio
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by a Subadviser based
on various factors, including (1) the frequency of trades and quotations, (2)
the number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Portfolio's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed to be within the 10% restriction on investments in securities that are
not readily marketable.
Each Portfolio will maintain cash and appropriate liquid assets (i.e., high
grade debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If a Portfolio enters into a swap agreement
on a net basis, it will segregate assets with a daily value at least equal to
the excess, if any, of the Portfolio's accrued obligations under the swap
agreement over the accrued amount the Portfolio is entitled to receive under the
agreement. If a Portfolio enters into a swap agreement on other than a net
basis, it will segregate assets with a value equal to the full amount of the
Portfolio's accrued obligations under the agreement. See "Use of Segregated and
Other Special Accounts."
Eurodollar Instruments
If and to the extent authorized to do so, a Portfolio may make investments
in Eurodollar instruments, which are typically dollar-denominated futures
contracts or options on those contracts that are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. A Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Municipal Bond Index Futures Contracts
The National Municipal Bond Fund may enter into municipal bond index
futures contracts. A municipal bond index futures contract is an agreement to
take or make delivery of an amount of cash equal to the difference between the
value of the index at the beginning and at the end of the contract period. The
National Municipal Bond Fund may enter into short municipal bond index futures
contracts in anticipation of or during a market decline to attempt to offset the
decrease in market value of securities in its respective portfolio that might
otherwise result. When the Portfolio is not fully invested in securities and
anticipates a significant market advance, it may enter into long municipal bond
index futures contracts in order to gain rapid market exposure that may wholly
or partially offset increases in the costs of securities that it intends to
purchase. In a substantial majority of these transactions, the Portfolio will
purchase such securities upon termination of the futures position but, under
unusual market conditions, a futures position may be terminated without the
corresponding purchase of securities.
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Risk Factors
Hedging and Other Strategic Transactions have special risks associated with
them, including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the Subadviser's view as to certain market
movements is incorrect, the risk that the use of the Hedging and Other Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options could result in losses to a Portfolio, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, or cause a Portfolio to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Portfolio could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Portfolio's position. In addition,
futures and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain
markets, a Portfolio might not be able to close out a transaction without
incurring substantial losses. Although a Portfolio's use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it will tend to
limit any potential gain to a Portfolio that might result from an increase in
value of the position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result
in losses to a Portfolio if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that a Portfolio is engaging in proxy
hedging. Currency transactions are also subject to risks different from those
of other portfolio transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be adversely
affected by government exchange controls, limitations or restrictions on
repatriation of currency, and manipulations or exchange restrictions imposed by
governments. These forms of governmental actions can result in losses to a
Portfolio if it is unable to deliver or receive currency or monies in settlement
of obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures contracts are subject to the same
risks that apply to the use of futures contracts generally. Further, settlement
of a currency futures contract for the purchase of most currencies must occur at
a bank based in the issuing nation. Trading options on currency futures
contracts is relatively new, and the ability to establish and close out
positions on these options is subject to the maintenance of a liquid market that
may not always be available. Currency exchange rates may fluctuate based on
factors extrinsic to that country's economy.
Losses resulting from the use of Hedging and Other Strategic Transactions
will reduce a Portfolio's net asset value, and possibly income, and the losses
can be greater than if Hedging and Other Strategic Transactions had not been
used.
Risks of Hedging and Other Strategic Transactions Outside the United States
When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken as
part of non-U.S. Hedging and Other Strategic Transactions also could be
adversely affected by: (1) other complex foreign political, legal and economic
factors, (2) lesser availability of data on which to make trading decisions than
in the United States, (3) delays in a Portfolio's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
Use of Segregated and Other Special Accounts
Use of many Hedging and Other Strategic Transactions by a Portfolio will
require, among other things, that the Portfolio segregate cash, liquid high
grade debt obligations or other assets with its custodian, or a designated sub-
custodian, to the extent the Portfolio's obligations are not otherwise "covered"
through ownership of the underlying security, financial instrument or currency.
In general, either the full amount of any obligation by a Portfolio to pay or
deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-
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custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. A call option on securities written by a Portfolio, for example, will
require the Portfolio to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid high grade debt obligations sufficient to purchase and deliver
the securities if the call is exercised. A call option sold by a Portfolio on an
index will require the Portfolio to own portfolio securities that correlate with
the index or to segregate liquid high grade debt obligations equal to the excess
of the index value over the exercise price on a current basis. A put option on
securities written by a Portfolio will require the Portfolio to segregate liquid
high grade debt obligations equal to the exercise price. Except when a Portfolio
enters into a forward contract in connection with the purchase or sale of a
security denominated in a foreign currency or for other non-speculative
purposes, which requires no segregation, a currency contract that obligates the
Portfolio to buy or sell a foreign currency will generally require the Portfolio
to hold an amount of that currency, liquid securities denominated in that
currency equal to a Portfolio's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Portfolio's obligations.
OTC options entered into by a Portfolio, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although a Portfolio
will not be required to do so. As a result, when a Portfolio sells these
instruments it will segregate an amount of assets equal to its obligations under
the options. OCC-issued and exchange-listed options sold by a Portfolio other
than those described above generally settle with physical delivery, and the
Portfolio will segregate an amount of assets equal to the full value of the
option. OTC options settling with physical delivery or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option on a futures contract, a
Portfolio must deposit initial margin and, in some instances, daily variation
margin in addition to segregating assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid high grade debt or equity securities or other
acceptable assets. A Portfolio will accrue the net amount of the excess, if
any, of its obligations relating to swaps over its entitlements with respect to
each swap on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to a Portfolio's net
obligation, if any.
Hedging and Other Strategic Transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. A
Portfolio may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding
obligation in related options and Hedging and Other Strategic Transactions. A
Portfolio could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Portfolio. Moreover, instead of segregating assets if it holds a futures
contracts or forward contract, a Portfolio could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Hedging and Other Strategic
Transactions may also be offset in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction, no segregation is
required, but if it terminates prior to that time, assets equal to any remaining
obligation would need to be segregated.
Other Limitations
No Portfolio will maintain open short positions in futures contracts, call
options written on futures contracts, and call options written on securities
indices if, in the aggregate, the current market value of the open positions
exceeds the current market value of that portion of its securities portfolio
being hedged by those futures and options plus or minus the unrealized gain or
loss on those open positions, adjusted for the historical volatility
relationship between that portion of the Portfolio and the contracts (e.g., the
Beta volatility factor). For purposes of the limitation stated in the
immediately preceding sentence, to the extent the Portfolio has written call
options on specific securities in that portion of its portfolio, the value of
those securities will be deducted from the current market value of that portion
of the securities portfolio. If this limitation should be exceeded at any time,
the Portfolio will take prompt action to close out the appropriate number of
open short positions to bring its open futures and options positions within this
limitation.
Warrant Transactions and Risks
Subject to certain restrictions described under "INVESTMENT RESTRICTIONS"
below, each of the Portfolios (other than the Money Market Fund) may purchase
warrants, including warrants traded independently of the underlying securities.
Such
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transactions entail certain risks. Warrants may be considered more speculative
than certain other types of investments in that prior to their exercise they do
not entitle a holder to dividends and voting rights with respect to the
securities which may be purchased by the exercise thereof, nor do they represent
any rights in the assets of the issuing company. Also, the value of the warrant
does not necessarily change with the value of the underlying security. If a
warrant expires unexercised, the Portfolio will lose the amount paid for the
warrant and any transaction costs.
The degree to which a Portfolio may utilize Hedging and Other Strategic
Transactions may also be affected by certain provisions of the Code.
INVESTMENT RESTRICTIONS
There are two classes of investment restrictions to which the Fund is
subject in implementing the investment policies of the Portfolios: fundamental
and nonfundamental. Nonfundamental restrictions are subject to change by the
Trustees of the Fund without shareholder approval. Fundamental restrictions may
only be changed by a vote of the lesser of (i) 67% or more of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares.
With respect to the submission of a change in an investment restriction to
the holders of the Fund's outstanding voting securities, the matter shall be
deemed to have been effectively acted upon with respect to a particular
Portfolio if a majority of the outstanding voting securities of the Portfolio
vote for the approval of the matter, notwithstanding (1) that the matter has not
been approved by the holders of a majority of the outstanding voting securities
of any other Portfolio affected by the matter, and (2) that the matter has not
been approved by the vote of a majority of the outstanding voting securities of
the Fund.
All of the restrictions through restriction (8) are fundamental.
Restrictions (9) through (20) are nonfundamental.
Fundamental
The Fund may not issue senior securities, except to the extent that the
borrowing of money in accordance with restriction (3) may constitute the
issuance of a senior security. (For purposes of this restriction, purchasing
securities on a when-issued or delayed delivery basis and engaging in Hedging
and Other Strategic Transactions will not be deemed to constitute the issuance
of a senior security.) In addition, unless a Portfolio is specifically excepted
by the terms of a restriction, each Portfolio will not:
(1) Invest more than 25% of the value of its total assets in securities of
issuers having their principal activities in any particular industry, excluding
U.S. Government securities and, with respect to the Money Market Fund,
obligations of domestic branches of U.S. banks and with respect to the National
Municipal Bond Fund, obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities or by any state, territory or any possession
of the United States, the District of Columbia, or any of their authorities,
agencies, instrumentalities or political subdivisions, or with respect to
repurchase agreements collateralized by any of such obligations. For purposes of
this restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased by a
Portfolio.
(2) Purchase the securities of any issuer if the purchase would cause more
than 5% of the value of the Portfolio's total assets to be invested in the
securities of any one issuer (excluding U.S. Government securities) or cause
more than 10% of the voting securities of the issuer to be held by the
Portfolio, except that up to 25% of the value of each Portfolio's total assets
may be invested without regard to these restrictions.
(3) Borrow money except that each Portfolio may borrow (i) for temporary or
emergency purposes (not for leveraging) up to 33 1/3% of the value of the
Portfolio's total assets (including amounts borrowed) less liabilities (other
than borrowings) and (ii) in connection with reverse repurchase agreements,
mortgage dollar rolls and other similar transactions.
(4) Underwrite securities of other issuers except insofar as the Fund may
be considered an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(5) Purchase or sell real estate, except that each Portfolio may invest in
securities issued by companies which invest in real estate or interests therein
and each of the Portfolios other than the Money Market Fund may invest in
mortgages and mortgage-backed securities.
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(6) Purchase or sell commodities or commodity contracts except that each
Portfolio other than the Investment Quality Bond and Money Market Funds may
purchase and sell futures contracts on financial instruments and indices and
options on such futures contracts, and the Equity - Income, Small/Mid Cap,
International Small Cap, Growth Equity, Global Equity, Strategic Income and
International Growth and Income Funds may purchase and sell futures contracts on
foreign currencies and options on such futures contracts. The U.S. Government
Securities Fund has elected for the present to not engage in the purchase or
sale of commodities or commodity contracts to the extent permitted by this
restriction, but it reserves the right to engage in such transactions at a
future time.
(7) Lend money to other persons except by the purchase of obligations in
which the Portfolio is authorized to invest and by entering into repurchase
agreements. For purposes of this restriction, collateral arrangements with
respect to options, forward currency and futures transactions will not be deemed
to involve the lending of money.
(8) Lend securities in excess of 33% of the value of its total non-cash
assets. For purposes of this restriction, collateral arrangements with respect
to options, forward currency and futures transactions will not be deemed to
involve loans of securities.
Nonfundamental
(9) Knowingly invest more than 10% of the value of its net assets in
securities or other investments not readily marketable, including repurchase
agreements maturing in more than seven days but excluding variable amount master
demand notes.
(10) Purchase any security if as a result the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in securities
of companies (including predecessors) less than three years old.
(11) Sell securities short or purchase securities on margin except that it
may obtain such short-term credits as may be required to clear transactions. For
purposes of this restriction, collateral arrangements with respect to Hedging
and Other Strategic Transactions will not be deemed to involve the use of
margin.
(12) Write or purchase options on securities, financial indices or
currencies except to the extent a Portfolio is specifically authorized to engage
in Hedging and Other Strategic Transactions.
(13) Purchase securities for the purpose of exercising control or
management.
(14) Purchase securities of other investment companies if the purchase
would cause more than 10% of the value of the Portfolio's total assets to be
invested in investment company securities, provided that (i) no investment will
be made in the securities of any one investment company if immediately after
such investment more than 3% of the outstanding voting securities of such
company would be owned by the Portfolio or more than 5% of the value of the
Portfolio's total assets would be invested in such company and (ii) no
restrictions shall apply to a purchase of investment company securities in
connection with a merger, consolidation or reorganization or in connection with
the investment of collateral received in connection with the lending of
securities in the Navigator Securities Lending Trust. For purposes of this
restriction, privately issued collateralized mortgage obligations will not be
treated as investment company securities if issued by "Exemptive Issuers".
Exemptive Issuers are defined as unmanaged, fixed-asset issuers that (a) invest
primarily in mortgage-backed securities, (b) do not issue redeemable securities
as defined in section 2(a)(32) of the 1940 Act, (c) operate under general
exemptive orders exempting them from "all provisions of the Investment Company
Act of 1940," and (d) are not registered or regulated under the 1940 Act as
investment companies.
(15) Pledge, hypothecate, mortgage or transfer (except as provided in
restriction (8) as security for indebtedness) any securities held by the
Portfolio, except in an amount of not more than 10% (33 1/3% in the case of the
Equity-Income, 15% in the case of the International Small Cap, Growth Equity and
Balanced Funds) of the value of the Portfolio's total assets and then only to
secure borrowings permitted by restrictions (3) and (11). For purposes of this
restriction, collateral arrangements with respect to Hedging and Other Strategic
Transactions will not be deemed to involve a pledge of assets.
(16) Invest in securities of any issuer if, to the knowledge of the
Portfolio, any officer or Trustee of the Fund or officer or director of the
Adviser owns more than 1/2 of 1% of the outstanding securities of such issuer,
and such Trustees, officers and directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such issuer.
(17) Purchase interests in oil, gas or other mineral exploration or
development programs or leases, except that it may acquire the securities of
companies engaged in the production or transmission of oil, gas or other
minerals.
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(18) Purchase warrants if, as a result, the Portfolio would then have more
than 10% of its total net assets (taken at the lower of cost or current value)
invested in warrants, or if more than 5% of the value of the Portfolio's total
net assets would be invested in warrants which are not listed on a recognized
United States or foreign stock exchange, except for warrants included in units
or attached to other securities.
(19) Purchase securities of foreign issuers, except that (A) the
International Small Cap, Global Equity, International Growth and Income and
Strategic Income Funds may each, without limitation, invest up to 100% of its
assets in securities issued by foreign entities and/or denominated in foreign
currencies, (B) the Balanced and Growth Equity Funds may each invest up to 30%
of its assets in such securities, (C) the Equity-Income Fund may invest up to
25% of its assets in such securities, and (D) each of the other portfolios
(other than the U.S. Government Securities and National Municipal Bond Funds)
may invest up to 20% of its assets in securities issued by foreign entities
and/or denominated in foreign currencies. (In the case of the Small/Mid Cap,
Growth Equity and Balanced Funds, ADRs and U.S. dollar denominated securities
are not included in the percentage limitation.)
(20) Purchase or sell real estate limited partnership interests.
In addition to the above policies, the Money Market Fund is subject to
certain restrictions required by Rule 2a-7 under the 1940 Act. In order to
comply with such restrictions, the Money Market Fund will, among other things,
not purchase the securities of any issuer if it would cause (i) more than 5% of
its total assets to be invested in the securities of any one issuer (excluding
U.S. Government securities and repurchase agreements fully collateralized by
U.S. Government securities), except as permitted by Rule 2a-7 for certain
securities for a period of up to three business days after purchase, (ii) more
than 5% of its total assets to be invested in "second tier securities," as
defined by Rule 2a-7, or (iii) more than the greater of $1 million or 1% of its
total assets to be invested in the second tier securities of that issuer.
For the purposes of the investment limitations applicable to the National
Municipal Bond Fund, the identification of the issuer of a municipal obligation
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality, or other political
subdivision are separate from those of the government creating the subdivision
and the obligation is backed only by the assets and revenues of the subdivision,
such subdivision would be regarded as the sole issuer. Similarly, in the case of
a private activity bond, if the bond is backed only by the assets and revenues
of the non-governmental user, such non-governmental user would be regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guarantee would be considered a separate security
and treated as an issue of such government or entity.
If a percentage restriction is adhered to at the time of an investment, a
later increase or decrease in the investment's percentage of the value of a
Portfolio's total assets resulting from a change in such values or assets will
not constitute a violation of the percentage restriction, except in the case of
the Money Market Fund where the percentage limitation of restriction (9) must be
met at all times.
PORTFOLIO TURNOVER
The annual rate of portfolio turnover will normally differ for each
Portfolio and may vary from year to year. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities during the
fiscal year by the monthly average of the value of the Portfolio's securities
(excluding from the computation all securities, including options, with
maturities at the time of acquisition of one year or less). A high rate of
portfolio turnover (in excess of 100%) generally involves correspondingly
greater brokerage commission expenses, which must be borne directly by the
Portfolio. No portfolio turnover rate can be calculated for the Money Market
Fund due to the short maturities of the instruments purchased. The portfolio
turnover rates for the Portfolios of the Fund in existence prior to December 31,
1996 for the periods shown below were as follows:
<TABLE>
<CAPTION>
11/1/94 11/1/95
to to
10/31/95 10/31/96
<S> <C> <C>
Small/Mid Cap............................... NA 92%**
International Small Cap..................... NA 67%**
Growth Equity............................... NA 450%**
Global Equity............................... 57% 165%
Equity-Income............................... 54% 169%
Growth and Income........................... 40% 49%
Balanced.................................... 226% 253%
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Strategic Income............................ 180% 68%
Investment Quality Bond..................... 132% 56%
U.S. Govt. Securities....................... 469% 477%
National Municipal Bond..................... 44% 49%
International Growth and Income............. 69%* 170%
</TABLE>
* For the period January 9, 1995 (commencement of operations) to October 31,
1995.
** For the period March 4, 1996 (commencement of operations) to October 31,
1996.
Prior rates of portfolio turnover do not provide an accurate guide as to what
the rate will be in any future year, and prior rates and estimated rates are not
a limiting factor when it is deemed appropriate to purchase or sell securities
for a Portfolio. Each Portfolio of the Fund intends to comply with the various
requirements of the Code so as to qualify as a "regulated investment company"
thereunder. One such requirement is that a Portfolio must derive less than 30%
of its gross income from gains on the sale or other disposition of stock or
securities held for less than three months. Accordingly, the ability of a
particular Portfolio to effect certain portfolio transactions may be limited.
MANAGEMENT OF THE FUND
The Trustees and officers of the Fund, together with information as to
their principal occupations during the past five years, are listed below:
<TABLE>
<CAPTION>
Name, Address and Age Position Principal Occupation
- --------------------- with the During Past Five
Fund Years
---- --------------
<S> <C> <C>
Don B. Allen Trustee Senior Lecturer,
136 Knickerbocker Rd. William E. Simon
Pittsford, NY Graduate School of
14534 Business Admin.,
Age: 68 University of
Rochester.
Charles L. Bardelis Trustee President and Chief
297 Dillingham Avenue Executive Officer, Island Commuter Corporation (marine
Falmouth, MA 02540 transport).
Age: 55
Joe Scott President President, North American Funds, September 25, 1996 to
116 Huntington Avenue the present; Vice President, Business Development and
Boston, MA 02116 Marketing of North American Funds, January 1, 1996 to
Age: 47 September 25, 1996; Annuities Vice President, U.S. Savings
and Retirement Services Division, of Manulife, January 1,
1995 to December 31, 1995; Distribution Vice President,
U.S. Group and Pension Division, of Manulife, January 1,
1990 to December 31, 1994.
Samuel Hoar Trustee Senior Mediator, Judicial Arbitration Mediation Services
73 Tremont Street "JAMS/Endispute", June 1, 1994 to date; Partner, Goodwin,
Boston, MA 02109 Proctor & Hoar, prior to June 1, 1994.
Age: 68
Robert J. Myers Trustee Consulting Actuary (self-employed), April 1983 to date;
9610 Wire Avenue Member, Prospective Payment Assessment Commission,
Silver Spring, MD 20901 June 1993 to present; Chairman, Commission on Railroad
Age: 83 Retirement Reform 1988-1990.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Age Position Principal Occupation
- --------------------- -------- During Past Five
with the Years
-------- --------------
Fund
----
<S> <C> <C>
John D. Richardson* Chairman Senior Vice President and General Manager, U.S.
200 Bloor Street East of the Operations of Manulife -- 1995-present; Senior Vice
Toronto, Ontario, Canada Trustees President and General Manager, Canadian Operations of
M4W lE5 Manulife -- 1992-1994; Senior Vice President, Financial
Age: 58 Services of Manulife -- 1992.
F. David Rolwing Trustee President, Montgomery Mutual Insurance Co., Sandy
17810 Meeting House Road Spring, MD
Sandy Spring, MD 20860
Age: 62
John G. Vrysen Vice Vice President, Chief Financial Officer, U.S. Operations, of
116 Huntington Avenue President Manulife, January 1, 1996 to date; Vice President and Chief
Boston, MA 02116 Actuary, January 1986 to date, North American Security Life
Age: 40 Insurance Company.
James D. Gallagher Secretary Vice President, Legal Services, of Manulife, January 1, 1996
116 Huntington Avenue to date; Vice President, Secretary and General Counsel, June
Boston, MA 02116 1994 to date, North American Security Life Insurance
Age: 42 Company; Vice President and Associate General Counsel,
1990-1994, The Prudential Insurance Company of America
Richard C. Hirtle Vice Vice President, Chief Financial Officer, Annuities, of
116 Huntington Avenue President, Manulife, January 1996 to date; Vice President, Treasurer
Boston, MA 02116 Treasurer and Chief Financial Officer, November 1988 to date, North
Age: 40 and Chief American Security Life Insurance Company.
Financial
Officer
</TABLE>
*Trustee who is an "interested person", as defined in the 1940 Act.
Compensation of Trustees
The Fund does not pay any remuneration to its Trustees who are officers or
employees of the Adviser or its affiliates. Trustees not so affiliated receive
an annual retainer of $4,000, a fee of $1,000 for each meeting of the Trustees
that they attend in person and a fee of $200 for each such meeting conducted by
telephone. Trustees are reimbursed for travel and other out-of-pocket expenses.
The officers listed above are furnished to the Fund pursuant to the Advisory
Agreement described below and receive no compensation from the Fund. These
officers spend only a portion of their time on the affairs of the Fund.
22
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
=======================================================================================
Name of Person, Aggregate Compensation From Total Compensation from Fund
Position Fund for Fiscal Year Ended Complex for Fiscal Year Ended
October 31, 1996* October 31, 1996#*
---------------------------------------------------------------------------------------
<S> <C> <C>
Don B. Allen, Trustee $8,250 $46,750
---------------------------------------------------------------------------------------
Charles L. Bardelis, $8,250 $46,750
Trustee
---------------------------------------------------------------------------------------
Samuel Hoar, $8,250 $46,750
Trustee
---------------------------------------------------------------------------------------
Robert J. Myers, $8,250 $46,750
Trustee
---------------------------------------------------------------------------------------
F. David Rowling, $0 $12,000
Trustee
=======================================================================================
</TABLE>
*Compensation received for services as Trustee.
#Fund Complex includes all portfolios of the Fund as well as all portfolios of
NASL Series Trust and Manulife Series Fund, Inc. of which the Adviser, or an
affiliate of the Adviser is the investment adviser.
Principal Holders of Securities
As of December 1, 1996 (i) Frontier Trust Company, Trustee FBO Saia Motor
Freight Line Incorporated 401k Plan, Springhouse Corporate Center II, 323
Norristown Road, Ambler, Pennsylvania 192202-2756 owned record 1,414,379.799
shares (6.39% of the outstanding shares) of the Money Market Fund,386.011.396
shares (5.24% of the outstanding shares) of the Growth & Income Fund and
155,816.685 shares (7.63% of the outstanding shares) of Investment Quality Bond
Fund, (ii) Nalco Pension Plan for US Members, Elliot & Page, 120 Adelaide Street
West 1120, Toronto, Ontario owned record 501,980.183 shares (6.38% of the
outstanding shares) of the Global Equity Fund and (iii) Security Life, 116
Huntington Avenue, Boston, Massachusetts 02116 beneficially owned 1,498,323.859
shares (5.34% of the outstanding shares) of the Small/Mid Cap Fund,
1,029,612.855 shares (7.77% of the outstanding shares) of the International
Small Cap Fund and 1,124,365.451 shares (7.11% of the outstanding shares) of the
Growth Equity Fund. As of such date, no other shareholder owned of record or, to
the knowledge of the Fund, beneficially owned more than 5% of the outstanding
shares of any Portfolio of the Fund. The officers and Trustees of the Fund as a
group own less than 1% of the outstanding shares of each Portfolio of the
Fund.
INVESTMENT MANAGEMENT ARRANGEMENTS
The following information supplements the material appearing in the
Prospectus under the caption "MANAGEMENT OF THE FUND." The principal terms of
the Advisory and Subadvisory Agreements are described in the Prospectus. The
following supplemental discussion of such agreements covers certain legal terms
of such agreements. The Advisory and Subadvisory Agreements discussed below have
been filed with and are available from the Commission.
Advisory and Subadvisory Agreements
The Advisory Agreement, each Subadvisory Agreement (except those described
below) and the Salomon Brothers Asset Management Limited Consulting Agreement
were approved by the Trustees on September 28, 1995 and by the shareholders of
the portfolios on December 5, 1995. These approvals occurred in connection with
the change of control of NASL Financial as a result of the merger of North
American Life Assurance Company, the ultimate controlling parent of NASL
Financial, with The Manufacturers Life Insurance Company on January 1, 1996.
On December 15, 1995, the Trustees appointed Fred Alger Management, Inc.
("Alger") pursuant to a new Subadvisory Agreement with Alger ("Alger Subadvisory
Agreement") as subadviser to the Small/Mid Cap Fund. The Alger Subadvisory
Agreement, which provides for the management of the newly-established Small/Mid
Cap Fund, was approved by the Trustees,
23
<PAGE>
including a majority of the Trustees who are not parties to the Alger
Subadvisory Agreement or interested persons of any party to such Agreement on
December 15, 1995. The Alger Subadvisory Agreement was approved by the sole
shareholder of the Small/Mid Cap Fund on March 1, 1996.
On December 15, 1995, the Trustees appointed Founders Asset Management,
Inc. ("Founders") pursuant to a new Subadvisory Agreement with Founders
("Founders Subadvisory Agreement") as subadviser to the International Small Cap
and the Growth Equity Fund. The Founders Subadvisory Agreement, which provides
for the management of the newly-established International Small Cap and Growth
Equity Fund, was approved by the Trustees, including a majority of the Trustees
who are not parties to the Founders Subadvisory Agreement or interested persons
of any party to such Agreement on December 15, 1995. The Founders Subadvisory
Agreement was approved by the sole shareholder of the International Small Cap
and Growth Equity Fund on March 1, 1996.
Effective October 1, 1996, Oechsle International, Wellington Management,
and Goldman Sachs Asset Management, the Subadvisers of the Global Equity
(formerly Global Growth), Money Market, Balanced (formerly the Asset Allocation)
and Equity-Income (formerly Value Equity and prior thereto Growth) Funds,
respectively, resigned their positions as Subadvisers of those Portfolios. On
September 27, 1996, the Trustees (i) appointed Morgan Stanley Asset Management
Inc. ("Morgan Stanley") pursuant to a new Subadvisory Agreement with Morgan
Stanley ("Morgan Stanley Subadvisory Agreement") to manage the Global Equity
Fund, (ii) appointed T. Rowe Price Associates, Inc. ("T. Rowe Price") pursuant
to a new Subadvisory Agreement with T. Rowe Price ("T. Rowe Price Subadvisory
Agreement") to manage the Equity-Income Fund, (iii) appointed Manufacturers
Adviser Corporation ("MAC") pursuant to a new Subadvisory Agreement with MAC
("MAC Subadvisory Agreement") to manage the Money Market Fund and (iv) appointed
Founders pursuant to an amendment to the Founders' Subadvisory Agreement to
manage the Balanced Fund. All such Subadvisory Agreements were approved by the
Trustees, including a majority of the Trustees who are not parties to the
agreements or interested persons of any party to such agreements, on September
27 (with an effective date of October 1, 1996) and by the shareholders of the
respective portfolios on December 20, 1996.
For the periods November 1, 1993 to October 31, 1994, November 1, 1994 to
October 31, 1995, November 1, 1995 to October 31, 1996, the Fund paid total
advisory fees to the Adviser of $3,483,764, $ 4,324,695 and $5,398,787,
respectively. The amounts represented by each of the Portfolios are as follows:
<TABLE>
<CAPTION>
Portfolio 11/1/93 to 10/31/94 11/1/94 to 10/31/95 11/1/95 to 10/31/96
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap NA NA 63,467*
International Small Cap NA NA 47,966*
Growth Equity NA NA 40,762*
Global Equity $882,302 $1,185,949 1,174,747
Equity-Income $556,612 $758,694 936,036
Growth and Income $333,531 $521,769 784,990
International Growth and Income N/A **$102,022 236,517
Strategic Income *** $195,046 415,019
Investment Quality Bond $89,202 $99,260 127,602
U.S. Government $860,225 $661,449 693,407
National Municipal Bond $19,807 $68,638 121,407
Money Market $38,127 $44,306 38,258
Balanced $703,958 $687,562 718,609
</TABLE>
*For the period March 4, 1996 (commencement of operations) to October 31,
1996.
**For the period January 9, 1995 (commencement of operations) to
October 31, 1995.
24
<PAGE>
***For the period November 30, 1993 (commencement of operations) to
October 31, 1994.
For information concerning waivers of advisory fees and expense
reimbursements, see note 5 to the financial statements dated October 31, 1996
included in this Statement of Additional Information.
For the same periods, the Adviser paid total subadvisory fees of
$1,609,821, $2,060,667 and $2,533,101, respectively. The amounts represented by
each of the Portfolios are as follows:
<TABLE>
<CAPTION>
Portfolio 11/1/93 to 10/31/94 11/1/94 to 10/31/95 11/1/95 to 10/31/96
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap N/A N/A $36,022*
International Small Cap N/A N/A $29,693*
Growth Equity N/A N/A $22,646*
Global Equity $539,184 $724,749 $709,960
Equity-Income $241,581 $323,912 $396,204
Growth and Income $148,991 $227,367 $334,666
International Growth and Income N/A **$56,679 $131,398
Strategic Income ***$0 #$91,022 #$192,079
Investment Quality Bond $33,714 $37,223 $47,851
U.S. Government $323,714 $248,043 $260,027
National Municipal Bond $9,819 $40,125 $50,586
Money Market $14,296 $16,615 $14,347
Balanced $298,522 $294,932 $307,622
</TABLE>
*For the period March 4, 1996 (commencement of operations) to October 31,
1996.
**For the period January 9, 1995 (commencement of operations) to
October 31, 1995.
***For the period November 30, 1993 (commencement of operations) to October
31, 1994.
#Of these amounts, $29,730 and $ 48,019.75 respectively, were paid by SBAM
to Salomon Brothers Asset Management Limited under the Subadvisory Consulting
Agreement.
The Prospectus refers to a subadvisory consulting agreement between SBAM
and Salomon Brothers Asset Management Limited ("SBAM Limited"). Under that
agreement SBAM Limited provides certain investment advisory services to SBAM
relating to currency transactions and investments in non-dollar denominated debt
securities for the benefit of the Strategic Income Fund. SBAM pays SBAM Limited,
as full compensation for all services provided under the subadvisory consulting
agreement, a portion of its subadvisory fee, such amount being an amount equal
to the fee payable under SBAM's subadvisory agreement multiplied by the current
value of the net assets of the portion of the assets of the Strategic Income
Fund that SBAM Limited has been delegated to manage divided by the current value
of the net assets of the Portfolio. The Fund will not incur any additional
expenses in connection with SBAM Limited's services. SBAM Limited is a wholly
owned subsidiary of Salomon Brothers Europe Limited ("SBEL"). Salomon
(International) Finance A G ("SIF") owns 100% of SBEL's Convertible Redeemable
Preference Shares and 36.8% of SBEL's Ordinary Shares, while the remaining 63.2%
of SBEL's Ordinary Shares are owned by Salomon Brothers Holding Company Inc
("SBH"). SIF is wholly owned by SBH, which is in turn, a wholly owned subsidiary
of Salomon Inc.
25
<PAGE>
For the year ended October 31, 1996 the net investment advisory fees
retained by the Adviser after payment of subadvisory fees was $2,865,686,
allocated among the portfolios as follows:
<TABLE>
<CAPTION>
Dollar Amount AnnualPercentage of
------------- Portfolio Net Assets
--------------------
<S> <C> <C>
Small/Mid Fund* $27,445 0.14
International Small Cap Fund* $18,273 0.15
Growth Equity Fund* $18,116 0.13
Global Equity Fund $464,786 0.40
International Growth and Income Fund $105,119 0.36
Growth and Income Fund $450,324 0.35
Equity-Income Fund $539,833 0.39
Balanced Fund $410,987 0.41
Strategic Income Fund $222,940 0.33
Investment Quality Bond Fund $79,752 0.37
National Municipal Bond Fund $70,821 0.36
U.S. Government Securities Fund $433,379 0.39
Money Market Fund $23,911 0.11
</TABLE>
*For the period March 4, 1996 (commencement of operations) to October 31, 1996.
The Advisory Agreement and each Subadvisory Agreement, including the SBAM
Limited Consulting Agreement (collectively, the "Agreements") will continue in
effect as to a Portfolio for a period no more than two years from the date of
its execution or the execution of an amendment making the agreement applicable
to that Portfolio only so long as such continuance is specifically approved at
least annually either by the Trustees or by the vote of a majority of the
outstanding voting securities of each of the Portfolios of the Fund, provided
that in either event such continuance shall also be approved by the vote of the
majority of the Trustees who are not interested persons of any party to the
Agreements, cast in person at a meeting called for the purpose of voting on such
approval. The required shareholder approval of any continuance of any of the
Agreements shall be effective with respect to any Portfolio if a majority of the
outstanding voting securities of the class of capital stock of that Portfolio
vote to approve such continuance, notwithstanding that such continuance may not
have been approved by a majority of the outstanding voting securities of the
Fund.
If the shareholders of any Portfolio fail to approve any continuance of any
Agreement, the Adviser or Subadviser (including SBAM Limited), as applicable,
will continue to act as such with respect to such Portfolio pending the required
approval of the continuance of such Agreement, of a new contract with the
Adviser or Subadviser or different investment adviser or subadviser, or other
definitive action. In the case of the Adviser and Oechsle International, the
compensation received by them in respect of such a Portfolio during such period
will be no more than its actual costs incurred in furnishing investment advisory
and management services to such Portfolio or the amount it would have received
under the Agreement in respect of such Portfolio, whichever is less. In the case
of the Subadvisers, the compensation received by them in respect of such a
Portfolio during such a period will be no more than that permitted by Rule 15a-4
under the 1940 Act.
The Agreements may be terminated at any time, without the payment of
penalty, by the Trustees of the Fund or by the vote of a majority of the
outstanding voting securities of the applicable Portfolios of the Fund, with
respect to any Portfolio by the vote of a majority of the outstanding shares of
such Portfolio, or by the Adviser or applicable Subadviser on 60 days' written
notice to the other party or parties to the Agreement and, in the case of the
Subadvisory Agreements, to the Fund. Each of the Agreements will automatically
terminate in the event of its assignment.
The Agreements may be amended by the parties provided that such amendment
is specifically approved by the vote of a majority of the outstanding voting
securities of the Fund or applicable Portfolio(s), as the case may be, and by
the vote of a majority of the Trustees of the Fund who are not interested
persons of the Fund, of the Adviser or of the applicable Subadviser or of SBAM
Limited, cast in person at a meeting called for the purpose of voting upon such
approval. The required shareholder approval of any amendment shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not be approved by a majority of the outstanding voting securities
of (i) any other Portfolio affected by the amendment or (ii) all the Portfolios
of the Fund.
26
<PAGE>
Each Subadvisory Agreement, except the Oechsle Subadvisory Agreement and
the J.P. Morgan Subadvisory Agreement, and the SBAM Limited Consulting
Agreement, provides that the Subadviser or SBAM Limited will not be liable to
the Fund or the Adviser for any losses resulting from any matters to which the
agreement relates other than losses resulting from the Subadviser's or SBAM
Limited's willful misfeasance, bad faith or gross negligence in the performance
of, or from reckless disregard of, its duties. The Oechsle Subadvisory Agreement
and the J.P. Morgan Subadvisory Agreement each provide that the subadviser will
not be liable to the Fund or NASL Financial for any losses resulting from any
error of judgment made in the good faith exercise of the Subadviser's investment
discretion in connection with selecting investments, except for losses resulting
from willful misfeasance, bad faith or gross negligence of, or from reckless
disregard of, it duties, and that it shall not be liable for any losses
resulting from any other matters except for losses resulting from willful
misfeasance, bad faith or negligence in the performance of, or from disregard
of, its duties.
DISTRIBUTION PLANS
The Fund currently offers three classes of shares in each Portfolio: "Class
A" shares, "Class B" shares and "Class C" shares (the "Multiple Pricing
System"). See "MULTIPLE PRICING SYSTEM" and "HOW TO PURCHASE SHARES" in the
Prospectus.
In addition to the front end sales charge which may be deducted at the time
of purchase of Class A shares and the CDSC which may apply on redemption of
Class B shares, each class of shares of each Portfolio is authorized under the
Distribution Plan applicable to that class of shares (the "Class A Plan," the
"Class B Plan" and the "Class C Plan," collectively, the "Plans") adopted
pursuant to Rule 12b-1 under the 1940 Act to use the assets attributable to such
class of shares of the Portfolio to finance certain activities relating to the
distribution of shares to investors. The Plans are "compensation" plans
providing for the payment of a fixed percentage of average net assets to finance
distribution expenses. The Plans provide for the payment by each class of shares
of each Portfolio of the Fund, other than the Money Market Fund, of a monthly
distribution and service fee to the Distributor, as principal underwriter for
the Fund. Portions of the fees prescribed below are used to provide payments to
the Distributor, to promotional agents, to brokers, dealers or financial
institutions (collectively, "Selling Agents") and to Service Organizations for
ongoing account services to shareholders and are deemed to be "service fees" as
defined in paragraph (b)(9) of Section 26 of the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
Under the Class A Plan, Class A shares of each Portfolio (except as
described in the next sentence) are subject to a fee of up to .35% of their
respective average annual net assets, five-sevenths of which (.25%) constitutes
a "service fee." Class A shares of the National Municipal Bond Fund are subject
to a fee of up to .15% of Class A average annual net assets, the entire amount
of which constitutes a "service fee," and Class A shares of the Money Market
Fund bear no such fees. Under the Class B Plan, Class B shares of each Portfolio
(with the exception of the Money Market Fund) are subject to a fee of up to
1.00% of their respective average annual net assets, one-fourth (.25%) of which
constitutes a "service fee." Under the Class C Plan, Class C shares of each
Portfolio (with the exception of the Money Market Fund) are subject to a fee of
up to 1.00% of their respective average annual net assets, one-fourth (.25%) of
which constitutes a "service fee."
Payments under the Plans are used primarily to compensate the Distributor
for distribution services provided by it in connection with the offering and
sale of the applicable class of shares, and related expenses incurred, including
payments by the Distributor to compensate or reimburse Selling Agents for sales
support services provided and related expenses incurred by such Selling Agents.
Such services and expenses may include the development, formulation and
implementation of marketing and promotional activities, the preparation,
printing and distribution of prospectuses and reports to recipients other than
existing shareholders, the preparation, printing and distribution of sales
literature, expenditures for support services such as telephone facilities and
expenses and shareholder services as the Fund may reasonably request, provision
to the Fund of such information, analyses and opinions with respect to marketing
and promotional activities as the Fund may, from time to time, reasonably
request, commissions, incentive compensation or other compensation to, and
expenses of, account executives or other employees of the Distributor or Selling
Agents, attributable to distribution or sales support activities, respectively,
overhead and other office expenses of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively, and any
other costs and expenses relating to distribution or sales support activities.
The Distributor may pay directly Selling Agents and may provide directly the
distribution services described above, or it may arrange for such payment or the
performance of some or all of such services by Wood Logan, the Fund's exclusive
promotional agent, at such level of compensation as may be agreed to by the
Distributor and Wood Logan.
27
<PAGE>
The distribution and service fees attributable to the Class B shares and
Class C shares are designed to permit an investor to purchase shares without the
assessment of a front end sales charge, and, with respect to the Class C shares,
without the assessment of a front end sales charge or a CDSC, and at the same
time permit the Distributor to compensate securities dealers with respect to
sales of such shares.
The Distributor is authorized by each Plan to retain any excess of the fees
it receives thereunder over its payments to selected dealers or Wood Logan and
its expenses incurred in connection with providing distribution services. Thus,
payments under a Plan may result in a profit to the Distributor. Each Plan also
provides that to the extent that any payments by any class of any Portfolio of
the Fund to the Distributor in its capacity as investment adviser to the Fund,
such as for investment management fees, may be deemed to be an indirect payment
of distribution expenses, those indirect payments are deemed to be authorized by
the Plans.
In adopting the Plans, the Trustees determined that the adoption of the
Plans is in the best interests of the Fund and its shareholders, that there is a
reasonable likelihood that the Plans will benefit the Fund and its shareholders,
and that the Plans are essential to, and an integral part of, the Fund's program
for financing the sale of shares of the various Portfolios of the Fund to the
public.
The Distributor, a wholly-owned subsidiary of North American Security Life
Insurance Company, is a broker/dealer registered under the Securities Exchange
Act of 1934, as amended ("1934 Act") and a member of the NASD. The Distributor's
address is the same as that of the Fund and the Distributor also serves as the
investment adviser to the Fund as described above under "MANAGEMENT OF THE
FUND." The Distributor has entered into an exclusive promotional agent agreement
with Wood Logan pursuant to which Wood Logan will solicit securities dealers to
sell Fund shares, offer sales training to registered representatives of such
dealers, prepare and distribute certain sales and promotional materials and
otherwise assist in the distribution of Fund shares. For providing such
services, the Distributor will pay Wood Logan such amounts as are agreed to from
time to time pursuant to the promotional agent agreement. Wood Logan, a
broker/dealer registered under the 1934 Act and a member of the NASD, is a
subsidiary of Wood Logan Associates, Inc., a corporation which is a wholly owned
subsidiary of a holding company that is 85% owned by Manulife and approximately
15% owned by principals of Wood Logan. The address of Wood Logan is 1455 East
Putnam Avenue, Old Greenwich, Connecticut 06870.
Neither a Plan nor any related agreements can take effect until approved by
a majority vote of both all the Trustees and those Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of a Plan or in any agreements related to it (the
"Qualified Trustees"), cast in person at a meeting called for the purpose of
voting on such Plan and the related agreements. Such approvals of the Plans were
obtained on December 16, 1993. The Plan relating to Class A shares was approved
(i) with respect to the Strategic Income, Investment Quality Bond, U.S.
Government Securities, National Municipal Bond and Money Market Funds, by the
shareholders of each such Portfolio on February 18, 1994, as the initial
shareholders of the Class A shares in each such Portfolio, (ii) with respect to
the Global Equity, Equity-Income, Growth and Income and Balanced Funds, by the
Distributor on March 30, 1994 as sole initial shareholder of the Class A shares
of each such Portfolio, (iii) with respect to the International Growth and
Income Fund, by the Distributor on January 4, 1995 as sole initial shareholder
of the Class A shares of such Portfolio, (iv) with respect to the Small/Mid Cap,
Growth Equity and the International Small Cap Funds, by the Distributor on March
1, 1996 as sole initial shareholder of the Class A shares of such Portfolio. The
Plan relating to Class B shares was approved (i) with respect to the Strategic
Income, Investment Quality Bond, U.S. Government Securities, National Municipal
Bond, Money Market, Global Equity, Equity-Income, Growth and Income and Balanced
Funds by the Distributor on March 30, 1994 as sole initial shareholder of the
Class B shares of each such Portfolio, (ii) with respect to the International
Growth and Income Fund, by the Distributor on January 4, 1995 as sole initial
shareholder of the Class B shares of such Portfolio, (iii) with respect to the
Small/Mid Cap, Growth Equity and International Small Cap Funds by the
Distributor on March 1, 1996 as sole initial shareholder of the Class B shares
of each such Portfolio. The Plan relating to Class C shares was approved (i)
with respect to the Global Equity, Equity-Income, Growth and Income and Balanced
Funds, by the shareholders of each such Portfolio on February 18, 1994, as the
initial shareholders of the Class C shares in each such Portfolio, (ii) with
respect to the Strategic Income, Investment Quality Bond, U.S. Government
Securities, National Municipal Bond and Money Market Funds, by the shareholders
of each such Portfolio on March 30, 1994, as the initial shareholders of the
Class C shares in each such Portfolio, (iii) with respect to the International
Growth and Income Fund, by the Distributor on January 4, 1995 as sole initial
shareholder of the Class C shares of such Portfolio, (iv) with respect to the
Small/Mid Cap, Growth Equity and International Small Cap Funds, by the
Distributor on March 1, 1996 as sole initial shareholder of the Class C shares
of such Portfolio.
The Plans will continue in effect only so long as their continuance is
specifically approved at least annually by the Trustees in the manner described
above for Trustee approval of the Plans. The Trustees will receive quarterly and
annual statements concerning distribution and shareholder servicing
expenditures. In such statements, only expenditures properly attributable to the
28
<PAGE>
sale or servicing of a particular class of shares will be used to justify any
distribution or servicing fee charged to that class. Expenditures not related to
the sale or servicing of a particular class will not be presented to the
Trustees to justify any fee attributable to that class. The statements,
including the allocations upon which they are based, will be subject to the
review and approval of the Qualified Trustees in the exercise of their fiduciary
duty. Each Plan may be terminated at any time with respect to any one or more
Portfolios by a majority vote of the Qualified Trustees or by vote of a majority
of the outstanding voting securities attributable to Class A, Class B and Class
C shares, as applicable, of such Portfolio or Portfolios. If a Plan is
terminated by the Trustees or is otherwise discontinued with respect to one or
more Portfolios, no further payments would be made by the Fund in respect of the
Class A, Class B and Class C shares, as applicable, of such Portfolio or
Portfolios under that Plan. A Plan may remain in effect with respect to Class A,
Class B, Class C or shares, as applicable, of a Portfolio even if it has been
terminated with respect to the Class A, Class B and Class C shares, as
applicable, of one or more other Portfolios.
A Plan may not be amended with respect to any class of any Portfolio so as
to materially increase the amount of the fees payable thereunder unless the
amendment is approved by a vote of at least a majority of the outstanding voting
securities of such class of such Portfolio. In addition, no material amendment
to a Plan may be made unless approved by the Trustees in the manner described
above for Trustee approval of the Plans.
For the period November 1, 1995 to October 31, 1996, the Fund paid
distribution and service fees pursuant to the Class A Plan to the Distributor of
$659,514 comprised of:
$ 4,983 from the Small/Mid Cap Fund*,
$ 3,424 from the International Small Cap Fund*,
$ 4,389 from the Growth Equity Fund*,
$ 92,464 from the Global Equity Fund,
$ 90,494 from the Equity-Income Fund,
$ 52,788 from the Growth and Income Fund,
$ 39,989 from the Strategic Income Fund,
$ 37,745 from the Balanced Fund,
$ 34,097 from the Investment Quality Bond Fund,
$268,716 from the U.S. Government Securities Fund,
$ 18,795 from the International Growth and Income Fund, and
$ 11,630 from the National Municipal Bond Fund.
*For the period March 4, 1996 to October 31, 1996.
Of the total, $51,507 was paid by the Distributor to Wood Logan for providing
promotional and shareholder services. Of this latter amount, approximately 81%
was spent for sales literature and printing prospectuses for other than current
shareholders, 6% represented allocated overhead expenses of Wood Logan and 13%
represented allocated compensation of personnel of Wood Logan. The balance of
the fees were, in accordance with the Class A Plan, retained by the Distributor
and used to fund shareholder servicing, promotional activities and expenses. In
addition, $468,970 of the total distribution fees for Class A were paid to
securities dealers, comprised of:
$ 2,397 from the Small/Mid Cap Fund,
$ 1,454 from the International Small Cap Fund,
$ 2,106 from the Growth Equity Fund,
$ 42,588 from the Global Equity Fund,
$ 48,274 from the Equity-Income Fund,
$ 35,897 from the Growth and Income Fund,
$ 31,240 from the Strategic Income Fund,
$ 26,197 from the Balanced Fund,
$ 27,218 from the Investment Quality Bond Fund
$230,796 from the U.S. Government Securities Fund
$ 9,335 from the International Growth and Income Fund and
$ 11,468 from the National Municipal Bond Fund.
29
<PAGE>
For the period November 1, 1995 to October 31, 1996, the Fund paid
distribution and service fees pursuant to the Class B Plan to the Distributor of
$1,665,286 comprised of:
$ 26,559 from the Small/Mid Cap Fund*,
$ 17,637 from the International Small Cap Fund*,
$ 15,448 from the Growth Equity Fund*,
$264,579 from the Global Equity Fund,
$243,764 from the Equity-Income Fund,
$280,833 from the Growth and Income Fund,
$263,337 from the Strategic Income Fund,
$132,045 from the Balanced Fund,
$ 44,719 from the Investment Quality Bond Fund,
$186,538 from the U.S. Government Securities Fund,
$128,705 from the International Growth and Income Fund and
$ 61,122 from the National Municipal Bond Fund.
*For the period March 4, 1996 to October 31, 1996.
Of the total, $0 was paid by the Distributor to Wood Logan for providing
promotional and shareholder services. Of this latter amount, approximately 81%
was spent for sales literature and printing prospectuses for other than current
shareholders, 6% represented allocated overhead expenses of Wood Logan and 13%
represented allocated compensation of personnel of Wood Logan. The balance of
the fees were, in accordance with the Class B Plan, retained by the Distributor
and used to fund shareholder servicing, promotional activities and expenses. In
addition, $218,442 of the total distribution fees for Class B were paid to
securities dealers, comprised of:
$ 472 from the Small/Mid Cap Fund,
$ 636 from the International Small Cap Fund,
$ 359 from the Growth Equity Fund,
$45,225 from the Global Equity Fund,
$36,251 from the Equity-Income Fund,
$34,620 from the Growth and Income Fund,
$39,902 from the Strategic Income Fund,
$18,975 from the Balanced Fund,
$ 5,364 from the Investment Quality Bond Fund,
$17,231 from the U.S. Government Securities Fund,
$13,165 from the International Growth and Income Fund and
$ 6,242 from the National Municipal Bond Fund.
For the period November 1, 1995 to October 31, 1996, the Fund paid
distribution and service fees pursuant to the Class C Plan to the Distributor of
$3,776,973, comprised of:
$ 27,814 from the Small/Mid Cap Fund*,
$ 18,264 from the International Small Cap Fund*,
$ 17,304 from the Growth Equity Fund*,
$788,845 from the Global Equity Fund,
$847,265 from the Equity-Income Fund,
$694,154 from the Growth and Income Fund,
$179,767 from the Strategic Income Fund,
$787,578 from the Balanced Fund,
$ 70,532 from the Investment Quality Bond Fund,
$201,380 from the U.S. Government Securities Fund,
$ 80,388 from the International Growth and Income Fund and
$ 63,682 from the National Municipal Bond Fund.
*For the period March 4, 1996 to October 31, 1996.
30
<PAGE>
Of the total, $404,803 was paid by the Distributor to Wood Logan for providing
promotional and shareholder services. Of this latter amount, approximately 81%
was spent for sales literature and printing prospectuses for other than current
shareholders, 6% represented allocated overhead expenses of Wood Logan and 13%
represented allocated compensation of personnel of Wood Logan. The balance of
the fees were, in accordance with the Class C Plan, retained by the Distributor
and used to fund shareholder servicing, promotional activities and expenses. In
addition, $2,835,633 of the total distribution fees for Class C were paid to
securities dealers, comprised of:
$ 6,181 from the Small/Mid Cap Fund,
$ 4,714 from the International Small Cap Fund,
$ 5,871 from the Growth Equity Fund,
$634,944 from the Global Equity Fund,
$682,211 from the Equity-Income Fund,
$521,558 from the Growth and Income Fund,
$112,120 from the Strategic Income Fund,
$655,538 from the Balanced Fund,
$ 37,808 from the Investment Quality Bond Fund,
$108,515 from the U.S. Government Securities Fund,
$ 37,814 from the International Growth and Income Fund and
$ 28,359 from the National Municipal Bond Fund.
Underwriters
For the periods November 1, 1993 to October 31, 1994, November 1, 1994 to
October 31, 1995 and November 1, 1995 to October 31, 1996, the Distributor
received underwriting commissions of $1,344,806, $960,690 and $1,046,375
respectively. The amounts were comprised as reflected below, with respect to
shares of the following Portfolios:
<TABLE>
<CAPTION>
Portfolio 11/1/93 to 11/1/94 to 10/31/95 11/1/95 to 10/31/96
10/31/94
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap NA NA * $ 77,609
International Small Cap NA NA * $ 47,504
Growth Equity NA NA * $ 51,483
Global Equity $413,960 $172,487 $ 93,621
Equity-Income $213,835 $138,334 $137,617
Growth and Income $102,711 $123,745 $141,037
International Growth and N/A **$100,890 $ 64,345
Income
Strategic Income ***$206,721 $65,693 $114,585
Investment Quality Bond $33,392 $19,367 $ 23,097
U.S. Government $155,785 $223,721 $218,181
National Municipal Bond $20,201 $31,612 $ 32,640
Balanced $198,201 $84,841 $ 44,656
</TABLE>
*For the period March 4, 1996 (commencement of operations) to October 31,
1996.
**For the period January 9, 1995 (commencement of operations) to
October 31, 1995.
***For the period November 30, 1993 (commencement of operations) to
October 31, 1994.
31
<PAGE>
Of the total underwriting commissions received during the three fiscal year
periods, none was retained by the Distributor. The balance of such commissions
was paid to securities dealers and the promotional agent. During such periods
the Distributor did not receive directly or indirectly from the Fund any
compensation on the redemption or repurchase of Fund shares, brokerage
commissions or other underwriting compensation.
PORTFOLIO BROKERAGE
Pursuant to the Subadvisory Agreements, the Subadvisers are responsible for
placing all orders for the purchase and sale of portfolio securities of the
Fund, the portfolio transactions for which are the responsibility of the
Adviser. The Subadvisers have no formula for the distribution of the Fund's
brokerage business, their intention being to place orders for the purchase and
sale of securities with the primary objective of obtaining the most favorable
overall results for the Fund. The cost of securities transactions for each
Portfolio will consist primarily of brokerage commissions or dealer or
underwriter spreads. Bonds and money market instruments are generally traded on
a net basis and do not normally involve either brokerage commissions or transfer
taxes.
Occasionally, securities may be purchased directly from the issuer. For
securities traded primarily in the over-the-counter market, the Subadvisers
will, where possible, deal directly with dealers who make a market in the
securities unless better prices and execution are available elsewhere. Such
dealers usually act as principals for their own account.
The Subadvisers consider various factors in selecting brokers through which
orders for client accounts are executed. The Subadvisers' primary consideration
is the broker's ability to provide the best execution of the trade (including
both trade price and commission). Assuming equal execution capabilities, the
Subadvisers also take other factors into account.
In determining which brokers provide best execution, the Subadvisers look
primarily to the stock price quoted by the broker, and normally place orders
with the broker through which they can obtain the most favorable price. If the
same price is available from more than one broker, a Subadviser's judgment as to
the following factors may influence the selection of a broker for a particular
trade: the execution, clearance and settlement capabilities of the brokers under
consideration; the nature of the security being traded; the size of the
transaction; the desired timing of the trade; the activity existing and expected
in the market for the particular security; confidentiality; the financial
stability of the brokers under consideration; actual or apparent operational
problems of any broker under consideration; and the negotiated commission rates
available at the time of the trade. The Subadvisers may also consider the
willingness of particular brokers to sell shares of the Fund and difficulty of
execution.
The Subadvisers also consider the nature and extent of research services
provided when they select brokers. Assuming equal execution capabilities as
described above, the Subadvisers may direct commission business to brokers who
provide research services. Such services include, but are not limited to:
analyses and reports concerning economic factors and trends, industries,
specific securities, portfolio strategy, and valuation and performance of
accounts; advice regarding critical factors supporting research recommendations
and special reports or information based on the specific requests of a
Subadviser's portfolio manager/analysts. The Subadvisers may also from time to
time obtain research services prepared by third parties and provided by brokers
in exchange for a predetermined amount of commission business. These services
include portfolio monitoring, analysis and performance measurement systems,
various economic forecasting and research services covering stocks and bonds,
research and trading conferences, and a source of information as to block
trading opportunities. Some third party arrangements are cancelable at any time
while others require notice. Such third party arrangements do not involve a
substantial amount of the Subadvisers' commission business on behalf of clients.
In accordance with industry practice, commission rates are normally
determined through negotiations with brokers conducted by the Subadvisers'
traders. These negotiations take into account industry norms for particular
transactions, the size and type of trades, the size and expertise of the
brokerage firm involved and the nature of brokerage and research services
provided, including special services in connection with a particular trade.
(Such special services could include, among other things, the assumption of
market risk in connection with a trade or series of trades or the facilitation
of trades in a thin or volatile market.) Commission rates paid by the
Subadvisers in those cases may be higher than those charged by brokers for
execution of similar trades without the provision of research and/or special
services.
No precise monetary value can be assigned to research and special execution
services furnished to the Subadvisers by brokers. The Subadvisers will review
all research services and will determine if the amounts of commissions directed
to brokers are reasonable in relation to the value of the brokerage and research
services provided, viewed in terms of both particular transactions
32
<PAGE>
and the Subadvisers' overall responsibilities with respect to the accounts over
which they exercise investment discretion. Each Subadviser will maintain an
internal allocation procedure to identify those brokers who provide them with
research services and the amount of research services they provide, and will
endeavor to direct sufficient commissions to them to ensure the continued
receipt of such services as the Subadviser believes to be valuable.
Research services furnished by brokers will generally be used in servicing
all of the Portfolios of the Fund advised by a Subadviser, although not all of
such services may be used in connection with any particular Portfolio that paid
commissions to the brokers providing such services.
The Subadvisers' practices in selecting brokers will be reviewed
periodically by the Trustees of the Fund.
The Subadvisers and/or their affiliates currently manage portfolios and
accounts other than those of the Fund. Although investment recommendations or
determinations for the Fund's Portfolios will be made by the Subadvisers
independently from the investment recommendations and determinations made by
them for any other portfolio or account or by the Subadvisers' affiliates for
the portfolios or accounts they manage, investments deemed appropriate for the
Fund's Portfolios by the Subadvisers may also be deemed appropriate by them or
affiliated advisers for other portfolios or accounts, so that the same security
may be purchased or sold at or about the same time for both the Fund's
Portfolios and such other portfolios or accounts. In such circumstances, the
Subadvisers may determine that orders for the purchase or sale of the same
security for the Fund's Portfolios and one or more other portfolios or accounts
should be combined, in which event the transactions will be priced and allocated
in a manner deemed by the Subadvisers to be equitable and in the best interests
of the Fund's Portfolios and such other portfolios or accounts. While in some
instances combined orders could adversely affect the price or volume of a
security, the Subadvisers and the Fund believe that its participation in such
transactions on balance will produce better overall results for the Fund.
For the periods November 1, 1993 to October 31, 1994, November 1, 1994 to
October 31, 1995 and November 1, 1995 to October 31, 1996, the Fund paid
brokerage commissions in connection with portfolio transactions of $777,036,
$1,039,631 and $1,768,058, respectively. The amounts represented by each of the
Portfolios are as follows:
<TABLE>
<CAPTION>
Portfolio 11/1/93 to 10/31/94 11/1/94 to 10/31/95 11/1/95 to 10/31/96
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap N/A N/A *****$24,367
International Small Cap N/A N/A *****$47,513
Growth Equity N/A N/A *****$65,354
Global Equity* $462,441 $509,668 $542,895
Equity-Income** $140,638 $211,194 $605,408
Growth and Income $70,381 $97,836 $141,134
International Growth and N/A ***$12,558 $173,403
Income
Balanced**** $103,576 $208,375 $167,984
</TABLE>
*Formerly known as the Global Growth Fund.
**Formerly known as the Value Equity Fund and prior thereto the Growth Fund
***For the period January 9, 1995 (commencement of operations) to
October 31, 1995.
****Formerly known as the Asset Allocation Fund.
*****For the period March 4, 1996 (commencement of operations) to
October 31, 1996.
Salomon Brothers Inc. ("Salomon"), Dresdner Bank, J.P. Morgan Securities
Inc and J.P. Morgan Securities Ltd. (J.P. Morgan") and Morgan Stanley & Co.
Incorporated are affiliated brokers of the Fund due to the positions of Salomon,
Oechsle International, J.P. Morgan and Morgan Stanley, respectively, as
Subadvisers to Fund portfolios. Prior to October 1, 1996, Goldman Sachs & Co.
("Goldman") was an affiliated brokers of the Fund due to the position of Goldman
as Subadviser to the Equity-Income Fund.
33
<PAGE>
From November 1, 1993 to October 31, 1994, brokerage commissions were paid
to Goldman, Sachs & Co. as follows:
--------------------
<TABLE>
<CAPTION>
Portfolio 11/1/93 to % of Portfolio's % of aggregate $
10/31/94 Brokerage Commissions amount of transactions
Represented for the for the period
period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity-Income $10,169 7% 1%
Growth and Income $2,502 4% 1%
Balanced $9,284 9% 0.12%
Investment Quality $0 0% 0.48%
National Municipal Bond $0 0% 37%
Money Market $0 0% 4%
</TABLE>
From November 1, 1994 to October 31, 1995, brokerage commission were paid to
Goldman, Sachs & Co. as follows:
- --------------------
<TABLE>
<CAPTION>
Portfolio 11/1/94 to % of Portfolio's % of aggregate $
10/31/95 Brokerage Commissions amount of transactions
Represented for the for the period
period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity $4,137 0.81% 0.67%
Equity-Income $23,638 11.19% 0.27%
Balanced $16,464 7.90% 0.26%
International Growth and $1,690 13.46% 1.97%
Income*
Growth and Income $4,086 4.18% 0.36%
</TABLE>
*For the period January 9, 1995 (commencement of operations) to October 31, 1995
From November 1, 1995 to October 31, 1996, brokerage commissions were paid
to Goldman, Sachs & Co. as follows:
--------------------
<TABLE>
<CAPTION>
Portfolio 11/1/95 to % of Portfolio's % of aggregate $
10/31/96 Brokerage Commissions amount of transactions
Represented for the for the period
period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap $9,019 18.98% 0.77%
Growth Equity $1,259 1.93% 0.74%
Global Equity $49,434 9.11% 1.87%
Equity-Income $32,267 5.33% 2.15%
Growth and Income $5,892 4.17% 1.03%
International Growth and $1,744 1.01% 1.79%
Income
Balanced $9,195 5.47% 0.28%
</TABLE>
34
<PAGE>
From November 1, 1993 to October 31, 1994, brokerage commissions were paid to
Salomon Brothers Inc as follows:
- --------------------
<TABLE>
<CAPTION>
Portfolio 11/1/93 to % of Portfolio's % of aggregate $
10/31/94 Brokerage Commissions amount of transactions
Represented for the for the period
period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity $2,277 0% 1%
Equity-Income $7,181 5% 0.13%
Growth & Income $7,908 11% 1%
Balanced $7,396 7% 4%
Investment Quality Bond $0 0% 1%
U.S. Government $0 0% 0.25%
Money Market $0 0% 1%
</TABLE>
From November 1, 1994 to October 31, 1995, brokerage commissions were paid
to Salomon Brothers Inc as follows:
--------------------
<TABLE>
<CAPTION>
Portfolio 11/1/94 to % of Portfolio's % of aggregate $
10/31/95 Brokerage Commissions amount of transactions
Represented for the for the period
period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity $6,414 1.26% 0.86%
Equity-Income $8,760 4.15% 0.16%
Growth and Income $10,402 10.63% 0.71%
Balanced $8,117 3.90% 2.71%
</TABLE>
From November 1, 1995 to October 31, 1996, brokerage commissions were paid
to Salomon Brothers Inc. as follows:
---------------------
<TABLE>
<CAPTION>
Portfolio 11/1/95 to % of Portfolio's % of aggregate $
10/31/96 Brokerage Commissions amount of transactions
Represented for the for the period
period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap $1,747 3.68% 0.13%
Growth Equity $978 1.50% 0.32%
Global Equity $1,996 0.37% 0.11%
Equity-Income $17,942 2.96% 0.41%
Growth & Income $8,968 6.35% 1.20%
International Growth & $846 0.49% 0.42%
Income
Balanced $7,604 4.53% 2.00%
</TABLE>
35
<PAGE>
From January 1, 1995 to October 31, 1995, brokerage commissions were paid to
J.P.Morgan Securities as follows:
<TABLE>
<CAPTION>
Portfolio 1/9/95 to % of % of aggregate $
10/31/95 Portfolio's amount of
Brokerage transactions for
Commissions the period
Represented for
the period
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity $3,265 0.64% 0.48%
Equity-Income $13,056 6.18% 0.21%
Growth & Income $300 0.31% 0.03%
Balanced $13,735 6.59% 0.88%
</TABLE>
From November 1, 1995 to October 31, 1996, brokerage commissions were paid
to J.P. Morgan Securities as follows:
<TABLE>
<CAPTION>
Portfolio 11/1/95 to % of % of aggregate
10/31/96 Portfolio's $ amount of
Brokerage transactions
Commissions for the period
Represented
or the period
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity $3,108 0.57% 0.11%
Equity-Income $26,767 4.42% 0.89%
Growth & Income $3,804 2.70% 0.52%
Balanced $4,691 2.79% 0.20%
</TABLE>
From November 1, 1995 to October 31, 1996, brokerage commissions were paid
to Morgan Stanley as follows:
--------------
<TABLE>
<CAPTION>
Portfolio 11/1/95 to % of % of aggregate
10/31/96 Portfolio's $ amount of
Brokerage transactions
Commissions for the period
Represented
or the period
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap $1,689 3.55% 0.21%
Global Equity $91,029 16.77% 21.92%
Equity-Income $27,173 4.49% 1.02%
Growth & Income $34,889 3.46% 0.87%
Int. Growth & Income $1,514 0.87% 1.06%
Balanced $5,712 3.40% 2.17%
Growth Equity $625 0.96% 0.41%
Small/Mid Cap $0 0.00% 1.00%
</TABLE>
From November 1, 1994 to October 31, 1996, there were no brokerage
commissions paid to Dresdner Bank.
DETERMINATION OF NET ASSET VALUE
The following supplements the discussion under the caption "GENERAL
INFORMATION -- Net Asset Value" set forth in the Prospectus. The assets
belonging to each class of shares of a Portfolio will, in each case, be invested
together in a single portfolio. The net asset value of each class will be
determined separately by subtracting the expenses and liabilities allocated to
that class from the assets belonging to that class.
The following provides further information concerning the Fund's use of the
amortized cost method of valuation for certain types of securities.
All instruments held by the Money Market Fund and money market instruments
with a remaining maturity of 60 days or less held by the other Portfolios will
be valued on an amortized cost basis. Under this method of valuation, the
instrument is initially valued at cost (or in the case of instruments initially
valued at market value, at the market value on the day before its remaining
maturity is such that it qualifies for amortized cost valuation); thereafter,
the Fund assumes a constant proportionate amortization in value until maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price that would be
received upon sale of the instrument.
The Money Market Fund uses the amortized cost valuation method in reliance
upon Rule 2a-7 under the 1940 Act. As required by Rule 2a-7, the Money Market
Fund will maintain a dollar weighted average maturity of 90 days or less. In
addition, the Money Market Fund is permitted to purchase only securities that
the Trustees determine to present minimal credit risks and which are at the time
of purchase "eligible securities," as defined by Rule 2a-7. Generally, eligible
securities must be rated by a nationally
36
<PAGE>
recognized statistical rating organization in one of the two highest rating
categories for short-term debt obligations or be of comparable quality. The
Money Market Fund will invest only in obligations that have remaining maturities
of 397 days or less.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, the Money Market Fund's price per share (for each
class) as computed for the purposes of sales and redemptions at $1.00. Such
procedures include a directive to the Adviser to establish procedures which will
allow for the monitoring of the propriety of the continued use of amortized cost
valuation to maintain a constant net asset value of $1.00 per share. Such
procedures also include a directive to the Adviser that requires that on
determining net asset value per share based upon available market quotations,
the Money Market Fund shall value weekly (a) all portfolio instruments for which
market quotations are readily available at market, and (b) all portfolio
instruments for which market quotations are not readily available or are not
obtainable from a pricing service, at their fair value as determined in good
faith by the Trustees, although the actual calculations may be made by persons
acting pursuant to the direction of the Trustees. If the fair value of a
security needs to be determined, the Subadviser will provide determinations, in
accordance with procedures and methods established by the Trustees of the Fund,
of the fair value of securities held by the Portfolios for which market
quotations are not readily available for purposes of enabling the Portfolio's
Custodian to calculate net asset value. The Adviser, with the Subadviser's
assistance, periodically (but no less frequently than annually) shall prepare a
written report to the Trustees verifying the accuracy of the pricing system or
estimate. A non-negotiable security which is not treated as an illiquid security
because it may be redeemed with the issuer, subject to a penalty for early
redemption, shall be assigned a value that takes into account the reduced amount
that would be received if it were currently liquidated. In the event that the
deviation from the amortized cost exceeds .50 of 1% or more or a difference of
$.005 per share in net asset value, the Adviser shall promptly call a special
meeting of the Trustees to determine what, if any, action should be initiated.
Where the Trustees believe the extent of any deviation from the Fund's amortized
cost price per share may result in material dilution or other unfair results to
investors or existing shareholders, it shall take such action as it deems
appropriate to eliminate or reduce to the extent reasonably practical such
dilution or unfair results. The actions that may be taken by the Board include,
but are not limited to: (a) redeeming shares in kind; (b) selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
the average portfolio maturity of the Portfolio; (c) withholding or reducing
dividends;(d) utilizing a net asset value per share based on available market
quotations; and (e)investing all cash in instruments with a maturity on the next
business day.
PERFORMANCE INFORMATION
As indicated in the Prospectus, the Fund may advertise its yield and/or
total return performance for all classes of shares of one or more of the
Portfolios, calculated in accordance with the rules of the Commission. Such
performance information may include time periods prior to the implementation of
the Multiple Pricing System on April 1, 1994, and will be calculated as
described below. For purposes of quoting and comparing the performance of the
classes of the Portfolios to that of other mutual funds and to stock or other
relevant indices in advertisements or in reports to shareholders, performance
will be stated in terms of total return and yield. Both "total return" and
"yield" figures are based on historical performance, show the performance of a
hypothetical investment and are not intended to indicate future performance.
Under the rules of the Commission, funds advertising performance must
include total return quotes, "T" below, calculated according to the following
formula:
P(1 + T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the "n" year period (or fractional
portion thereof) at the end of such period.
The average annual total return will be calculated under the foregoing
formula and the time periods used in advertising will be based on rolling
calendar quarters, updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover one, five, and ten
year periods (if available) plus the time period since the effective date of the
Fund's registration statement. When the period since inception for a Portfolio
is less than one year, the total return quoted will be the aggregate return for
the period. In calculating the ending redeemable value, for Class A shares, the
current maximum front end
37
<PAGE>
sales charge of 4.75% (as a percentage of the offering price) is deducted from
the initial $1,000 payment, and for Class B shares, the applicable CDSC imposed
on a redemption of shares held for the period is deducted. The schedule of CDSCs
due upon redemption is described under "PURCHASE OF SHARES -- Class B Shares" in
the Prospectus. The formula also assumes that all dividends and distributions
have been reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula above,
is computed by finding the average annual compounded rates of return over the 1,
5 and 10 year periods (or fractional portions thereof) that would equate the
initial amount invested to the ending redeemable value. Any sales charges that
might in the future be made applicable to reinvestments would be included as
would any recurring account charges that might be imposed by the Fund.
The Fund implemented the Multiple Pricing System by reclassifying the then
existing shares of each Portfolio as shares of a particular class of each such
Portfolio. This reclassification was effected in such a manner so that the
shares of each Portfolio outstanding at April 1, 1994 would be subject to
identical distribution and service fees both before and after the
reclassification. Specifically, all outstanding shares of the Strategic Income,
Investment Quality Bond, U.S. Government Securities, National Municipal Bond and
Money Market Funds were reclassified as Class A shares of each such Portfolio,
and all outstanding shares of the Global Equity, Equity-Income, Growth and
Income and Balanced Funds were reclassified as Class C shares of each such
Portfolio.
The figures shown in the table below are, for all classes, restated to
reflect front end sales charges and CDSCs currently payable by each class of
shares under the Multiple Pricing System (as described above), and (for all of
the tables presented below) are based on the distribution and service fees and
other expenses actually paid by each Portfolio for the periods presented, rather
than the distribution and service fees and other expenses currently payable by
each class of shares under the Multiple Pricing System, which in certain cases
are different. Until April 1, 1994, each Portfolio paid distribution and
service fees under the Prior Plan. Under the Prior Plan, (i) the Global Equity,
Equity-Income, Growth and Income and Balanced Funds paid the Distributor a
distribution fee at an annual rate of up to .75% of average daily net assets and
a service fee of up to .25% of average daily net assets; (ii) the Strategic
Income, Investment Quality Bond and U.S. Government Securities Funds paid the
Distributor a distribution fee at an annual rate of up to .10% of average daily
net assets and a service fee of up to .25% of average daily net assets;
(iii) the National Municipal Bond Fund paid the Distributor no distribution fee
and a service fee at an annual rate of up to .15% of average daily net assets;
and (iv) the Money Market Fund did not pay any fees. The distribution and
service fees currently payable by each class of shares under the Multiple
Pricing System are described in "DISTRIBUTION PLANS" in this Statement of
Additional Information.
The following tables set forth the average annual total returns for each
class of shares of each Portfolio for certain periods of time ending October 31,
1996, restated to reflect the effects of the maximum front end sales charges and
any applicable CDSCs payable by an investor under the Multiple Pricing System:
38
<PAGE>
Class A shares
<TABLE>
<CAPTION>
Through
10/31/96 One Year Five Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap NA NA -3.84% (03-04-96)*
International Small Cap NA NA 2.34% (03-04-96)*
Growth Equity NA NA 5.00% (03-04-96)*
Global Equity 1.28% 6.48% 6.89% (11-07-90)
Equity-Income 13.57% 12.57% 7.57% (08-28-89)
Growth & Income 16.06% 12.18% 12.18% (05-01-91)
International Growth and Income 8.82% NA 5.60% (01-09-95)
Strategic Income 11.77% NA 6.23% (11-01-93)
Balanced 7.73% 10.19% 7.53% (08-28-89)
Investment Quality Bond -0.45% 6.04% 6.82% (05-01-91)
U.S. Government Securities -0.33% 5.53% 6.81% (08-28-89)
National Municipal Bond 1.26% NA 3.01% (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1996.
Class B shares
<TABLE>
<CAPTION>
Through
10/31/96 One Year Five Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap NA NA -4.36% (03-04-96)*
International Small Cap NA NA 1.96% (03-04-96)*
Growth Equity NA NA 4.84% (03-04-96)*
Global Equity 0.64% 6.90% 7.38% (11-07-90)
Equity-Income 13.59% 13.17% 8.13% (08-28-89)
Growth & Income 16.08% 12.76% 12.82% (05-01-91)
International Growth and Income 8.58% NA 5.45% (01-09-95)
Strategic Income 11.59% NA 6.19% (11-01-93)
Balanced 7.35% 10.71% 8.07% (08-28-89)
Investment Quality Bond -1.08% 6.44% 7.34% (05-01-91)
U.S. Government Securities -1.03% 5.91% 7.30% (08-28-89)
National Municipal Bond 0.41% NA 3.04% (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1996.
39
<PAGE>
Class C shares
<TABLE>
<CAPTION>
Through
10/31/96 One Year Five Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap NA NA -0.28% (03-04-96)*
International Small Cap NA NA 5.96% (03-04-96)*
Growth Equity NA NA 8.84% (03-04-96)*
Global Equity 4.70% 7.22% 7.51% (11-07-90)
Equity-Income 17.53% 13.40% 8.12% (08-28-89)
Growth & Income 20.12% 12.96% 12.88% (05-01-91)
International Growth and Income 12.63% N/A 8.11% (01-09-95)
Strategic Income 15.59% N/A 7.36% (11-01-93)
Balanced 11.41% 10.98% 8.07% (08-28-89)
Investment Quality Bond 2.92% 6.75% 7.47% (05-01-91)
U.S. Government Securities 2.97% 6.23% 7.30% (08-28-89)
National Municipal Bond 4.41% NA 3.88% (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1996.
As described in the Prospectus under the caption "FEE TABLE AND EXAMPLE,"
the Portfolios have been and still are subject to certain fee reimbursements.
Absent such reimbursement, the returns shown above would be lower.
The performance data quoted represents past performance; investment returns
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. On
July 10, 1992, the former Aggressive, Moderate and Conservative Asset Allocation
Trusts were reorganized into the Balanced Fund. The Balanced Fund's investment
objectives, policies and restrictions are identical to the old Moderate Asset
Allocation Trust. The performance figures shown above for the Balanced Fund
therefore are based on the past performance of the former Moderate Asset
Allocation Trust for the period prior to July 10, 1992.
A Portfolio's yield is a way of showing the rate of income the Portfolio
earns on its investments as a percentage of the Portfolio's share price. Under
the rules of the Commission, yield must be calculated according to the following
formula:
a-b 6
YIELD = 2[(--- + 1) - 1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
40
<PAGE>
Yields for the classes of the Portfolios of the Fund used in advertising are
computed by dividing the class of the Portfolio's interest and dividend income
for a given 30 day period, net of expenses, by the average number of shares
entitled to receive distributions during the period, dividing this figure by the
offering price (including the applicable front end sales charge or CDSC) at the
end of the period and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for purposes
of yield quotations in accordance with standardized methods applicable to all
stock and bond mutual funds. Dividends from equity investments are treated as
if they were accrued on a daily basis, solely for the purposes of yield
calculations. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to bonds
trading at a discount by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from the calculation. Income
calculated for the purposes of calculating the Portfolio's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a class of a Portfolio may differ from the
rate of distributions paid over the same period or the rate of income reported
in the Fund's financial statements. The yields for Classes A, B and C of the
Investment Quality Bond Fund for the thirty day period ended October 31, 1996
were 5.73%, 5.37% and 5.37%, respectively. The yields for Classes A, B and C of
the U.S. Government Securities Fund for the thirty day period ended October 31,
1996 were 4.76%, 4.35% and 4.35%, respectively. The yields for Classes A, B and
C of the Strategic Income Fund for the thirty day period ended October 31, 1996
were 7.14%, 6.84% and 6.84%, respectively.
Yield quotations for the Investment Quality Bond and U.S. Government
Securities and Strategic Income Funds will reflect the fact that such Portfolios
will have paid no advisory fees during certain periods of their operations.
Therefore, the yield for those Portfolios encompassing the periods during which
no advisory fees were paid will be higher than the yields the Portfolios would
have realized had the suspension of advisory fees not been in effect.
The yields for Classes A, B and C of the National Municipal Bond Fund for
the thirty day period ended October 31, 1996 were 4.59%, 3.98% and 3.98%,
respectively. With respect to the National Municipal Bond Fund, tax-equivalent
yields are computed by dividing that portion of yield that is tax-exempt by one,
minus a stated income tax rate and adding the quotient to that portion, if any,
of the yield that is not tax-exempt.
---
Yields for the Money Market Fund will be computed on the basis of seven-day
periods, and such quotations will be in lieu of total return quotations for the
one, five and ten year periods described above. Yields will be computed by
dividing the net change, exclusive of capital changes, in the value of a
hypothetical account having a balance of one share at the beginning of the
seven-day period by the value of the account at the beginning of the period and
multiplying the return so determined ("base period return") by 365/7. Effective
yields will be computed by compounding the base period return in accordance with
the following formula:
Effective yield = [(Base period return +1)365/7] - 1
For the seven-day period ended October 31, 1996, yields for Classes A, B and C
of the Money Market Fund were 4.94%, 4.94% and 4.94%, respectively. For the
seven-day period ended October 31, 1996, the effective yields for Classes A, B
and C of the Money Market Fund were 4.94%, 4.94% and 4.94%, respectively.
Yield and total return are calculated separately for each class of shares
of a Portfolio. As discussed above, these calculations adjust for the different
front end sales charges and CDSCs currently payable with respect to each class,
and are based on distribution and service fees and other expenses actually paid
by each Portfolio for the periods presented.
The Fund may also from time to time include in such advertising a total
aggregate return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare
performance more accurately with other measures of investment return. Each class
of a Portfolio may quote an aggregate total return figure in comparing total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Value Line
Composite Index, the Lehman Brothers Bond, Government Corporate, Corporate and
Aggregate Indices, Merrill Lynch Government & Agency Index, Merrill Lynch
Intermediate Agency Index, Morgan Stanley Capital International Europe,
Australia, Far East Index or the Morgan Stanley Capital International World
Index. For such purposes, aggregate total return is calculated for the specified
periods of time by assuming the investment of $1,000 in shares of a class of a
Portfolio and assuming the reinvestment of each dividend or other distribution
at net asset value on the reinvestment date. Percentage increases are determined
by subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. The Fund does not, for these
purposes, deduct from the initial value invested any amount representing front
end sales charges or CDSCs applicable to a class. To calculate its average
annual total
41
<PAGE>
return, the aggregate return is then annualized according to the Commission's
formula for total return quotes, outlined above. When the period since inception
is less than one year, the total return quoted will be the aggregate return for
the period. The Fund will, however, disclose the maximum front end sales charge
or CDSC applicable to each class and will also disclose that the performance
data does not reflect sales charges and that the 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 Commission 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. The Fund may also advertise the performance
rankings assigned certain Portfolios (or classes thereof) or their investment
subadvisers by various publications and statistical services, including but not
limited to SEI, Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, Intersec Research Survey of Non-U.S. Equity Fund Returns, Frank
Russell International Universe, and any other data which may be presented from
time to time by such analysis as Dow Jones, Morningstar, Chase Investment
Performance, Wilson Associates, Stanger, CDA Investment Technology, the Consumer
Price Index ("CPI"), The Bank Rate Monitor National Index, IBC/Donaghue's
Average/U.S. Government and Agency, or as they appear in various publications
including but not limited to The Wall Street Journal, Forbes, Barrons, Fortune,
Money Magazine, The New York Times, Financial World and Financial Services Week.
Calculated in the manner set forth immediately above, the average annual total
returns for each class of each Portfolio for the one andfive year periods ended
October 31, 1996 and since inception to October 31, 1996 are as follows:
Class A shares
<TABLE>
<CAPTION>
Through
10/31/96 One Year Five Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap NA NA 0.96% (03-04-96)*
International Small Cap NA NA 7.44% (03-04-96)*
Growth Equity NA NA 10.24% (03-04-96)*
Global Equity 6.33% 7.52% 7.76% (11-07-90)
Equity-Income 19.23% 13.67% 8.31% (08-28-89)
Growth & Income 21.84% 13.28% 13.17% (05-01-91)
International Growth and Income 14.25% NA 8.49% (01-09-95)
Strategic Income 17.35% NA 7.97% (11-01-93)
Balanced 13.10% 11.27% 8.27% (08-28-89)
Investment Quality Bond 4.52% 7.08% 7.77% (05-01-91)
U.S. Government Securities 4.64% 6.56% 7.54% (08-28-89)
National Municipal Bond 6.31% NA 4.54% (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1996.
42
<PAGE>
Class B shares
<TABLE>
<CAPTION>
Through
10/31/96 One Year Five Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap NA NA 0.64% (03-04-96)*
International Small Cap NA NA 6.96% (03-04-96)*
Growth Equity NA NA 9.84% (03-04-96)*
Global Equity 5.64% 7.21% 7.50% (11-07-90)
Equity-Income 18.59% 13.41% 8.13% (08-28-89)
Growth & Income 21.08% 13.01% 12.93% (05-01-91)
International Growth and Income 13.58% NA 8.08% (01-09-95)
Strategic Income 16.59% NA 7.37% (11-01-93)
Balanced 12.35% 10.98% 8.07% (08-28-89)
Investment Quality Bond 3.92% 6.75% 7.47% (05-01-91)
U.S. Government Securities 3.97% 6.23% 7.30% (08-28-89)
National Municipal Bond 5.41% NA 3.88% (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1996
Class C shares
<TABLE>
<CAPTION>
Through
10/31/96 One Year Five Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap NA NA 0.72% (03-04-96)*
International Small Cap NA NA 6.96% (03-04-96)*
Growth Equity NA NA 9.84% (03-04-96)*
Global Equity 5.70% 7.22% 7.51% (11-07-90)
Equity-Income 18.53% 13.40% 8.12% (08-28-89)
Growth & Income 21.12% 12.96% 12.88% (05-01-91)
International Growth and Income 13.63% N/A 8.11% (01-09-95)
Strategic Income 16.59% N/A 7.36% (11-01-93)
Balanced 12.41% 10.98% 8.07% (08-28-89)
Investment Quality Bond 3.92% 6.75% 7.47% (05-01-91)
U.S. Government Securities 3.97% 6.23% 7.30% (08-28-89)
National Municipal Bond 5.41% NA 3.88% (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1996.
43
<PAGE>
As described in the Prospectus under the caption "FEE TABLE AND EXAMPLE,"
the Portfolios have been and still are subject to certain fee reimbursements.
Absent such reimbursement, the returns shown above would be lower .
The Fund may also from time to time include in advertising and sales
literature the following: 1) information regarding its portfolio subadvisers,
such as information regarding a subadviser's specific investment expertise,
client base, assets under management or other relevant information; 2)
quotations about the Fund, its portfolios or its investment subadvisers that
appear in various publications and media; and 3) general discussions of economic
theories, including but not limited to discussions of how demographics and
political trends may effect future financial markets, as well as market or other
relevant information. The Fund will include performance data for each class of
shares of a Portfolio in any advertisement or information including performance
data of such Portfolio.
TAXES
The following information supplements the disclosure contained in the
Prospectus under the heading "Taxes." No attempt is made to present a detailed
explanation of all federal, state, local and foreign tax concerns, and the
discussion set forth here and in the Prospectus do not constitute tax advice.
Investors are urged to consult their own tax advisers with specific questions
relating to federal, state, local and foreign taxes.
Each Portfolio intends to qualify as a regulated investment company (a
"RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") and to continue to so qualify. Qualification as a RIC requires, among
other things, that each Portfolio: (a) derive at least 90% of its gross income
in each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stocks or securities; (b) derive less than 30% of its gross income in
each taxable year from the sale or other disposition of any of the following
held for less than three months: (i) stock or securities, (ii) options, futures,
or forward contracts, or (iii) foreign currencies (or foreign currency options,
futures or forward contracts) that are not directly related to its principal
business of investing in stock or securities (or options and futures with
respect to stocks or securities) (the "30% limitation"); and (c) diversify its
holdings so that, at the end of each quarter of each taxable year, (i) at least
50% of the market value of a Portfolio's assets is represented by cash, cash
items, U.S. government securities, securities of other regulated investment
companies and other securities with such other securities limited, in respect of
any issuer, to an amount not greater than 5% of the value of a Portfolio's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities (other
than U.S. government securities or the securities of other regulated investment
companies) of any one issuer.
As a RIC, a Portfolio will not be subject to federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
Paid) and "net capital gains" (the excess of a Portfolio's net long-term capital
gains over net short-term capital Losses), if any, that it distributes in each
taxable year to its shareholders, provided that it distributes (i) 90% of its
net investment income for such taxable year and (ii) in the case of the National
Municipal Bond Fund at least 90% of its net tax-exempt income for such taxable
year. Each Portfolio expects to designate amounts retained as undistributed net
capital gains in a notice to its shareholders who (i) will be required to
include in income for United States federal income tax purposes, as long-term
capital gains, their proportionate shares of the undistributed amount, (ii) will
be entitled to credit their proportionate shares of the 35% tax paid by a
Portfolio on the undistributed amount against their federal income tax
liabilities and to claim refunds to the extent such credits exceed their
liabilities and (iii) will be entitled to increase their tax basis, for federal
income tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed net capital gains included in the shareholder's income.
A Portfolio will be subject to a nondeductible 4% excise tax on the amount
by which the aggregate income it distributes in any calendar year is less than
the sum of: (a) 98% of a Portfolio's ordinary income for such calendar year; (b)
98% of its capital gain net income (the excess of capital gains over capital
losses, both long- and short-term) for the one-year period ending on October 31
of each year; and (c) 100% of the undistributed ordinary income and gains from
prior years. For this purpose, any income or gains retained by a Portfolio
subject to corporate income tax will be considered to have been distributed by
year-end. Each Portfolio expects to distribute substantially all of its net
income and gain, and, assuming that it does so, it will not be subject to this
excise tax.
Pay-in-kind Bonds, Zero Coupon Bonds and Discount Obligations. Certain
Portfolios may make investments that produce income that is not matched by a
corresponding cash distribution to the Portfolio, such as investments in pay-in-
kind bonds or in discount obligations such as zero coupon securities, certain
sovereign debt securities and stripped mortgage securities having original
44
<PAGE>
issue discount or market discount (if a Portfolio elects to accrue the market
discount on a current basis with respect to such instruments). Such income would
be treated as income earned by the Portfolio and therefore would be subject to
the distribution requirements of the Code. Because such income may not be
matched by a corresponding cash distribution to the Portfolio, the Portfolio may
be required to borrow money or dispose of other securities to be able to make
distributions to its investors. For example, pursuant to a provision of the Code
governing the treatment of securities such as the stripped mortgage securities
described in this Statement of Additional Information, a principal-only ("PO")
class will be treated as having been issued with original issue discount and,
consequently, will result in income to the Portfolio without a corresponding
distribution of cash to the Portfolio. A portion of the amount received on a PO
class will constitute a return of the Portfolio's investment and as such will
not be income.
Futures and Forward Transactions. Under Section 1256 of the Code, gain or
loss on certain futures contracts and forward contracts ("Section 1256
contracts") will be treated as 60% long-term and 40% short-term capital gain or
loss (hereinafter "blended gain or loss"). In addition, Section 1256 contracts
held by a Portfolio at the end of each taxable year will be required to be
treated as sold at market value on the last day of such taxable year for U.S.
federal income tax purposes and the resulting gain or loss will be treated as
blended gain or loss.
Offsetting positions held by a Portfolio involving certain futures
transactions may be considered to constitute, for federal income tax purposes,
"straddles" which are subject to special rules under the Code. Under these
rules, depending on different elections which may be made by a Portfolio, the
amount, timing and character of gain and loss realized by a Portfolio and its
shareholders may be affected.
The requirements for qualification as a regulated investment company under
the Code may limit a Portfolio's ability to engage in certain transactions in
futures contracts and forward contracts.
Special Rules for Certain Foreign Currency Transactions. Under section 988
of the Code, special rules are provided for certain transactions in a foreign
currency other than the taxpayer's functional currency (i.e., in a Portfolio's
case, currencies other than the United States dollar). In general, foreign
currency gains or losses from certain forward contracts not traded in the
interbank market and from futures contracts that are not "regulated futures
contracts" will be treated as ordinary income or loss under section 988 of the
Code. In certain circumstances, a Portfolio may elect capital gain or loss
treatment for such transactions. The rules under section 988 of the Code may
also affect the timing of income recognized by a Portfolio.
Investments in Passive Foreign Investment Companies. If a Portfolio
purchases shares in a foreign investment company treated for U.S. federal income
tax purposes as a "passive foreign investment company" (a "PFIC"), a Portfolio
may be subject to U.S. federal income tax on a portion of any "excess
distribution" or gain from the disposition of such shares even if such income is
distributed as a taxable dividend by the Portfolio to its shareholders.
Additional charges in the nature of interest may be imposed on a Portfolio in
respect of deferred taxes arising from such distributions or gains. If a
Portfolio were to invest in a PFIC and elected to treat the PFIC as a "qualified
electing fund" under the Code, in lieu of the foregoing requirements, a
Portfolio would be required to include in income each year a portion of the
ordinary earnings and net capital gain of the qualified electing fund, even if
not distributed to the Portfolio, and such amounts would be subject to the
distribution requirements described in the Prospectus. On March 31, 1992 the IRS
proposed regulations providing a mark-to-market election for RICs that would
have effects similar to the proposed legislation. These regulations would be
effective for taxable years ending after promulgation of the regulations as
final regulations.
Foreign Withholding Taxes. Certain dividends and interest received by a
Portfolio may be subject to foreign withholding taxes. If more than 50% in value
of a Portfolio's total assets at the close of any taxable year consists of
stocks or securities of foreign corporations, the Portfolio may elect to treat
any foreign income taxes paid by it as paid by its shareholders. If eligible,
the Portfolio(s) intend to make this election. If a Portfolio makes this
election, its shareholders will be required to include in income their
respective pro rata portions of foreign income taxes paid by the Portfolio(s)
and, if they itemize their deductions, will be entitled to deduct such
respective pro rata portions in computing their taxable income or,
alternatively, to claim foreign tax credits (subject to the limitations
discussed below). Each year that a Portfolio makes this election, it will report
to its shareholders the amount per share of foreign income taxes it has elected
to have treated as paid by its shareholders.
Generally, a credit for foreign income taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, the source of a
Portfolio's income flows through to its shareholders. A Portfolio's gains from
the sale of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign currency
denominated debt securities, receivables and payables, will be treated as
ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source
45
<PAGE>
passive income, such as the portion of dividends received from a Portfolio that
qualifies as foreign source income. In addition, the foreign tax credit is
allowed to offset only 90% of the revised alternative minimum tax imposed on
corporations and individuals. Because of these limitations, shareholders may be
unable to claim a credit for the full amount of their proportionate share of the
foreign taxes paid by a Portfolio.
State and Local Income Taxes. Depending on the residence of the shareholder
for tax purposes, distributions may also be subject to state and local taxes or
witholding taxes. Most states provide that a RIC may pass through (without
restriction) to its shareholders state and local income tax exemptions available
to direct owners of certain types of U.S. government securities. Thus, for
residents of these states, distributions derived from a Portfolio's investment
in certain types of U.S. government securities should be free from state and
local income taxes to the extent that the interest income from such investments
would have been exempt from state and local taxes if such securities had been
held directly by the respective shareholders themselves. Certain states,
however, do not allow a RIC to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of U.S.
government securities unless the RIC holds at least a required amount of U.S.
government securities. Accordingly, for residents of these states, distributions
derived from a Portfolio's investment in certain types of U.S. government
securitiesmay not be entitled to the exemptions from state and local income
taxes that would be available if the shareholders had purchaased U.S. government
securities directly. Shareholders' dividends attributable to a Portfolio's
income from repurchase agreements generally are subject to state and local
income taxes, although states and regulations vary in their treatment of such
income. The exemption from state and local income taxes does not preclude states
from asserting other taxes on the ownership of U.S. government securities. To
the extent that a Portfolio invests to a substantial degree in U.S. government
securities which are subject to favorable state and local tax treatment,
shareholders of such Portfolio will be notified as to the extent to which
distributions from the Portfolio are attributable to interest on such
securities.
National Municipal Bond Fund
The National Municipal Bond Fund intends to qualify to pay "exempt-interest
dividends," as that term is defined in the Code, by holding at the end of each
quarter of its taxable year at least 50% of the value of its total assets in the
form of municipal obligations described in section 103(a) of the Code. Because
the National Municipal Bond Fund will primarily invest in municipal obligations,
dividends from the Portfolio will generally be exempt from regular federal
income tax in the hands of shareholders subject to the possible application of
the alternative minimum tax. Further, gain from a sale of redemption of shres of
the National Municipal Bond Fund will be taxable to shareholders as capital gain
even though the increase in value of such shares is attributable to tax-exempt
income. Thus, it will normally be advantageous for the National Municipal Bond
Fund to declare exempt-interest dividends frequently.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain municipal obligations, such as bonds issued to make loans for housing
purposes or to private entities (but not to certain tax-exempt organizations
such as universities and non-profit hospitals) is included as an item of tax
preference in determining the amount of a taxpayer's alternative minimum taxable
income. To the extent that the Portfolio receives income from municipal
obligations treated as a tax preference item for purposes of the alternative
minimum tax, a portion of the dividends paid by it, although otherwise exempt
from federal income tax, will be taxable to shareholders to the extent that
their tax liability will be determined under the alternative minimum tax. The
Portfolio will annually supply shareholders with a report indicating the
percentage of portfolio income attributable to municipal obligations subject to
the alternative minimum tax. Additionally, taxpayers must disclose to the
Internal Revenue Service on their tax returns the entire amount of tax-exempt
interest (including exempt-interest dividends on shares of the Portfolio)
received or accrued during the year.
In addition, for corporations, the alternative minimum taxable income is
increased by a percentage of the amount by which an alternative measure of
income ("adjusted current earnings", referred to as "ACE") exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the Portfolio, is included in calculating ACE. Taxpayers that may be subject to
the alternative minimum tax should consult their tax advisers before investing
in the Portfolio.
Under the Omnibus Budget Reconciliation Act of 1993, all or a portion of
the National Municipal Bond Fund's gain from the sale or redemption of tax-
exempt obligations acquired after April 30, 1993 attributable to market discount
will be treated as ordinary income rather than capital gain. This rule may
increase the amount of ordinary income dividends received by shareholders.
Shares of the Portfolio would not be a suitable investment for tax-exempt
institutions and may not be a suitable investment for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and individual retirement accounts,
because such plans
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<PAGE>
and accounts are generally tax-exempt and, therefore, would not gain any
additional benefit from the receipt of exempt-interest dividends from the
Portfolio. Moreover, subsequent distributions of such dividends to the
beneficiaries will be taxable.
In addition, the Portfolio may not be an appropriate investment for
entities that are "substantial users" of facilities financed by private activity
bonds or "related persons" thereof. A "substantial user" is defined under United
States Treasury Regulations to include a non-exempt person who regularly uses a
part of such facilities in his trade or business and, unless such facility, or
part thereof, is constructed, reconstructed or acquired specifically for the
non-exempt person, whose gross revenue derived with respect to the facilities
financed by the issuance of bonds is more than 5% of the total revenue derived
by all users of such facilities. "Related persons" include certain related
natural persons, affiliated corporations, partnerships and their partners and S
Corporations and their shareholders. The foregoing is not a complete statement
of all of the provisions of the Code covering the definitions of "substantial
user" and "related person". For additional information, investors should consult
their tax advisers before investing in the Portfolio.
All or a portion of the exempt-interest dividends received by certain
foreign corporations may be subject to the federal branch profits tax. Likewise,
all or a portion of the exempt-interest dividends may be taxable to certain
Subchapter S Corporations that have Subchapter C earnings and profits and
substantial passive investment income. In addition, the exempt-interest
dividends may reduce the deduction for loss reserves for certain insurance
companies. Such corporations and insurance companies should consult their tax
advisers before investing in the Portfolio. The Code may also require
shareholders that receive exempt-interest dividends to treat as taxable income a
portion of certain otherwise nontaxable social security and railroad retirement
benefit payments.
SHAREHOLDER SERVICES
Systematic Withdrawal Plan. You may establish a plan for redemptions to be
made automatically at monthly, quarterly, semiannual or annual intervals with
payments sent directly to you or to persons designated by you as recipients of
the withdrawals (the "Withdrawal Plan"). Requests for this service not made on
the initial application require signature guarantees unless the payments are to
be made to you and mailed to the address of record on your account. You are
required to have a minimum account value of $10,000 per Portfolio in order to
establish this plan. The Withdrawal Plan provides for monthly or other periodic
checks in any amount not less than $50. Maintenance of a Withdrawal Plan
concurrently with purchases of additional shares may be disadvantageous to you
because of the front end sales charge on certain purchases and the CDSC on
certain redemptions.
The Fund acts as agent for the shareholder in redeeming sufficient full and
fractional shares to provide the amount of the periodic withdrawal payment. The
Withdrawal Plan may be terminated at any time, and, while no fee is currently
charged (although a CDSC may be applicable to certain redemptions that exceed
12% annually of the value of the account), the Fund reserves the right to
initiate a fee of up to $5 per withdrawal upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield, or
income. If periodic withdrawals continuously exceed reinvested dividends and
capital gains distributions, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes.
Withdrawals which are made concurrently with purchases of additional shares are
generally inadvisable because of the front end sales charges and CDSCs which may
be applicable to the purchase of additional shares or to redemptions.
Automatic Investment Plan. A shareholder who wishes to make additional
investments in the Fund on a regular basis may do so by authorizing the Fund on
the Shareholder Application to deduct a fixed amount (not less than $50) each
month from the shareholder's checking account at his or her bank. This amount
will automatically be invested on the same day that the pre-authorized check is
issued. The shareholder will receive a confirmation from the Fund, and the
checking account statement will show the amount charged.
Tax Deferred Retirement Plans. Retirement plans are either available or
expected to be available for use by Individual Retirement Accounts ("IRAs"),
plans under Section 403(b)(7) of the Code, and other retirement plans. Adoption
of such plans should be on advice of legal counsel or a tax adviser. With the
exception of the National Municipal Bond Fund, the Portfolio may be available
for purchase through retirement plans or other programs offering deferral of or
exemption from income taxes, which may produce superior after-tax returns over
time. For example, a $1,000 investment earning a taxable return of 10% annually
would have an after-tax value of $1,949 after ten years, assuming tax was
deducted from the return each year at a 31% rate. An equivalent
47
<PAGE>
tax-deferred investment would have an after-tax value of $2,099.86 after ten
years, assuming tax was deducted at a 31% rate from the deferred earnings at the
end of the ten year period.
For further information regarding plan administration, custodial fees and
other details, investors should contact their broker or Wood Logan or call the
shareholder inquiry number for the Fund.
GENERAL
Adviser's Rationale for Multi-Manager Fund
Every investment adviser has different strengths and weaknesses. Finding
the right investment adviser is an important part of choosing the right family
of mutual funds. That is why the Fund has selected thirteen companies that are,
in the opinion of the Adviser, among the world's most distinguished asset
management firms. Each of these firms has been recognized as among the finest in
the world for their particular investment style or area of investment expertise.
The Adviser believes that together the Portfolios offer investors a unique
opportunity to benefit from some of the industry's finest investment
professionals.
It is well recognized that one of the basic principles of managing money is
diversification. The Fund is designed, in the opinion of the Adviser, to make it
easy for investors to create a sound and diversified investment program that can
help them meet their current and future investment needs. The Fund is
specifically designed to enable investors to allocate their assets effectively
across a spectrum of investment Portfolios representing particular investment
styles or asset classes. As conditions change, investors in the Fund can easily
adjust the allocation of their assets among the Fund's investment Portfolios.
Global Equity Fund. The investment objective of the Global Equity Fund (prior to
October 1, 1996, the "Global Growth Fund") is long-term capital appreciation.
Morgan Stanley manages the Global Equity Fund and seeks to attain this
objective by investing primarily in common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, American and Global
Depository Receipts and other equity securities of issuers throughout the world,
including issuers in the U.S. and emerging market countries.
Under normal circumstances, at least 65% of the value of the total assets
of the Global Equity Fund will be invested in equity securities and at least 20%
of the value of the portfolio's total assets will be invested in the common
stocks of U.S. issuers. The Subadviser's approach is oriented to individual
stock selection and is value driven. In selecting stocks for the portfolio, the
Subadviser initially identifies those stocks that it believes to be undervalued
in relation to the issuer's assets, cash flow, earnings and revenues, and then
evaluates the future value of such stocks by running the results of an in-depth
study of the issuer through a dividend discount model. In selecting investments,
the Subadviser utilizes the research of a number of sources, including Morgan
Stanley Capital International, an affiliate of the Subadviser located in Geneva,
Switzerland. Portfolio holdings are regularly reviewed and subjected to
fundamental analysis to determine whether they continue to conform to the
Subadviser's value criteria. equity securities which no longer conform to such
investment criteria will be sold.
Foreign securities in which the Global Equity Fund may invest include
emerging market securities. The Subadviser's approach to emerging markets
investing is based on the Subadviser's evaluation of both short-term and long-
term international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities. Emerging markets describes
any country which is generally considered to be an emerging, or developing
country by the international financial community such as the International Bank
for Reconstruction and Development (more commonly known as the World Bank) and
the International Finance Corporation. There are currently over 130 countries
which are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets.
Growth Equity Fund. The investment objective of the Growth Equity Fund is to
seek long-term growth of capital. Founders manages the Growth Equity Fund and
will pursue this objective by investing at least 65% of its assets in common
stocks of well-established, high-quality growth companies. These companies tend
to have strong performance records, solid market positions and reasonable
financial strength, and have continuous operating records of three years or
more. The Portfolio may also invest up to 30% of its assets in foreign
securities, with no more than 25% invested in any one foreign country.
The Growth Equity Fund may invest in convertible securities, preferred
stocks, bonds, debentures and other corporate obligations when Founders believes
that these investments offer opportunities for capital appreciation. Current
income will not be a substantial factor in the selection of these securities.
The Portfolio will only invest in bonds, debentures and corporate obligations--
other than convertible securities and preferred stock--rated investment-grade
(BBB or higher by Moody's and Baa or higher by S&P) or, if unrated, of
comparable
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<PAGE>
quality in the opinion of Founders at the time of purchase. Convertible
securities and preferred stocks purchased by the Portfolio may be rated in
medium and lower categories by Moody's or S&P (Ba or lower by Moody's and BB or
lower by S&P) but will not be rated lower than B. The Portfolio may also invest
in unrated convertible securities and preferred stocks in instances in which
Founders believes that the financial condition of the issuer or the protection
afforded by the terms of the securities limits risk to a level similar to that
of securities rated in categories no lower than B. The Portfolio is not required
to dispose of debt securities whose ratings are down-graded below these ratings
subsequent to the Portfolio's purchase of the securities.
International Growth and Income Fund. The International Growth and Income Fund
seeks long-term growth of capital and income. The Portfolio is designed for
investors with a long-term investment horizon who want to diversify their
investments by adding international securities and take advantage of investment
opportunities outside the United States.
J.P. Morgan seeks to achieve its objective by investing, under normal
circumstances, at least 65% of its total assets in equity securities of foreign
issuers, consisting of common stocks and other securities with equity
characteristics such as preferred stock, warrants, rights and convertible
securities. The Portfolio will focus primarily on the common stock of
established companies based in developed countries outside the United States.
Such investments will be made in at least three foreign countries. The Portfolio
may also invest in securities of issuers located in emerging markets countries.
The Portfolio invests in securities listed on foreign or domestic securities
exchanges and securities traded in foreign or domestic over-the-counter markets,
and may invest in certain restricted or unlisted securities. Under normal
circumstances, the International Growth and Income Fund expects to invest
primarily in equity securities. However, the Portfolio may invest up to 35% of
its assets in corporate or sovereign issuers rated A or higher by Moody's or
S&P, or if unrated, of equivalent credit quality as determined by the
Subadviser.
In pursuing the International Growth and Income Fund's objective, J.P.
Morgan will actively manage the assets of the Portfolio through country
allocation and stock valuation and selection. Based on fundamental research,
quantitative valuation techniques and experienced judgment, J.P. Morgan uses a
structured decision-making process to allocate the Portfolio primarily across
the developed countries of the world outside the United States. This universe is
typically represented by the Morgan Stanley Europe, Australia and Far East Index
(the "EAFE Index").
Growth and Income Fund. The Growth and Income Fund seeks long-term growth of
capital and income consistent with prudent investment risk by investing
primarily in a diversified portfolio of dividend-paying common stocks of U.S.
issuers believed to be of high quality. In selecting investments for this Fund,
Wellington Management emphasizes medium to large capitalization companies
having: leadership position within their industries; solid balance sheets and
low leverage; relatively high return on equity; steady or increasing dividends;
and strong management. The Growth and Income Fund is structured to provide, in
the opinion of the Adviser, an excellent opportunity for investors to
participate in the growth of the U.S. stock market through a conservatively
managed, well-diversified portfolio of stocks. By investing primarily in medium
to large capitalization issuers with above-average dividend yields, the Fund
seeks to reduce the volatility generally experienced by stocks through the
income cushion provided by dividend income. In addition to providing potential
downside protection, over the past 30 years reinvested dividends have accounted
for approximately 70% of the total appreciation of the S&P 500. An important
feature of the Fund is its exposure to convertible securities. The Fund
dedicates a portion of its assets to convertible securities, which, in general,
provide higher yields than common stocks while participating in the stock's
capital appreciation potential.
Strategic Income Fund. The Strategic Income Fund seeks a high level of total
return consistent with preservation of capital by giving SBAM broad discretion
to deploy the Fund's assets among various segments of the fixed income market.
SBAM may deploy the Fund's assets based on their analysis of current economic
and market conditions and the relative risks and opportunities present in a wide
range of market segments, including: U.S. Government securities; mortgage-
backed securities; high yield corporate bonds; high yield international bonds;
and investment quality corporate and foreign bonds.
SBAM expects that the Fund's investments will emphasize U.S. Government
securities, high yield corporate bonds and high yield international bonds. SBAM
believes that there is a low correlation among these distinct bond markets and,
historically, they have rarely reacted to interest rate changes and economic
conditions at the same time or in the same manner. Diversifying the portfolio
among securities in markets with low correlation is designed to reduce the risk
of owning securities in just one bond market. While there is no guarantee that
this market diversification will produce the results intended, SBAM believes
that it can help to alleviate the risk of investing in less than investment
grade securities.
Investment Quality Bond Fund. The Investment Quality Bond Fund seeks a high
level of current income consistent with the maintenance of principal and
liquidity by investing primarily in a diversified portfolio of investment grade
corporate bonds and U.S. government bonds with intermediate to longer-term
maturities. In the present low interest rate environment, high quality U.S.
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<PAGE>
Government securities and investment grade corporate bonds can offer an
opportunity for investors to achieve rates of return higher than those available
from short-term investments such as certificates of deposit, savings accounts,
and money market funds. Historically, investors have achieved consistently
higher levels of income from investment grade corporate bonds than U.S. Treasury
securities. Nevertheless, investment grade bonds are subject to greater credit
risk than U.S. Treasury securities. In addition, certificates of deposit and
savings accounts are insured and offer a fixed rate of return and money market
funds seek to provide a stable net asset value. The investment returns and
principal value of the Investment Quality Bond Fund will fluctuate with changes
in market conditions.
This Fund will be invested primarily in investment grade corporate bonds,
mortgage-related bonds and U.S. government bonds with intermediate to long-term
maturities. This Fund may also invest up to 20% of its assets in non-investment
grade fixed income securities. Wellington Management, in managing the Fund's
investments, emphasizes a sector rotation strategy which seeks to identify
relative value among these three major sectors of the fixed income marketplace.
U.S. Government Securities Fund. The U.S. Government Securities Fund seeks a
high level of current income consistent with preservation of capital and
maintenance of liquidity by investing in securities issued or guaranteed as to
the timely payment of interest or principal by the U.S. government, its agencies
or instrumentalities. The U.S. Government Securities Fund, managed by SBAM, is
designed to provide investors with high current income and a high degree of
credit safety in one fund. To date, the U.S. Government has never defaulted on
or delayed payments of principal or interest on its obligations. In addition,
under normal market conditions, the medium and long-term U.S. Government
securities in which the Fund invests have historically provided higher yields
than short-term securities. Moreover, U.S. Government securities are considered
to be highly liquid.
National Municipal Bond Fund. The National Municipal Bond Fund seeks to achieve
a high level of current income exempt from regular federal income taxes,
consistent with the preservation of capital, by investing primarily in a
portfolio of municipal obligations. A fund that invests in municipal bonds can
provide income free from federal income tax liability, even as taxes rise. In
addition, earnings may grow more quickly when they are permitted to compound
without federal income taxation.
An investor may want to determine which investment, tax-exempt or taxable,
will provide a higher after-tax return. To determine the taxable equivalent
yield, simply divide the yield from the tax-exempt investment by the sum of (1
minus the investor's marginal tax rate). The tables below are provided for
making this calculation for selected tax-exempt yield and taxable income levels.
These yields are presented for purposes of illustration only and are not
representative of any yield that the Fund may generate. The tables are based
upon the 1996 federal tax rates (in effect as of January 1, 1997.)
Taxable Equivalent Yields
<TABLE>
<CAPTION>
=========================================================================================
Single Joint Marginal A Tax-Exempt Yield of:
Federal
Income Tax 3% 4% 5% 6% 7% 8%
Taxable Income** Rate
Is Equivalent to a Taxable Yield of:
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
under $24,000 under $40,100 15% 3.53, 4.71, 5.88, 7.06, 8.24, 9.41
- -----------------------------------------------------------------------------------------
$24,000-$58,150 $40,100-$96,900 28% 4.17, 5.56, 6.94, 8.33, 9.72, 11.11
- -----------------------------------------------------------------------------------------
$58,150-$121,300 $96,900-$147,700 31% 4.35, 5.80, 7.25, 8.70, 10.14, 11.59
- -----------------------------------------------------------------------------------------
$121,300-$263,750 $147,700- 36% 4.69, 6.25, 7.81, 9.38, 10.94, 12.50
$263,750
- -----------------------------------------------------------------------------------------
over $263,750 over $263,750 39.6% 4.97, 6.62, 8.28, 9.93, 11.59, 13.25
=========================================================================================
</TABLE>
* Certain taxpayers may, to the extent such taxpayers itemize deductions or
claim personal exemptions, be subject to a higher marginal rate. In addition,
the tax rate on net capital gains of individuals may not exceed 28%.
**Taxable Income amounts apply for taxable years beginning in 1996. The amounts
are indexed annually for inflation.
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Fund Shares
The Fund's Declaration of Trust permits its Trustees to issue an unlimited
number of full and fractional shares of beneficial interest and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in the Fund.
At a meeting of the Board of Trustees held on December 16, 1993, the
Trustees, including each Trustee who is not an "interested person," as such term
is defined under the Investment Company Act of 1940, as amended, unanimously
approved amendments to the Declaration of Trust to permit implementation of the
Multiple Pricing System. Shareholders of the Fund approved these amendments at
a special meeting held February 18, 1994. The Multiple Pricing System was
implemented on April 1, 1994. All shares of the Fund have equal voting rights
and will be voted in the aggregate, and not by series (Portfolio) or class,
except where voting by series or class is required by law or where the matter
involved affects only one series or class (for example, matters pertaining to
the plan of distribution relating to Class A shares will only be voted on by
Class A shares). Matters required by the 1940 Act to be voted upon by each
affected series include changes to (i) the Advisory Agreement, (ii) a
Subadvisory Agreement and (iii) the fundamental investment objectives and
policies.
Shares of each class of a Portfolio represent interests in that Portfolio in
proportion to each share's net asset value. Certain operating expenses which
are specifically allocable to a class of a Portfolio may be so allocated by the
Trustees. Upon the Fund's liquidation, all shareholders of a class would share
pro rata in the net assets of that class available for distribution to
shareholders of the Portfolio, but, as shareholders of such class of such
Portfolio, would not be entitled to share in the distribution of assets
belonging to any other class or Portfolio. As of the date of this Statement of
Additional Information, the Trustees have designated thirty-two Portfolios of
the Fund and three classes of Shares in each Portfolio: Class A, Class B and
Class C shares.
Certificates representing shares are issued only upon written request to the
Fund.
Redemption in Kind
Although it is each of the Portfolios' present policy to make payment of
redemption proceeds in cash, if the Trustees determine it appropriate,
redemption proceeds may be paid in whole or in part by a distribution in kind of
marketable securities held by that Portfolio subject to the limitation that each
Portfolio is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Portfolio during any 90-day period
for any one account. If a redemption in kind is made, a shareholder might be
required to bear transaction costs, including brokerage commissions, to dispose
of such securities. The Fund will endeavor to only distribute securities for
which there is an active trading market.
Repurchase of Shares
The Distributor is authorized to repurchase Portfolio shares through certain
securities dealers who have entered into dealer agreements with the Distributor.
The offer to repurchase may be suspended by the Distributor at any time.
Dealers may charge for their services in connection with a repurchase, but
neither the Fund nor the Distributor makes any such charge. Repurchase
arrangements differ from redemptions in that the dealer buys the shares as
principal from his customer in lieu of tendering shares to the Fund for
redemption as agent for the customer. The proceeds to the shareholder will be
the net asset value of the shares repurchased as next determined after receipt
of the repurchase order by the dealer. By a repurchase, the customer should be
able to receive the sale proceeds from the dealer more quickly. Shareholders
should contact their dealers for further information as to how to effect a
repurchase and the dealer's charges applicable thereto.
Payment for the Shares Presented
Payment for shares presented for redemption will be based on the net asset
value of the applicable class of the applicable Portfolio next computed after a
request is received in proper form at the Transfer Agent's office. As described
in the Prospectus under the caption "PURCHASE OF SHARES -- Class B Shares",
certain redemptions of Class A, B and C shares may be subject to a CDSC, which
will be deducted from the redemption proceeds. Payment proceeds will be mailed
within seven days following receipt of all required documents. However, payment
may be postponed or the right of redemption suspended (i) for any period during
which the New York Stock Exchange is closed for other than customary weekend and
holiday closing or during which trading on the New York Stock Exchange is
restricted; (ii) for any period during which an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets; or (iii) for such other periods as the Commission
may by order permit for the protection of shareholders,
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<PAGE>
provided that applicable rules and regulations of the Commission shall govern as
to whether the conditions described in (i) and (ii) exist. Payment of proceeds
may also be delayed if the shares to be redeemed or repurchased were purchased
by check and that check has not cleared (which may be up to 15 days or more).
Transfer Agent
State Street Bank and Trust Company acts as the Fund's transfer agent,
provides shareholder services and acts as dividend disbursing and redemption
agent. Its mailing address is P.O. Box 8505, Boston, Massachusetts 02266-8505.
State Street Bank and Trust Company also serves as the custodian for all
Portfolios of the Fund.
REPORTS TO SHAREHOLDERS
The financial statements of the Fund at October 31, 1996 are incorporated
herein by reference from its annual report to shareholders filed with the
Securities and Exchange Commission pursuant to Section 30(b) of the Investment
Company Act of 1940 and Rule 30b2-1.
Independent Accountants
The financial statements of the Fund at October 31, 1996, including the
Financial Highlights which appear in the prospectus, have been audited by
Coopers & Lybrand L.L.P., independent auditors, as indicated in their report
with respect thereto, and are included herein in reliance upon said report given
on the authority of said firm as experts in accounting and auditing. Coopers &
Lybrand, L.L.P. has offices at One Post Office Square, Boston Massachusetts
02109.
52
<PAGE>
PART B
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
(1) Audited Financial Statements for period ended October 31, 1996.
Report of Independent Public Accountants, December 30, 1996 -- Part B
Statements of Assets and Liabilities at October 31, 1996 -- Part B
Statements of Operations for the year ended October 31, 1996 -- Part
B
Statements of Changes in Net Assets for the periods October 31, 1996
and October 31, 1995 -- Part B
Financial Highlights -- Parts A and B
Portfolio of Investments owned -- Part B
Notes to Financial Statements, October 31, 1996 -- Part B
(b) Exhibits
(1)(a) Agreement and Declaration of Trust dated September 28, 1988 --
previously filed as Exhibit (b)(1) to North American Security
Trust's initial registration statement on Form N-1A (File No. 33-
27958) dated April 5, 1989.
(1)(b) Amended and Restated Agreement and Declaration of Trust dated
June 1, 1993 -- previously filed as Exhibit (b)(1)(b) to North
American Fund's Post-Effective Amendment No. 13 on Form N-1A
(File No. 33-27958) dated June 1, 1993.
(1)(c) Amended and Restated Agreement and Declaration of Trust dated
February 18, 1994 -- filed herewith.
(1)(d) Declaration of Trust Amendment -- Establishment and Designation
of Additional Series of Shares for the International Growth and
Income Fund, dated December 28, 1994 -- filed herewith.
<PAGE>
(1)(e) Declaration of Trust Amendment - Establishment and Designation of
Classes A, B and C, dated March 17, 1994 -- filed herewith.
(1)(f) Declaration of Trust Amendment - Establishment and Designation of
Additional Series of Shares for the Growth Equity, International Small
Cap, and Small/mid Cap Funds dated February 28, 1996. - Filed herewith
(1)(g) Declaration of Trust Amendment - Redesignation of Series Of Shares
of Beneficial Interest known as the Growth Fund dated February 28,
1996. - Filed herewith
(1)(h) Declaration of Trust Amendment - Redesignation of Series of Shares
of Beneficial Interest known as the Global Growth Fund and the Asset
Allocation Fund dated October 1, 1996. - Filed herewith
(2) By-laws of North American Security Trust -- previously filed as
Exhibit (b)(2) to North American Security Trust's initial registration
statement on Form N-1A (File No. 33-27958) dated April 5, 1989.
(3) Not applicable.
(4) (a) Specimen Share Certificate for Global Growth Trust -- previously
filed as Exhibit No. (b)(4)(a) to North American Security Trust's
Post-Effective Amendment No. 3 on Form N-1A (File No. 33-27958) dated
February 1, 1991.
(b) Specimen Share Certificate for Growth Trust -- previously filed as
Exhibit (b)(4)(a) to North American Security Trust's Post-Effective
Amendment No. 1 on Form N-1A (File No. 33-27958) dated December 29,
1989.
(c) Specimen Share Certificate for Growth and Income Trust --previously
filed as Exhibit (b)(4)(c) to North American Security Trust's Post-
Effective Amendment No. 4 on Form N-1A (File No. 33-27958) dated
February 22, 1991.
(d) Specimen Share Certificate for Investment Quality Bond Trust
previously filed as Exhibit (b)(4)(d) to North American Security
Trust's Post-Effective Amendment No. 6 on Form N-1A (File No. 33-
27958) dated April 22, 1991.
<PAGE>
(e) Specimen Share Certificate for U.S. Government Securities Trust --
previously filed as Exhibit (b)(4)(b) to North American Security
Trust's Post-Effective Amendment No. 1 on Form N-1A (File No. 33-
27958) dated December 29, 1989.
(f) Specimen Share Certificate for Money Market Trust -- previously filed
as Exhibit (b)(4)(c) to North American Security Trust's Post-
Effective Amendment No. 1 on Form N-1A (File No. 33-27958) dated
December 29, 1989.
(g) Specimen Share Certificate for Asset Allocation Trust --previously
filed as Exhibit (b)(4)(g) to North American Security Trust's Post-
Effective Amendment No. 8 on Form N-1A (File No. 33-27958) dated May
12, 1992.
(h) Forms of Specimen Share Certificates for Strategic Income Fund,
National Municipal Bond Fund, California Municipal Bond Fund, Global
Growth Fund, Growth Fund, Growth and Income Fund, U.S. Government
Securities Fund, Money Market Fund and Asset Allocation Fund --
previously filed as Exhibit (b)(4)(h) to North American Funds' Post-
Effective Amendment No. 13 on Form N-1A (File No. 33-27958) dated
June 30, 1993.
(i) Forms of Specimen Share Certificates: for Strategic Income Fund -A,
Investment Quality Bond Fund - A, National Municipal Bond Fund - A,
California Municipal Bond Fund - A, Global Growth Fund - A, Growth
Fund - A, Growth and Income Fund - A, U.S. Government Securities
Fund -A, Money Market Fund - A, Asset Allocation Fund - A; for
Strategic Income Fund - B, Investment Quality Bond Fund - B, National
Municipal Bond Fund - B, California Municipal Bond Fund - B, Global
Growth Fund-B, Growth Fund - B, Growth and Income Fund -B, U.S.
Government Securities Fund - B, Money Market Fund - B, Asset
Allocation Fund -B; for Strategic Income Fund - C, Investment Quality
Bond Fund - C, National Municipal Bond Fund - C, California Municipal
Bond Fund - C, Global Growth Fund - C, Growth Fund - C, Growth and
Income Fund - C, U.S. Government Securities Fund - C, Money Market
Fund - C, and Asset Allocation Fund - C --previously filed as Exhibit
(b)(4)(i) to North American Funds' Post-Effective Amendment No. 17 on
Form N-1A (File No. 33-27958) dated April 1, 1994.
(j) Forms of Specimen Share Certificates for International Growth and
Income Fund: A, B, C and D -- previously filed as Exhibit (b)(4)(j)
to North American Funds' Post-Effective Amendment No. 18 on Form N-1A
(File No. 33-27958) dated October 20, 1994.
<PAGE>
(k) Forms of Specimen Share Certificates, for the Small/Mid Cap, the
International Small Cap and the Growth Equity Fund - A,B and C. --
previously filed as Exhibit (b)(4)(k) to North American Funds Post
effective Amendment No. 21 on Form N1-A (File No. 33-27958) dated
December 15, 1995.
5. (a)(ix)Form of Amended and Restated Advisory Agreement betwen North American
Funds and NASL Financial Services, Inc. -- previously filed as
Exhibit (b)(5)(a)(ix) to North American Funds Post effective
Amendment No. 21 on Form N1-A (File No. 33-27958) dated December 15,
1995.
(b) Subadvisory Agreement Between NASL Financial Services, Inc. and
Oechsle International Advisors, L.P. dated January 1, 1996 --
previously filed as Exhibit (b)(5)(b) to North American Funds Post-
Effective Amendment No. 22 on Form N-1A (File No. 33-27958) dated
February 23, 1996.
(c) Subadvisory Agreement Between NASL Financial Services, Inc. and
Wellington Management Company dated January 1, 1996 -- previously
filed as Exhibit (b)(5)(c) to North American Funds Post-Effective
Amendment No. 22 on Form N-1A (File No. 33-27958) dated February 23,
1996.
(d) Subadvisory Agreement Between NASL Financial Services, Inc. and
Salomon Brothers Asset Management Inc dated January 1, 1996 --
previously filed as Exhibit (b)(5)(d) to North American Funds Post-
Effective Amendment No. 22 on Form N-1A (File No. 33-27958) dated
February 23, 1996.
(d)(i)Subadvisory Consulting Agreement Between Salomon Brothers Asset
Management Inc and Salomon Brothers Asset Management Limited on
behalf of Strategic Income Fund dated January 1, 1996 -- previously
filed as Exhibit (b)(5)(d)(i) to North American Funds Post-Effective
Amendment No. 22 on Form N-1A (File No. 33-27958) dated February 23,
1996.
(e) Subadvisory Agreement Between NASL Financial Services, Inc. and
Goldman Sachs Asset Management dated January 1, 1996 -- previously
filed as Exhibit (b)(5)(e) to North American Funds Post-Effective
Amendment No. 22 on Form N-1A (File No. 33-27958) dated February 23,
1996.
<PAGE>
(f) Subadvisory Agreement between NASL Financial Services, Inc. and J.P.
Morgan Investment Management Inc. dated January 1, 1996 -- previously
filed as Exhibit (b)(5)(f) to North American Funds Post-Effective
Amendment No. 22 on Form N-1A (File No. 33-27958) dated February 23,
1996.
(g) Form of Subadvisory Agreement between NASL Financial Services, Inc.
and Fred Alger Management, Inc., dated January 2, 1996 - previously
filed as Exhibit (b)(5)(g) to North American Funds Post-Effective
Amendment No. 22 on Form N-1A (File No. 33-27958) dated February 23,
1996.
(h) Form of Subadvisory Agreement between NASL Financial Services, Inc.
and Founders Asset Management, Inc., dated January 2, 1996 -
previously filed as Exhibit (b)(5)(h) to North American Funds Post-
Effective Amendment No. 22 on Form N-1A (File No. 33-27958) dated
February 23, 1996.
(i) Form of Subadvisory Agreement between NASL Financial Services, Inc.
and Morgan Stanley Asset Management Inc. dated October 1, 1996 -Filed
herewith
(j) Form of Subadvisory Agreement between NASL Financial Services, Inc.
and T. Rowe Price Associates Inc. dated October 1, 1996 -Filed
herewith
(k) Form of Subadvisory Agreement between NASL Financial Services, Inc.
and Manufacturers Adviser Corporation dated October 1, 1996 - Filed
herewith
(l) Form of Amendment to Subadvisory Agreement between NASL Financial
Services, Inc. and Founders Asset Management, Inc. dated October 1,
1996 - Filed herewth
(6) (a) Distribution Agreement Between North American Funds and NASL
FinancialServices, Inc. -- previously filed as Exhibit (b)(6)(a) to
North American Funds Post-Effective Amendment No. 22 on Form N-1A
(File No. 33-27958) dated February 23, 1996.
(b)(i)Amended and Restated Promotional Agent Agreement Among NASL Financial
Services, Inc., Wood Logan Associates, Inc., and North American
<PAGE>
Security Life Insurance Company dated June 15, 1990 -- previously
filed as Exhibit (b)(6)(b)(i) to North American Security Trust's
Post-Effective Amendment No. 2 on Form N-1A (File No. 33-27958)
dated August 29, 1990.
(b)(ii) Form of Assignment from Wood Logan Associates, Inc. to Wood Logan
Distributors, Inc., dated July 27, 1990 -- previously filed as
Exhibit (b)(6)(b)(ii) to North American Security Trust's Post-
Effective Amendment No. 2 on Form N-1A (File No. 33-27958) dated
August 29, 1990.
(c)(i) Form of Dealer Agreement Among NASL Financial Services, Inc., Wood
Logan Associates, Inc. and Selected Broker-Dealer -- previously
filed as Exhibit (b)(6)(c) to North American Security Trust's
initial registration statement on Form N-1A (File No. 33-27958)
dated April 5, 1989.
(c)(ii) Form of Dealer Agreement -- previously filed as Exhibit
(b)(6)(c)(ii) to North American Fund's Post-Effective Amendment 19
on Form N-1A (File No. 33-27958) filed December 29, 1994.
(c)(iii)Form of Dealer Agreement Among NASL Financial Services, Inc., Wood
Logan Associates, Inc. and Selected Broker-Dealer - previously filed
as Exhibit (b)(6)(c)(iii) to North American Fund's Post-Effective
Amendment 20 on Form N-1A (File No. 33-27958) filed June 30, 1995.
(7) Not applicable.
(8) (a) Custodian Agreement Between North American Security Trust and Boston
Safe Deposit and Trust Company -- previously filed as Exhibit
(b)(8)(a) to North American Security Trust's initial registration
statement on Form N-1A (File No. 33-27958) dated November 1, 1991.
(b) Custodian Agreement Between North American Security Trust and State
Street Bank and Trust Company -- previously filed as Exhibit
(b)(8)(a) to North American Security Trust's initial registration
statement on Form N-1A (File No. 33-27958) dated April 5, 1989.
(c) Transfer and Shareholder Services Contract Between North American
Security Trust and State Street Bank and Trust Company -- previously
filed as Exhibit (b)(8)(b) to North American Security Trust's
initial registration statement on Form N-1A (File No. 33-27958)
dated April 5, 1989.
(d) Forms of Sub-Custodian Agreements Between State Street Bank and
Trust Company and the Bank of New York, Chemical Bank and Bankers
Trust --
<PAGE>
previously filed as Exhibit (8)(d) to North American Funds' Post-
Effective Amendment No. 17 on Form N-1A (File No. 33-27958) dated
April 1, 1994.
(9) Not applicable.
(10) (a) Opinion of Ruth Ann Fleming, Esq. -- previously filed as Exhibit
(b)(10) to North American Security Trust's Post-Effective Amendment
No. 2 on Form N-1A (File No. 33-27958) dated August 29, 1990.
(b) Opinion of Christina M. Perrino, Esq. -- previously filed as Exhibit
(b)(10)(b) to North American Security Trust's Post-Effective
Amendment No. 6 on Form N-1A (File No. 33-27958) dated April 22,
1991.
(c) Opinion of Christina M. Perrino, Esq. -- previously filed as Exhibit
(b)(10)(c) to North American Security Trust's Post-Effective
Amendment No. 7 on Form N-1A (File No. 33-27958) dated November 1,
1991.
(d) Opinion of Christina M. Perrino, Esq. -- previously filed as Exhibit
(b)(10)(d) to North American Security Trust's Post-Effective
Amendment No. 9 on Form N-1A (File No. 33-27958) dated July 7, 1992.
(e) Opinion of Jeffrey M. Ulness, Esq. -- previously filed as Exhibit
(b)(10)(e) to North American Security Trust's Post-Effective
Amendment No. 13 on Form N-1A (File No. 33-27958) dated June 29,
1993.
(f) Opinion of Tracy A. Kane, Esq. -- previously filed as Exhibit
(10)(f) to North American Funds' Post-Effective Amendment No. 17 on
Form N-1A (File No. 33-27958) dated April 1, 1994.
(g) Opinion of Counsel of Betsy Anne Seel, Esq. -- previously filed as
Exhibit (b)(10)(g) to North American Fund's Post Effective Amendment
No. 19 on Form N-1A (File No. 33-27958) filed December 29, 1994.
(h) Opinion of Counsel of Betsy Anne Seel, Esq. -- previously filed as
Exhibit (b)(10)(h) to North American Funds Post effective Amendment
No. 21 on Form N1-A (File No. 33-27958) dated December 15, 1995.
(11) Consent of Coopers & Lybrand -- Filed herewith.
(12) Not applicable.
<PAGE>
(13) Letter Containing Investment Undertaking of North American Life
Assurance Company -- previously filed as Exhibit (b)(13) to North
American Security Trust's Post-Effective Amendment No. 2 on Form N-
1A (File No. 33-27958) dated August 29, 1990.
(14) Model Plans Documents for Custodial IRAs -- previously filed as
Exhibit (b)(14) to North American Security Trust's Post-Effective
Amendment No. 1 on Form N-1A (File No. 33-27958) dated December 29,
1989.
(15) (a) Distribution Plan of North American Security Trust as amended March
26, 1993 -- previously filed as Exhibit (15)(a) to North American
Funds' Post-Effective Amendment No. 13 on Form N-1A (File No. 33-
27958) dated June 30, 1993.
(b) Distribution Plan of North American Funds as amended June 18, 1993--
previously filed as Exhibit (15)(b) to North American Funds' Post-
Effective Amendment No. 13 on Form N-1A (File No. 33-27958) dated
June 30, 1993.
(c) Distribution Plan of North American Funds as amended September 30,
1993 -- previously filed as Exhibit (15)(d) to North American Funds'
Post-Effective Amendment No. 14 on Form N-1A (File No. 33-27958)
dated November 30, 1993.
(d) Class A Distribution Plan -- previously filed as Exhibit (15)(d) to
North American Funds' Post-Effective Amendment No. 16 on Form N-1A
(File No. 33-27958) dated January 31, 1994.
(e) Class B Distribution Plan -- previously filed as Exhibit (15)(e) to
North American Funds' Post-Effective Amendment No. 16 on Form N-1A
(File No. 33-27958) dated January 31, 1994
(f) Class C Distribution Plan -- previously filed as Exhibit (15)(f) to
North American Funds' Post-Effective Amendment No. 16 on Form N-1A
(File No. 33-27958) dated January 31, 1994.
(g) Class A, B and C Distribution Plans as amended March 18, 1994 --
previously filed as Exhibit (15)(g) to North American Funds' Post-
Effective Amendment No. 17 on Form N-1A (File No. 33-27958) dated
April 1, 1994.
(h) Form of Class D Distribution Plan -- previously filed as Exhibit
(15)(h) to North American Funds' Post-Effective Amendment No. 18 on
Form N-1A (File No. 33-27958) dated October 20, 1994.
<PAGE>
(i) Amendment to 12b-1 Distribution Plans for J.P. Morgan International
Growth and Income Fund - Classes A, B, and C -- previously filed as
Exhibit 15. to North American Funds' Post Effective Amendment No. 19
on Form N-1A on December 29, 1994.
(j) Amendment to 12b-1 Plans for the Small/Mid Cap, International Small
Cap and Growth Equity Fund Classes A, B and C -- previously filed as
Exhibit (b)(15)(j) to North American Funds Post effective Amendment
No. 21 on Form N1-A (File No. 33-27958) dated December 15, 1995.
(16) (a) Schedule of Computations of Total Return and Yield Figures for the
Growth and Income, Investment Quality Bond and Global Growth
Trusts --previously filed as Exhibit (b)(16)(a) to North American
Security Trust's Post-Effective Amendment No. 7 on Form N-1A (File
No. 33-27958) dated November 1, 1991.
(b) Schedule of Computations of Total Return and Yield Figures for the
Growth, U.S. Government and Asset Allocation Trusts -- previously
filed as Exhibit (b)(16) to North American Security Trust's Post-
Effective Amendment No. 1 on Form N-1A (File No. 33-27958) filed
December 29, 1989.
(c) Schedule of Computations of Total Return and Yield Figures for Class
A, Class B and Class C shares -- previously filed as Exhibit (16)(c)
to North American Funds' Post-Effective Amendment No. 17 on Form N-
1A (File No. 33-27958) dated April 1, 1994.
(d) Schedule of Computations of Total Return and Yield Figures for
Strategic Income Fund Class A, Class B and Class C shares --
previously filed as Exhibit (b)(16)(d) to North American Fund's
Post-Effective Amendment No. 19 on Form N-1A (File No. 33-27958)
filed December 29, 1994.
(e) Schedule of Computations of Total Return Figures for the
International Growth and Income Fund, Class A, Class B and Class C
Shares --previously filed as Exhibit (b)(16)(e) to North American
Fund's Post-Effective Amendment No. 20 on Form N-1A (File No. 33-
27958) filed June 30, 1995.
(17) Financial Data Schedule for financials statements for the year ended
October 31, 1996 - Filed herewith.
<PAGE>
(18) Rule 18f-3 plan, as amended -- previously filed as Exhibit (b)(18)
to North American Funds Post effective Amendment No. 21 on Form N1-A
(File No. 33-27958) dated December 15, 1995.
(19) (a) Power of Attorney - previously filed as Exhibit (b)(17) to North
American Security Trust's Post-Effective Amendment No. 10 on Form N-
1A (File No. 33-27958) filed December 30, 1992.
(b) Power of Attorney - Frederick W. Gorbet -- previously filed as
Exhibit (b)(16) to North American Funds' Post-Effective Amendment
No. 16 on Form N-1A (File No. 33-27958) dated January 31, 1994.
(c) Powers of Attorney -- previously filed as Exhibit (17)(c) to North
American Funds' Post-Effective Amendment No. 18 on Form N-1A (File
No. 33-27958) dated October 20, 1994.
(d) Powers of Attorney -- Richard Hirtle, Treasurer, Chief Financial
Officer and Joseph Scott, President, dated September 27, 1996 -
Filed herewith
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
No person is directly or indirectly controlled by the Registrant. With
respect to the other portfolios of the Registrant, no person controls the
Registrant by virtue of share ownership in the Registrant. While the Registrant
disclaims any such control relationship, it may be deemed to be controlled by
its investment adviser by virtue of the advisory relationship. In such case, the
Registrant and its adviser, NASL Financial Services, Inc., a Massachusetts
corporation, may be deemed to be under common control of the adviser's parent
corporations. NASL Financial Services, Inc. is 100% owned by North American
Security Life Insurance Company, a stock life insurance company organized under
the laws of Delaware, which in turn is a subsidiary controlled by The
Manufacturers Life Insurance Company. A list of all companies under the control
of The Manufacturers Life Insurance Company is set forth on the following
pages.
THE MANUFACTURERS LIFE INSURANCE COMPANY
(Subsidiaries Organization Chart
- - including certain Significant Investments)
The Manufacturers Life Insurance Company (Canada)
<PAGE>
1. ManuLife Holdings (Hong Kong) Limited - H.K. (100%)
2. ManuLife Financial Systems (Hong Kong) Limited - H.K. (100%)
3. P.T. Asuransi Jiwa Dharmala Manulife - Indonesia (51%)
4. WT (SW) Properties Ltd. - U.K. (100%)
5. OUB Manulife Pte. Ltd. - Singapore (50%)
6. Manulife (Malaysia) SDN. BHD. - Malaysia (100%)
7. Manulife (Thailand) Ltd. - Thailand (100%)
8. Young Poong Manulife Insurance Company - Korea (50%)
9. Ennal, Inc. - Ohio (100%)
10. First North American Realty, Inc. - Minnesota (100%)
11. NAL Resources Limited - Alberta (100%)
(a) Nottingham Gas Limited - Saskatchewan (31%)
12. Nottingham Gas Limited - Saskatchewan (31%)
13. 484551 Ontario Limited - Ontario (100%)
(a) 911164 Ontario Limited - Ontario (100%)
14. Peel-de Maisonneuve Investments Ltd. - Canada (50%)
(a) 2932121 Canada Inc. - Canada (100%)
15. Balmoral Developments Inc. - Canada (100%)
16. KY Holding Corporation - Canada (100%)
17. 165351 Canada Limited - Canada (100%)
18. 172846 Canada Limited - Canada (100%)
19. 576986 Ontario Inc. - Ontario (100%)
20. Cantay Holdings Inc. - Ontario (100%)
<PAGE>
21. Manufacturers Life Capital Corporation Inc. - Canada (100%)
22. Elliott & Page Asset Management Ltd. - Canada (100%)
23. 495603 Ontario Limited - Ontario (100%)
24. 994744 Ontario Inc. - Ontario (100%)
25. The North American Group Inc. - Ontario (100%)
26. Manulife Investment Management Corporation - Canada (100%)
(a) 159139 Canada Inc. - Canada (50%)
i. Altamira Management Ltd. - Canada (60.96%)
A. ACI2 Limited - Cayman (100%)
a/ Regent Pacific Group Limited-Cayman (63.8%)
a.1 Manulife Regent Investment Corporation -
Barbados (100%) [50% by Regent Pacific Group Limited
and 50% by Manulife Data Services Inc.]
b.1 Manulife Regent Investment Asia Limited -
Hong Kong (100%)
B. Altamira Financial Services Inc. - Ontario (100%)
a/ AIS Securities (Partnership) - Ontario (100%) [5% by
Altamira Financial Services, Inc. and 95% by
Altamira Investment Services Inc.]
b/ Altamira Investment Services Inc. - Ontario (100%)
(a) AIS Securities (Partnership) - Ontario (100%)[95% by
by Altamira Investment Services Inc. and 5% by
Altamira Financial Services Inc.]
(b) Altamira (Alberta) Ltd. - Alberta (100%)
(c) Capital Growth Financial Services Inc. -
Ontario (100%)
27. Manulife International Investment Management Limited - U.K. (100%)
(a) Manulife International Fund Management Limited - U.K. (100%)
28. Manulife (International) Limited - Bermuda (100%)
(a) The Manufacturers (Pacific Asia) Insurance Company Limited
- Hong Kong (100%)
(b) Newtime Consultants Limited - Hong Kong (100%)
29. Manulife Data Services Inc.- Barbados (100%)
(a) Manulife Regent Investment Corporation - Barbados - (100%)
[50%] by Manulife Data Services Inc. and 50% by Regent
<PAGE>
Pacific Group Limited]
(b) Manulife Regent Investment Asia Limited - Hong Kong (100%)
30. FNA Financial Inc. - Canada (100%)
(a) NAL Trustco Inc. - Ontario (100%)
(b) First North America Insurance Company - Canada (100%)
(c) Elliott & Page Limited - Ontario (100%)
(d) Seamark Asset Management Ltd. - Canada (69.175%)
(e) NAL Resources Management Limited - Canada (100%)
(i) NAL Energy Inc. - Alberta (100%)
31. ManuCab Ltd. - Canada (100%)
(a) Plazcab Service Limited - Canada (100%)
32. Townvest Inc. - Ontario (100%)
33. Manulife Reinsurance Corporation (U.S.A.) - Michigan (100%)
(a) The Manufacturers Life Insurance Company (U.S.A.) - Michigan (100%)
(b) Manulife Holding Corporation - Delaware (100%)
i. Manufacturers Life Mortgage Securities
Corporation - Delaware (100%)
ii. Manulife Property Management of Washington, D.C., Inc.
- Washington D.C. (100%)
iii. Capital Design Corporation - California - (100%)
iv. ManEquity, Inc. - Colorado (100%)
v. Manulife Service Corporation - Colorado (100%)
vi. Succession Planning International Inc. - Wisconsin (100%)
(c) The Manufacturers Life Insurance Company of America - Michigan (100%)
i. Manulife Series Fund, Inc. - Maryland (100%)
ii. Manufacturers Adviser Corporation - Colorado (100%)
(d) Manulife Reinsurance Limited - Bermuda (100%)
34. The Manufacturers Investment Corporation - Michigan (100%)
35. Capitol Bankers Life Insurance Company - Minnesota (100%)
36. NAWL (North American Wood Logan Holding Company) - Delaware (85%)
(a) Wood Logan Associates Inc. - Connecticut (100%)
(i) Wood Logan Distributors - Connecticut (100%)
(b) North American Security Life Insurance Company - Delaware (100%)
(i) NASL Financial Services, Inc. - Massachusetts (100%)
(ii) First North American Life Assurance Company - New York (100%)
<PAGE>
37. Manulife (International) Reinsurance Limited - Bermuda (100%)
(a) Manulife (International) P&C Limited - Bermuda (100%)
(b) Manufacturers P&C Limited - Barbados (100%)
38. Manulife Financial Holdings Limited - Ontario (100%)
(a) 742166 Ontario Inc. - Ontario (100%)
(b) Family Realty Firstcorp Limited - Ontario (100%)
(c) Thos. N. Shea Investment Corporation Limited - Ontario (100%)
(d) Manulife Bank of Canada - Canada (100%)
i. Manulife Securities International Ltd. - Canada (100%)
Item 26. Number of Holders of Securities
-------------------------------
As of December 13, 1996, the number of holders of the shares of beneficial
interest of each class of each series of shares of the Registrant was as
follows:
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
- --------------- ------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Global Equity Fund Shares of 1,168 2,640 5,326
Beneficial Interest
Value Equity Fund Shares of 1,310 2,521 6,242
Beneficial Interest*
Growth and Income Fund Shares 988 2,668 4,505
of Beneficial Interest
Strategic Income Fund Shares of 624 1,387 845
Beneficial Interest
Balanced Fund Shares of 469 1,087 4,337
Beneficial Interest
Investment Quality Bond Fund 499 379 427
Shares of Beneficial Interest
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
U.S. Government Securities Fund 2,787 892 873
Shares of Beneficial Interest
National Municipal Bond Fund 136 132 131
Shares of Beneficial Interest
Money Market Fund Shares of 752 267 749
Beneficial Interest
International Growth and Income 522 1,382 951
Fund Shares of Beneficial Interest
Small/Mid Cap Fund Shares of
Beneficial Interest 555 885 933
International Small Cap Fund Shares 329 570 586
of Beneficial Interest
Growth Equity Fund Shares of
Beneficial Interest 364 502 573
</TABLE>
*Formerly the Growth Fund
Item 27. Indemnification
---------------
Sections 6.4 and 6.5 of the Agreement and Declaration of Trust of the
Registrant provide that the Registrant shall indemnify each of its Trustees and
officers against all liabilities, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and against
all expenses, including but not limited to accountants and counsel fees,
reasonably incurred in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such trustee or officer may be or
may have been involved as a party or otherwise or with which such person may be
or may have been threatened, while in office or thereafter, by reason of being
or having been such a trustee or officer, except that indemnification shall not
be provided if it shall have been finally adjudicated in a decision on the
merits by the court or other body before which the proceeding was brought that
such trustee or officer (i) did not act in good faith in the reasonable belief
that his or her action was in the best interests of the Registrant or (ii) is
liable to the Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office.
Registrant has previously provided the undertaking set forth in Rule 481
under the Securities Act of 1933.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
See "Management of the Fund" in the Prospectus and Statement of Additional
Information and "Investment Management Arrangements" in the Statement of
Additional Information for information regarding the business of the Adviser and
each of the Subadvisers. For information as to the business, profession,
vocation or employment of a substantial nature of each director, officer or
partner of the Adviser and each of the Subadvisers, reference is made to the
respective Form ADV, as amended, filed under the Investment Advisers Act of
1940, each of which is herein incorporated by reference.
Item 29. Principal Underwriters
----------------------
a. NASL Financial Services, Inc. also acts a principal underwriter for NASL
Variable Account, a separate account of North American Security Life
Insurance Company, and as investment adviser of NASL Series Trust, the
shares of which are the underlying investments of that separate account.
b. Officers and Directors of Principal Underwriter
<TABLE>
<CAPTION>
Name and Principal Position and Offices Offices with
Business Address with Underwriter Registrant
- ------------------------ -------------------- ---------------
<S> <C> <C>
John D. DesPrez III*** Director
Brian L. Moore * Chairman & Director Chairman
Richard C. Hirlte *** President & Director Treasurer
John G. Vrysen *** Vice President &
Treasurer Vice President
James R. Boyle** ____ Vice President,
Chief Administrative
Officer
James D. Gallagher*** Vice President, Secretary
Secretary &
General Counsel
</TABLE>
<PAGE>
* 200 Bloor Street East
South Tower, 11th Floor
Toronto, Ontario
Canada M4W-1E5
** 116 Huntington Avenue
Boston, MA 02116
*** 73 Tremont Street
Boston, MA 02108
c. None.
Item 30. Location of Accounts and Records
--------------------------------
All accounts, books and other documents required to be maintained under
Section 31(a) of the Investment Company Act of 1940 are kept by NASL Financial
Services, Inc., the Registrant's investment adviser, at its offices at 116
Huntington Avenue, Boston, Massachusetts 02116, by Wellington Management
Company, the investment subadviser to the Growth and Income Fund and the
Investment Quality Bond Fund at its offices at 75 State Street, Boston,
Massachusetts 02109, by Salomon Brothers Asset Management Inc, the investment
subadviser to the U.S. Government Securities Fund, Strategic Income Fund and
National Municipal Bond Fund at its offices at 7 World Trade Center, New York,
New York 10048, by Salomon Brothers Asset Management Limited, who provides
certain advisory services to SBAM relating to currency transactions and
investments in non-dollar denominated debt securities for the benefit of the
Strategic Income Fund at its offices at Victoria Plaza, 111 Buckingham Palace
Road, London SW1W OSB, England, by J.P. Morgan Investment Management Inc., the
investment subadviser to the International Growth and Income Fund at its offices
at 522 5th Avenue, New York, New York 10036, by Fred Alger Management, Inc., the
investment adviser to the Small/Mid Cap Fund at its offices at 30 Montgomery
Street, Jersey City, New Jersey 07302, by Founders Asset Management, Inc., the
investment adviser to the International Small Cap and Growth Equity Fund at its
offices at 2930 East Third Avenue, Denver, Colorado 80206, by the Registrant at
its principal business office located at 116 Huntington Avenue, Boston,
Massachusetts 02116, by T. Rowe Price Associates, Inc., the investment
subadviser to the Value Equity Trust, at its offices at 100 East Pratt Street,
Baltimore, MD 21202, by Morgan Stanley Asset Management, Inc., the investment
subadviser of the Global Equity Trust, at its offices at 1221 Avenue of the
Americas, New York, New York 10020, by Manufacturers Adviser Corporation, the
investment subadviser to the Money Market Trust, at its offices at 200 Bloor
Street East, Toronto, Ontario, Canada M4W lE5, by Boston Safe Deposit and Trust
Company, One Boston Place, Boston, Massachusetts 02108, custodian for the Global
Growth Fund's assets or by State Street Bank and Trust Company, the custodian
and transfer agent for all the other portfolios of the Registrant, at its
offices at 225 Franklin Street, Boston, Massachusetts 02110.
<PAGE>
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Previously furnished
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant, North American Funds, certifies
that it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Boston, and
Commonwealth of Massachusetts on the 30th day of December, 1996.
NORTH AMERICAN FUNDS
--------------------
(Registrant)
By: Joseph Scott
-----------------------
Joseph Scott, President
Attest:
Betsy Anne Seel
- ---------------
Assistant Secretary
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
* Trustee December 30, 1996
---------------------- ------------------
Don B. Allen (Date)
* Trustee December 30, 1996
---------------------- ------------------
Charles L. Bardelis (Date)
* Trustee December 30, 1996
---------------------- ------------------
Samuel Hoar (Date)
* Trustee December 30, 1996
---------------------- and Chairman ------------------
Brian L. Moore (Date)
* Trustee December 30, 1996
---------------------- ------------------
Robert J. Myers (Date)
* Vice President and December 30, 1996
---------------------- Treasurer (Prin- ------------------
Richard C. Hirtle cipal Financial and (Date)
Accounting Officer)
Joseph Scott
- ----------------------- December 30, 1996
Joseph Scott President (Chief ------------------
Executive Officer) (Date)
*By: James D. Gallagher December 30, 1996
------------------ ------------------
James D. Gallagher (Date)
Attorney-in-Fact
Pursuant to Powers
of Attorney
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Page No.
Where Exhibit
Exhibit No. Description Located
- ----------- ----------- -------
<S> <C> <C>
(b)(1)(c) Amended & Restated Agreement
and Declaration of Trust
(b)(1)(d) Declaration of Trust Amendment
(b)(1)(e) Declaration of Trust Amendment
(b)(1)(f) Declaration of Trust Amendment
(b)(1)(g) Declaration of Trust Amendment
(b)(1)(h) Declaration of Trust Amendment
(b)(5)(i) Morgan Stanley Asset Management
Subadvisory Agreement
(b)(5)(j) T. Rowe Price Associates, Inc
Subadvisory Agreement
(b)(5)(k) Manufacturers Adviser Corporation
Subadvisory Agreement
(b)(5)(l) Amendment to Founders Asset
Management, Inc. Subadvisory
Agreement
(b)(11) Consent of Coopers and Lybrand
(b)(17) Financial Data Schedule
(b)(19)(d) Powers of Attorney
</TABLE>
<PAGE>
Exhibit (b)(1)(c)
NORTH AMERICAN FUNDS
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
<PAGE>
NORTH AMERICAN FUNDS
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
TABLE OF CONTENTS
-----------------
ARTICLE I Name and Definitions Page
1.1 Name 1
1.2 Definitions 1
ARTICLE II Purpose of Trust 2
ARTICLE III The Trustees
3.1 Number, Designation, Election, Term, etc. 2
(a) Initial Trustee
(b) Number
(c) Election and Term
(d) Resignation and Retirement
(e) Removal
(f) Vacancies
(g) Effect of Death, Resignation, etc
(h) No Accounting
(i) Meetings
3.2 Powers of Trustees 4
(a) By-laws
(b) Sub-Trusts
(c) Officers, Agents, etc.
(d) Committees
(e) Advisory Boards
(f) Advise and Custody
(g) Transfer and Dividend Agents
(h) Distribution
(i) Record Dates
(j) Compensation
(k) Delegation
(l) Investments
(m) Disposition of Assets
(n) Ownership Powers
(o) Subscription
(p) Form of Holding
(q) Reorganization, etc.
(r) Voting Trusts, etc.
(s) Compromise
(t) Partnerships, etc.
(u) Borrowing and Security
(v) Guarantees, etc.
(w) Indemnification
(x) Insurance
(y) Pensions, etc.
<PAGE>
(z) Minimum Total Investment
3.3 Certain Contracts 7
(a) Advisory
(b) Administration
(c) Distribution
(d) Custodian and Depository
(e) Transfer and Dividend Disbursing Agency
(f) Shareholder Servicing
(g) Accounting
3.4 Parties to Contracts 8
3.5 Payment of Trust Expenses and Compensation
of Trustees 8
3.6 Ownership of Assets of the Trust 9
ARTICLE IV Shares
4.1 Description of Shares 9
(a) Series of Shares and Sub-Trusts
(b) Classes of Shares
(c) Number and Issuance of Shares
4.2 Establishment and Designation of Sub-Trusts and Classes
10
(a) Assets Belonging to Sub-Trusts
(b) Liabilities Belonging to Sub-Trusts
(c) Income and Capital
(d) Dividends and Distributions
(e) Liquidation
(f) Voting
(g) Redemption by Shareholder
(h) Redemption by Trust
(i) Net Asset Value
(j) Transfer
(k) Equality
(l) Fractions
(m) Conversion and Exchange Rights
4.3 Ownership of Shares 14
4.4 Investments in the Trust 14
4.5 No Preemptive Rights 14
<PAGE>
4.6 Trust Only 14
4.7 Status of Shares and Limitation of Personal
Liability 14
ARTICLE V Shareholders' Voting Powers and Meetings
5.1 Voting Powers 15
5.2 Proxies 15
5.3 Meetings 15
5.4 Place of Meetings 16
5.5 Record Dates 16
5.6 Quorum and Required Vote 16
5.7 Action by Written Consent 16
5.8 Inspection of Records 16
5.9 Additional Provisions 16
ARTICLE VI Limitation of Liability; Indemnification
6.1 Trustees, Shareholders, etc. Not Personally
Liable; Notice 17
6.2 Trustee's Good Faith Action; Expert Advice;
No Bond or Surety 17
6.3 Indemnification of Shareholders 17
6.4 Indemnification of Trustees, Officers, etc. 18
6.5 Exceptions to Indemnification 18
6.6 Indemnification Not Exclusive, etc. 18
6.7 Liability of Third Persons Dealing with Trustee 19
ARTICLE VII Miscellaneous
7.1 Duration and Termination of Trust 19
7.2 Reorganization 19
7.3 Amendments 19
7.4 Resident Agent 20
<PAGE>
7.5 Filing of Copies; References; Headings 20
7.6 Applicable Law 20
7.7 Reliance by Third Parties 20
7.8 Provisions in Conflict with Law or Regulations 21
7.9 Use of the Name "North American" 21
<PAGE>
NORTH AMERICAN FUNDS
----------------------------
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
----------------------------
AGREEMENT AND DECLARATION OF TRUST, made at Boston, Massachusetts,
September 28,1988, establishing the North American Security Trust and amended on
June 1, 1993, is hereby amended and restated, this 18th day of February, 1994,
by the Trustees hereunder and by the holders of shares of beneficial interest
issued hereunder as hereinafter provided.
W I T N E S S E T H
WHEREAS, this Trust has been formed to carry on the business of an
investment company and exercise all powers necessary and appropriate to the
conduct of such operations;
WHEREAS, this Trust is authorized to issue its shares of beneficial
interest in separate series, each separate series to be a Sub-Trust hereunder,
all in accordance with the provisions hereinafter set forth; and
WHEREAS, the Trustees have agreed to manage all property coming
into their hands as trustees of a Massachusetts business trust in accordance
with the provisions hereinafter set forth;
NOW, THEREFORE, the Trustees hereby declare that they will hold all
cash, securities and other assets which they may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the benefit of the holders from time to
time of shares of beneficial interest in this Trust or in the Sub-Trusts created
hereunder as hereinafter set forth.
ARTICLE I
---------
NAME AND DEFINITIONS
--------------------
Section 1.1 Name. This Trust shall be known as "North American Funds", and
----
the Trustees shall conduct the business of the Trust under that name or any
other name or names as they may from time to time determine.
Section 1.2 Definitions. Whenever used herein, unless otherwise required
-----------
by the context or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust
established by this Declaration of Trust, as amended from time to time,
inclusive of each and every Sub-Trust established hereunder.
(b) "Sub-Trust" refers to each Sub-Trust of the Trust established
and designated when the Trustees create each Series of Shares hereunder.
1
<PAGE>
(c) "Trustees" refers to the Trustees of the Trust and of each Sub-
Trust named herein so long as they shall continue in office and to all other
individuals who may from time to time be duly appointed or elected, qualified
and serving as Trustees in accordance with the provisions hereof, and reference
herein to a Trustee or the Trustees shall refer to each such individual in his
capacity as a trustee hereunder.
(d) "Shares" refers to the transferable units of interest into which
the beneficial interest in the Trust and each Sub-Trust (as the context may
require) shall be divided from time to time, and includes (i) fractions of
Shares as well as whole Shares and (ii) each separate class of Shares into which
each Sub-Trust shall be divided from time to time.
(e) "Series" refers to Series of Shares established and designated
under or in accordance with the provisions of Article IV, each of which Series
shall represent the beneficial interest in a Sub-Trust of the Trust.
(f) "Shareholder" means a record owner of Shares.
(g) The "1940 Act" refers to the Investment Company Act of 1940 and
the Rules and Regulations thereunder, all as amended from time to time.
(h) "Declaration of Trust" shall mean this Agreement and Declaration
of Trust as amended or restated from time to time.
(i) "By-Laws" shall mean the By-Laws of the Trust as amended from
time to time.
(j) "Affiliated Person", "Assignment", "Commission", "Interested
Person", "Majority Shareholder Vote" (the 67% or 50% requirement of the third
sentence of Section 2(a)(42) of the 1940 Act, whichever may be applicable) and
"Principal Underwriter" shall have the meanings given them in the 1940 Act, as
amended from time to time.
ARTICLE II
----------
PURPOSE OF TRUST
----------------
The purpose of the Trust is to operate as an investment company and to
offer Shareholders one or more investment programs primarily in securities and
debt instruments.
ARTICLE III
-----------
THE TRUSTEES
------------
Section 3.1 Number, Designation, Election, Term, etc.
----------------------------------------
(a) Initial Trustee. Upon the execution of this Declaration of Trust or
---------------
a counterpart hereof or some other writing in which he accepts such Trusteeship
and agrees to the provisions hereof, William J. Atherton, whose address is
116 Huntington Avenue, Boston, MA 02116, shall become a Trustee of the Trust and
of each Sub-Trust hereunder.
2
<PAGE>
(b) Number. The Trustees serving as such, whether named above or
------
hereafter becoming a Trustee, may increase or decrease (to not less than three)
the number of Trustees to a number other than the number theretofore determined.
No decrease in the number of Trustees shall have the effect of removing any
Trustee from Office prior to the expiration of his term, but the number of
Trustees may be decreased in conjunction with the removal of a Trustee pursuant
to subsection (e) of this Section 3.1.
(c) Election and Term. The Trustees shall be elected by the
-----------------
Shareholders of the Trust at the first meeting of Shareholders. Each Trustee,
whether named above or hereafter becoming a Trustee, shall serve as a Trustee of
the Trust and of each Sub-Trust during the lifetime of this Trust and until its
termination as hereinafter provided except as such Trustee sooner dies, resigns,
retires or is removed, or becomes incapacitated to perform the duties of a
Trustee. Subject to Section 16(a) of the 1940 Act, the Trustees may elect
successor Trustees and may, pursuant to Section 3.1(f) hereof, appoint Trustees
to fill vacancies. Trustees need not own Shares.
(d) Resignation and Retirement. Any Trustee may resign his trust or
--------------------------
retire as a Trustee, by written instrument signed by him and delivered to the
other Trustees or to the Chairman, if any, the President or Secretary of the
Trust, and such resignation or retirement shall take effect upon such delivery
or upon such later date as is specified in such instrument and shall be
effective as to the Trust and each Sub-Trust.
(e) Removal. Any Trustee may be removed with or without cause at any
-------
time: (i) by action of two-thirds of the Trustees prior to such removal; or
(ii) by vote of Shareholders holding not less than two-thirds of the Shares then
outstanding, cast in person or by proxy at any meeting called for the purpose.
Any such removal shall be effective as of the date of such action or such later
date as may be specified in such action and as to the Trust and each Sub-Trust.
(f) Vacancies. Any vacancy or anticipated vacancy resulting from any
---------
reason, including without limitation the death, resignation, retirement, removal
or incapacity of any of the Trustees, or resulting from an increase in the
number of Trustees by the other Trustees may (but so long as there are at least
three remaining Trustees, need not unless required by the 1940 Act) be filled by
a majority of the remaining Trustees, subject to the provisions of Section 16(a)
of the 1940 Act, through the appointment in writing of such other person as such
remaining Trustees in their discretion shall determine. Until a vacancy is
filled, the Trustees in office regardless of their number, shall have all the
powers granted to the Trustees and shall discharge all the duties imposed on the
Trustees by this Declaration of Trust. An appointment as Trustee shall be
effective upon the written acceptance of the person named therein to serve as a
Trustee and agreement by such person to be bound by the provisions of this
Declaration of Trust, except that any such appointment in anticipation of a
vacancy to occur by reason of retirement, resignation or increase in number of
Trustees to be effective at a later date shall become effective only at or after
the effective date of said retirement, resignation, or increase in number of
Trustees. As soon as any Trustee so appointed shall have accepted such
appointment and shall have agreed in writing to be bound by this Declaration of
Trust and the appointment is effective, the Trust estate shall vest in the new
Trustee, together with the continuing Trustees, without any further act or
conveyance.
(g) Effect of Death, Resignation, etc. The death, resignation,
---------------------------------
retirement, removal or incapacity of the Trustees, or any one of them, shall not
operate to annul or terminate the Trust or any Sub-Trust or to revoke or
terminate any existing agency or contract created or entered into pursuant to
the terms of this Declaration of Trust. When a Trustee ceases to be a Trustee,
his right title and interest in the assets of the Trust shall automatically
cease and vest in the remaining Trustees. Such cessation and vesting shall be
effective whether or not conveyancing documents have been executed and
delivered, but the individual (or his legal representative) shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of recording the conveyance to the remaining Trustees or the Trust of any trust
property held in the name of that individual.
3
<PAGE>
(h) No Accounting. Except to the extent required by law or under
-------------
circumstances which would justify his removal for cause, no person ceasing to be
a Trustee as a result of his death, resignation, retirement, removal or
incapacity (nor the estate of any such person) shall be required to make an
accounting to the Shareholders or remaining Trustees upon such cessation.
(i) Meetings. Meetings of the Trustees shall be held from time to
--------
time upon the call of the Chairman, if any, the President, the Secretary or any
two Trustees. Regular meetings of the Trustees may be held without call or
notice at a time and place fixed by the By-Laws or by resolution of the
Trustees. Notice of any other meeting shall be mailed or otherwise given as
specified in the By-Laws. A quorum for all meetings of the Trustees shall be a
majority of the Trustees then in office. Unless provided otherwise in this
Declaration of Trust, any action of the Trustees may be taken at a meeting by
vote of a majority of the Trustees present (a quorum being present). Trustees
who are Interested Persons of the Trust within the meaning of Section 1.2 hereof
or otherwise interested in any action to be taken may be counted for quorum
purposes under this Section and shall be entitled to vote to the extent
permitted by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the
Trustees by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
and, subject to the 1940 Act, participating in a meeting pursuant to such
communications systems shall constitute presence in person at such meeting.
Unless provided otherwise in this Declaration of Trust, and subject to
the 1940 Act, any action that may be taken at a meeting by the Trustees may be
taken without a meeting by written consents of a majority of the Trustees then
in office.
Section 3.2 Powers of Trustees. Subject to the provisions of this
------------------
Declaration of Trust, the business of the Trust shall be managed by the
Trustees, and they shall have all powers necessary or convenient to carry out
that responsibility and the purpose of the Trust. The Trustees shall have the
power to conduct the business of the Trust and carry on its operations in any
and all of its branches and maintain offices both within and without the
Commonwealth of Massachusetts, in any and all states of the United States of
America, in the District of Columbia, in any and all foreign countries and in
any and all commonwealths, territories, dependencies, colonies, possessions,
agencies or instrumentalities of the United States of America and of foreign
governments, and to do all such other things and execute all such instruments as
they deem necessary, proper or desirable in order to promote the interests of
the Trust although such things are not herein specifically mentioned. The
Trustees shall not in any way be bound or limited by any present or future law
or custom in regard to investments by trustees. Any determination as to what is
in the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of this Declaration of Trust, the
presumption shall be in favor of a grant of power to the Trustees. The Trustees
will not be required to obtain any court order to deal with trust property.
Without limiting the foregoing, the Trustees may:
(a) By-Laws. Adopt By-Laws, not inconsistent with this Declaration
-------
of Trust, providing for the conduct of the business and affairs of the Trust and
may amend and repeal them to the extent that such By-Laws do not reserve that
right to the Shareholders;
(b) Sub-Trusts. From time to time in accordance with the provisions
----------
hereof, establish Sub-Trusts, each Sub-Trust to operate as a separate and
distinct investment medium and with separately defined investment objectives and
policies; allocate assets, liabilities and expenses of the Trust to a particular
Sub-Trust or apportion the same among two or more Sub-Trusts, provided that any
liabilities or
4
<PAGE>
expenses incurred or arising in connection with a particular Sub-Trust, as
determined by the Trustees, shall be payable solely out of the assets of that
Sub-Trust;
(c) Officers, Agents, etc. As they consider appropriate, elect and
---------------------
remove officers and appoint and terminate agents and consultants and hire and
terminate employees, any one or more of the foregoing of whom may be a Trustee,
and may provide for the compensation of all of the foregoing;
(d) Committees. Appoint from their own number, and terminate, any
----------
one or more committees consisting of two or more Trustees, including without
implied limitation an executive committee, which may, when the Trustees are not
in session and subject to the 1940 Act, exercise some or all of the power and
authority of the Trustees as the Trustees may determine; notice, quorum, voting
and other procedures for each committee shall be as determined by the Trustees
or, in the absence of such determination, shall be the same as the procedures
that apply to meetings and other proceedings of the Trustees;
(e) Advisory Boards. Appoint one or more advisory boards for the
---------------
Trust or for one or more Sub-Trusts, the members of each of which shall not be
Trustees and need not be Shareholders;
(f) Advise and Custody. Employ one or more advisers, administrators,
------------------
depositories and custodians and may authorize any depository or custodian to
employ domestic and foreign subcustodians or agents and to deposit all or any
part of such assets in one or more domestic or foreign systems for the central
handling of securities;
(g) Transfer and Dividend Agents. Retain transfer, dividend,
----------------------------
accounting or Shareholder servicing agents or any of the foregoing;
(h) Distribution. Provide for the distribution of Shares by the
------------
Trust through one or more distributors, principal underwriters or otherwise;
(i) Record Dates. Set record dates or times for the determination of
------------
Shareholders or various of them with respect to various matters;
(j) Compensation. Compensate or provide for the compensation of the
------------
Trustees, officers, advisers, administrators, custodians, other agents,
consultants and employees of the Trust or the Trustees on such terms as they may
deem appropriate;
(k) Delegation. In general, delegate to any officer of the Trust, to
----------
any committee of the Trustees and to any employee, adviser, administrator,
distributor, depository, custodian, transfer and dividend disbursing agent, or
any other agent or consultant of the Trust such authority, powers, functions and
duties as they consider desirable or appropriate for the conduct of the business
and affairs of the Trust, including without implied limitation the power and
authority to act in the name of the Trust and of the Trustees, to sign documents
and to act as attorney-in-fact for the Trustees;
(l) Investments. Invest and reinvest cash and other property, and
-----------
hold cash or other property uninvested;
(m) Disposition of Assets. Sell, exchange, lend, pledge, mortgage,
---------------------
hypothecate, write options on and lease any or all of the assets of the Trust;
(n) Ownership Powers. Vote or give assent, or exercise any rights of
----------------
ownership with respect to stock or other securities, including debt instruments,
or other property; and execute and deliver proxies or powers of attorney to such
person or persons as the Trustees shall deem proper, granting to such
5
<PAGE>
person or persons such power and discretion with relation to securities or other
property as the Trustees shall deem proper;
(o) Subscription. Exercise powers and rights of subscription or
------------
otherwise which in any manner arise out of ownership of securities;
(p) Form of Holding. Hold any security or other property in a form
---------------
not indicating any trust, whether in bearer, unregistered or other negotiable
form, or in the name of the Trustees or of the Trust or of any Sub-Trust or in
the name of a custodian, subcustodian or other depository or a nominee or
nominees or otherwise;
(q) Reorganization, etc. Consent to or participate in any plan for
-------------------
the reorganization, consolidation or merger of any corporation or issuer, any
security of which is or was held in the Trust; consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and pay
calls or subscriptions with respect to any security held in the Trust;
(r) Voting Trusts, etc. Join with other holders of any securities in
------------------
acting through a committee, depository, voting trustee or otherwise, and in that
connection deposit any security with, or transfer any security to, any such
committee, depository or trustee, and delegate to them such power and authority
with relation to any security (whether or not so deposited or transferred) as
the Trustees shall deem proper, and agree to pay, and pay, such portion of the
expenses and compensation of such committee, depository or trustee as the
Trustees shall deem proper;
(s) Compromise. Compromise, prosecute, defend, arbitrate or
----------
otherwise adjust any claims, actions, suits, proceedings, or demands in favor of
or against the Trust or any Sub-Trust or class thereof on any matter in
controversy, including but not limited to claims for taxes;
(t) Partnerships, etc. Enter into joint ventures, general or limited
-----------------
partnerships and any other combinations or associations;
(u) Borrowing and Security. Borrow funds and mortgage and pledge the
----------------------
assets of the Trust or any part thereof to secure obligations arising in
connection with such borrowing;
(v) Guarantees, etc. Endorse or guarantee the payment of any notes
---------------
or other obligations of any person; make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and mortgage and pledge the
Trust property or any part thereof to secure any of or all such obligations;
(w) Indemnification. To the extent permitted by law, indemnify any
---------------
person with whom the Trust has dealings, including any investment adviser,
administrator, transfer agent, distributor, principal underwriter and selected
dealers to such extent as the Trustees shall determine;
(x) Insurance. Purchase and pay for entirely out of Trust property
---------
such insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust and payment of distributions and principal on its portfolio
investments, and, subject to the 1940 Act, insurance policies insuring the
Shareholders, trustees, officers, employees, agents, consultants, investment
advisers, managers, administrators, distributors, principal underwriters, or
independent contractors, or any thereof (or any person connected therewith), of
the Trust individually against all claims and liabilities of every nature
arising by reason of holding or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such person in
any such capacity, including any action taken or omitted that may be determined
to constitute negligence, whether or not the Trust would have the power to
indemnify such persons against such liability;
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(y) Pensions, etc. Pay pensions for faithful service, as deemed
-------------
appropriate by the Trustees, and adopt, establish and carry out pension, profit-
sharing, share bonus, share purchase, savings, thrift and other retirement,
incentive and benefit plans, trust and provisions, including the purchasing of
life insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and agents
of the Trust; and
(z) Minimum Total Investment. Establish, from time to time, a
------------------------
minimum total investment for Shareholders, and require redemption of the Shares
of any Shareholders whose investment is less than such minimum.
Section 3.3 Certain Contracts. Subject to compliance with the
-----------------
provisions of the 1940 Act, but not withstanding any limitations of any present
or future law or custom in regard to delegation of powers by trustees generally,
the Trustees may, at any time and from time to time and without limiting the
generality of their power and authority otherwise set forth herein, enter into
one or more contracts with any one or more corporations, trusts, associations,
partnerships, limited partnerships, other types of organizations, and
individuals, including North American Life Assurance Company and its affiliates
("Contracting Party"), to provide for the performance and assumption of
services, duties and responsibilities to, for or on behalf of the Trust, any
Sub-Trust and any classes thereof or the Trustees, including but not limited to
those set forth in paragraphs (a) to (g) below, as the Trustees may determine
appropriate.
(a) Advisory. Subject to the general supervision of the Trustees and
--------
in conformity with the stated policy of the Trustees with respect to the
investments of the Trust or of the assets belonging to any Sub-Trust of the
Trust, to manage such investments and assets, make investment decisions with
respect thereto, furnish statistical and research facilities and services, and
to place purchase and sale orders for portfolio transactions relating to such
investments and assets. The Trustees may, subject to applicable requirements of
the 1940 Act, including those related to Shareholder approval, authorize the
investment adviser to employ one or more subadvisers, from time to time, to
perform such of the acts and services of the investment adviser, and upon such
terms and conditions, as may be agreed upon between the investment adviser and
subadviser;
(b) Administration. Subject to the general supervision of the
--------------
Trustees and in conformity with any policies of the Trustees with respect to the
operations of the Trust and each Sub-Trust, to supervise all or any part of the
operations of the Trust and each Sub-Trust, and to provide all or any part of
the administrative and clerical personnel, office space and office equipment and
services appropriate for the efficient administration and operations of the
Trust and each Sub-Trust;
(c) Distribution. To distribute the Shares of the Trust and each
------------
Sub-Trust and each class thereof, to be principal underwriter of such Shares,
and to act as agent of the Trust and each Sub-Trust in the sale of Shares and
the acceptance or rejection of orders for the purchase of Shares;
(d) Custodian and Depository. To act as a depository for and to
------------------------
maintain custody of property of the Trust and each Sub-Trust and accounting
records in connection therewith;
(e) Transfer and Dividend Disbursing Agency. To maintain records of
---------------------------------------
the ownership of outstanding Shares, the issuance and redemption and the
transfer thereof, and to disburse any dividends declared by the Trustees and in
accordance with the policies of the Trustees and the instructions of any
particular Shareholder to reinvest any such dividends;
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(f) Shareholder Servicing. To provide service with respect to the
---------------------
relationship of the Trust and its Shareholders, records with respect to
Shareholders and their Shares, and similar matters; and
(g) Accounting. To handle all or any part of the accounting
----------
responsibilities, whether with respect to the Trust's properties, Shareholders
or otherwise.
Section 3.4 Parties to Contracts. The same person may be the
--------------------
Contracting Party for some or all of the services, duties and responsibilities
to, for and of the Trust and the Trustees, and the contracts with respect
thereto may contain such terms interpretive of or in addition to the delineation
of the services, duties and responsibilities provided for, including provisions
that are not inconsistent with the 1940 Act relating to the standard duty of and
the rights to indemnification of the Contracting Party and others, as the
Trustees may determine. Nothing herein shall preclude, prevent or limit the
Trust or a Contracting Party from entering into subcontractual arrangements
relative to any of the matters referred to in Sections 3.3(a) through (g)
hereof.
The fact that:
(a) any of the Shareholders, Trustees, or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee, manager,
adviser, principal underwriter or distributor or agent of or for any Contracting
Party, or of or for any parent or affiliate of any Contracting Party or that the
Contracting Party or any parent or affiliate thereof is a Shareholder or has an
interest in the Trust or any Sub-Trust, or that
(b) any Contracting Party may have a contract providing for the
rendering of any similar services to one or more other corporations,
trusts, associations, partnerships, limited partnerships or other
organizations, or have other business or interests,
shall not affect the validity of any contract for the performance and assumption
of services, duties and responsibilities to, for or of the Trust or any Sub-
Trust or the Trustees or disqualify any Shareholder, Trustee or officer of the
Trust from voting upon or executing the same or create any liability or
accountability to the Trust, any Sub-Trust or Shareholders, provided that in the
case of any relationship or interest referred to in the preceding clause (a) on
the part of any Trustee or officer of the Trust either:
(c) the material facts as to such relationship or interest have been
disclosed to or are known by the Trustees not having any such relationship or
interest and the contract involved is approved in good faith by a majority of
such Trustees not having any such relationship or interest (even though such
unrelated or disinterested Trustees are less than a quorum of all the Trustees),
(d) the material facts as to such relationship or interest and as to
the contract have been disclosed to or are known by the Shareholders
entitled to vote thereon and the contract involved is specifically approved
in good faith by vote of the Shareholders, or
(e) the specific contract involved is fair to the Trust as of the
time it is authorized, approved or ratified by the Trustees or by the
Shareholders.
Section 3.5 Payment of Trust Expenses and Compensation of Trustees. The
------------------------------------------------------
Trustees are authorized to pay or cause to be paid out of the principal or
income of the Trust or any Sub-Trust or classes thereof, or partly out of
principal and partly out of income, and to charge or allocate the same to,
between or among such one or more of the Sub-Trusts or classes thereof that may
be established and designated pursuant to Article IV, as the Trustees deem fair,
all expenses, fees, charges, taxes and
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liabilities incurred or arising in connection with the Trust or any Sub-Trust or
classes thereof or in connection with the management thereof, including, but not
limited to, the Trustees' compensation and such expenses and charges for the
services of the Trust's officers, employees, investment adviser, administrator,
distributor, principal underwriter, auditor, counsel, depository, custodian,
transfer agent, dividend disbursing agent, accounting agent, Shareholder
servicing agent, and such other agents, consultants, and independent contractors
and such other expenses and charges as the Trustees may deem necessary or proper
to incur; provided, however, that all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with a particular Sub-Trust or
class thereof as determined by the Trustees, shall be payable solely out of the
assets of that Sub-Trust or class thereof. Without limiting the generality of
any other provision hereof, the Trustees shall be entitled to reasonable
compensation from the Trust for their services as Trustees and may fix the
amount of such compensation.
Section 3.6 Ownership of Assets of the Trust. Title to all of the assets
--------------------------------
of each Sub-Trust and of the Trust shall at all times be considered as vested in
the Trustees. No Shareholder shall be deemed to have a severable ownership in
any individual asset of the Trust or any Sub-Trust or any right of partition or
possession thereof, but each Shareholder shall have an undivided beneficial
interest in each Sub-Trust in which he is a Shareholder.
ARTICLE IV
----------
SHARES
------
Section 4.1 Description of Shares. The beneficial interest in the
---------------------
Trust shall be divided into Shares, par value $0.001 per share.
(a) Series of Shares and Sub-Trusts. The Trustees shall have the
-------------------------------
authority from time to time to divide the Shares into two or more Series of
Shares as they deem necessary of desirable. Each Series of Shares shall be a
separate and distinct Sub-Trust of the Trust. Each Sub-Trust established
hereunder shall be deemed to be a separate trust under Massachusetts General
Laws Chapter 182. The Trustees shall have exclusive power without the
requirement of shareholder approval to establish and designate such separate and
distinct Sub-Trusts, and to fix and determine the relative rights and
preferences as between the Shares of the separate Sub-Trusts as to purchase
price, right of redemption and the price, terms and manner of redemption,
special and relative rights as to dividends and other distributions and on
liquidation, sinking or purchase fund provisions, conversion rights, and
conditions under which the several Sub-Trusts shall have separate voting rights
or no voting rights.
Each Share of a Sub-Trust shall represent a beneficial interest only
in the assets belonging to that Sub-Trust, and such interest shall not extend to
the assets of any other Sub-Trust or to the assets of the Trust generally.
Shareholders of a particular Sub-Trust shall not be entitled to participate in a
derivative or class action on behalf of any other Sub-Trust or the Shareholders
of any other Sub-Trust.
The establishment and designation of any Sub-Trust in addition to
those established and designated in Section 4.2 shall be effective upon the
execution by a majority of the Trustees of an instrument setting forth such
establishment and designation and the relative rights and preferences of the
Shares of such Sub-Trust. At any time that there are no Shares outstanding of
any particular Sub-Trust previously established and designated, the Trustees may
by an instrument executed by a majority of their number abolish that Sub-Trust
and the establishment and designation thereof. Each instrument referred to in
this paragraph shall have the status of an amendment to this Declaration of
Trust.
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Any Trustee, officer or other agent of the Trust, and any organization
in which any such person is interested, may acquire, own, hold and dispose of
Shares of any Sub-Trust to the same extent as if such person were not a Trustee,
officer or other agent of the Trust; the Trust may issue an sell or cause to be
issued and sold and may purchase Shares of any Sub-Trust from any such person or
any such organization subject only to the general limitations, restrictions or
other provisions applicable to the sale or purchase of Shares of such Sub-Trust
generally.
(b) Classes of Shares. The Trustees shall have the authority,
-----------------
without action or approval of the Shareholders, from time to time to divide the
Shares of any sub-Trust into classes and to fix and determine the different
rights and preferences as between the Shares of separate classes within a
particular Sub-Trust as to purchase price, right of redemption and the price,
terms and manner of redemption, dividends and other distributions and rights on
liquidation, conversion rights, voting rights and such other rights as the
Trustees may determine, and may designate the specific classes of shares of each
Sub-Trust. The fact that a Sub-Trust shall have initially been established and
designated without any specific establishment or designation of classes (i.e.,
----
that all Shares of such Sub-Trust are initially of a single class), or that a
Sub-Trust shall have more than one established and designated class, shall not
limit the authority of the Trustees to establish and designate separate classes,
or one or more further classes, of said Sub-Trust without approval of the
holders of the initial class thereof, or previously established and designated
class or classes thereof, provided that the establishment and designation of
such further separate classes would not adversely affect the rights of the
holders of the initial or previously established and designated class or classes
within the meaning of Section 77 of the Massachusetts General Laws Chapter 156B.
The division of Shares into classes and the terms and conditions pursuant to
which the Shares of the classes will be issued, must be made in compliance with
the 1940 Act. The establishment and designation of any class of Shares of a
Sub-Trust shall be effective upon the execution by a majority of the then
Trustees of an instrument setting forth such establishment and designation and
the relative rights and preferences of the Shares of such class. Each such
instrument shall have the status of an amendment to this Declaration of Trust.
(c) Number and Issuance of Shares. The number of authorized Shares
-----------------------------
is unlimited as is the number of Shares of each Sub-Trust and of each class that
may be issued. The Trustees may issue Shares of any Sub-Trust and of any class
for such consideration and on such terms as they may determine (or for no
consideration if pursuant to a Share dividend or split-up), all without action
or approval of the Shareholders. All Shares when so issued on the terms
determined by the Trustees shall be fully paid and non-assessable (but may be
subject to mandatory contribution back to the Trust as provided in subsection
(i) of Section 4.2). The Trustees may classify or reclassify any unissued
Shares or any Shares previously issued and reacquired into one or more Sub-
Trusts or classes thereof that may be established and designated from time to
time. The Trustees may hold as treasury shares, reissue for such consideration
and on such terms as they may determine, or cancel, at their discretion from
time to time, any Shares of any Sub-Trust or class thereof reacquired by the
Trust. The Trustees may from time to time divide or combine the shares of any
Series or any class into a greater or lesser number without thereby changing the
proportionate beneficial interest in the Series or class. The Trustees may from
time to time close the transfer books or establish record dates and time for the
purposes of determining the holders of Shares entitled to be treated as such, to
the extent provided or referred to in Section 5.5
Section 4.2 Establishment and Designation of Sub-Trusts and Classes.
-------------------------------------------------------
Without limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby establish
and designate ten Sub-Trusts:
1. Growth Fund
2. Investment Quality Bond Fund
3. Money Market Fund
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4. Global Growth Fund
5. U.S. Government Securities Fund
6. Growth and Income Fund
7. Asset Allocation Fund
8. Strategic Income Fund
9. National Municipal Bond Fund
10. California Municipal Bond Fund
The Shares of these Sub-Trusts and any Shares of any further Sub-Trusts that may
from time to time be established and designated by the Trustees shall have the
relative rights and preferences described below in this Section 4.2; provided
that the Trustees may determine otherwise with respect to some further Sub-Trust
at the time of establishing and designating the same; and provided further that
the Trustees, in their absolute discretion, may amend any previously established
relative rights and preferences as they may deem necessary or desirable to
enable the Trust to comply with the 1940 Act or other applicable law.
(a) Assets Belonging to Sub-Trusts. All consideration received by the
------------------------------
Trust for the issue or sale of Shares of a particular Sub-Trust or classes
thereof, together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits, and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of such assets, and any
funds or payments derived from any reinvestment of such proceeds in whatever
form the same may be (collectively, "Specific Asset Items"), shall be held by
the Trustees in trust for the benefit of the holders of Shares of that Sub-Trust
and shall irrevocably belong to that Sub-Trust and be allocable to any classes
thereof for all purposes, and shall be so recorded upon the books of account of
the Trust. In the event that there are any assets, income, earnings, profits,
and proceeds thereof, funds or payments which are not readily identifiable as
belonging to any particular Sub-Trust (collectively, "General Asset Items), the
Trustees shall allocate such General Asset Items to and among any one or more of
the Sub-Trusts established and designated from time to time in such manner and
on such basis as they, in their sole discretion, deem fair and equitable; and
any General Asset Items so allocated to a particular Sub-Trust shall belong to
that Sub-Trust and be allocable to any classes thereof. Each allocation of
assets by the Trustees shall be conclusive and binding upon the Shareholders of
all Sub-Trusts for all purposes. The Specific Asset Items of a Sub-Trust
together with any General Asset Items allocated to that Sub-Trust are herein
referred to as "assets belonging to" that Sub-Trust.
(b) Liabilities Belonging to Sub-Trusts. The assets belonging to each
-----------------------------------
particular Sub-Trust shall be charged with all the liabilities, expenses, costs,
charges and reserves which, as determined by the Trustees, are readily
identifiable as belonging to that particular Sub-Trust (collectively, "Specific
Liability Items"). Any general liabilities, expenses, costs, charges or
reserves of the Trust which are not readily identifiable as belonging to any
particular Sub-Trust (collectively, "General Liability Items") shall be
allocated and charged by the Trustees to and among any one or more of the Sub-
Trusts established and designated from time to time in such manner and on such
basis as the Trustees, in their sole discretion, deem fair and equitable. Each
allocation of liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the Shareholders of all Sub-Trusts and of
all classes for all purposes. The Specific Liability Items of a Sub-Trust
together with any General Liability Items allocated to that Sub-Trust are herein
referred to as "liabilities belonging to" that Sub-Trust. General liabilities,
expenses, costs, charges or reserves being borne solely by a class of Shares or
pertaining
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solely to a class of shares are herein referred to as "expenses being borne
solely" by a class. Expenses being borne solely by a particular class of Shares
may be allocable to, or borne by, only such class of Shares (as determined by
the Trustees). Under no circumstances shall the assets belonging to any
particular Sub-Trust or class be charged with the liabilities belonging to any
other Sub-Trust or class. All persons who have extended credit which the
Trustees have allocated to a particular Sub-Trust, or who have a claim or
contract which the Trustees have allocated to a particular Sub-Trust, shall look
only to the assets of that particular Sub-Trust for payment of such credit,
claim or contract.
(c) Income and Capital. The Trustees shall have full discretion, to the
------------------
extent not inconsistent with the 1940 Act, to determine which items shall be
treated as income and which items as capital; and each such determination and
allocation shall be conclusive and binding upon the Shareholders.
(d) Dividends and Distributions. The Trustees shall from time to time
---------------------------
distribute ratably among the Shareholders of a Sub-Trust or class such
proportion of the net profits, surplus (including paid-in surplus), capital, or
assets held by the Trustees with respect to that Sub-Trust or class as they may
deem proper with any expenses being borne solely by a class of Shares of a Sub-
Trust being reflected in the net profits or other assets being distributed to
such class. Dividends and distributions may be paid with such frequency as the
Trustees may determine, which may be daily or otherwise, pursuant to a standing
resolution or resolutions adopted only once or with such frequency as the
Trustees may determine. Distributions may be made in cash or property
(including without limitation any type of obligations of the Trust or any assets
thereof), and the Trustees may distribute ratably among the Shareholders
additional Shares issuable hereunder in such manner, at such times, and on such
terms as the Trustees deem proper. Such distributions may be among the
Shareholders of record at the time of declaring a distribution or among the
Shareholders of record at such later date as the Trustees shall determine. The
Trustees may always retain from the net profits of a Sub-Trust or class such
amount as they may deem necessary to pay the liabilities belonging to the Sub-
Trust or class or to meet obligations of the Sub-Trust or class, or as they may
deem desirable to use in the conduct of its affairs or to retain for future
requirements or extensions of the business. The Trustees may adopt and offer to
Shareholders such dividend reinvestment plans, cash dividend payout plans or
related plans as the Trustees shall deem appropriate.
Inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust and the Sub-Trusts to avoid or reduce liability for taxes.
(e) Liquidation. In the event of the liquidation or dissolution of the
-----------
Trust or of any Sub-Trust, the Shareholders of each affected Sub-Trust shall be
entitled to receive, when and as declared by the Trustees, the excess of the
assets belonging to that Sub-Trust over the liabilities belonging to that Sub-
Trust. The assets so distributable to the Shareholders of any particular Sub-
Trust shall be distributed among the Shareholders of each class according to
their respective rights taking into account the proper allocation of expenses
being borne solely by any class of Shares of that Sub-Trust.
(f) Voting. Shareholders shall be entitled to vote only with respect to
------
such matters as may be required by law, the Declaration of Trust or the By-Laws
and such additional matters as the Trustees may consider necessary or desirable.
On each matter submitted to a vote of the Shareholders, each holder of a Share
shall be entitled to one vote for each whole Share and to a proportionate
fractional vote for each fractional Share standing in his name on the books of
the Trust. All Shares of the Trust then entitled to vote shall be voted by Sub-
Trust, except that when voting for the election of Trustees and when otherwise
permitted by the 1940 Act, shares shall be voted in the aggregate and not by
Sub-Trust. As to any matter which does not affect the interest of a particular
Sub-Trust, only the holders of Shares of the one or more affected Sub-Trusts
shall be entitled to vote. As to any matter relating to expenses being
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borne solely by a class of a Sub-Trust or to any other matter which only affects
the interests of a particular class of a particular Sub-Trust, only the holders
of Shares of the affected class of the Sub-Trust shall be entitled to vote.
(g) Redemption by Shareholder. Each holder of Shares of a particular Sub-
-------------------------
Trust or any class thereof shall have the right at such time as may be permitted
by the Trust to require the Trust to redeem all or any part of his Shares of
that Sub-Trust or class, subject to the terms and conditions set forth in this
Declaration of Trust and to such additional terms and conditions that may be
adopted by the Trustees. Shares of any particular Sub-Trust or class may be
redeemed solely out of the assets belonging to that Sub-Trust or class. Payment
of the redemption price shall be in cash; provided, however, that if the
Trustees determine, which determination shall be conclusive, that conditions
exist which make payment wholly in cash unwise or undesirable, the Trust may
make payment wholly or partly in securities or other assets belonging to the
Sub-Trust or class of which the Shares being redeemed are part at the value of
such securities or assets used in such determination of net asset value. The
amount per Share at which the Trust redeems or repurchases Shares shall be
determined by the application of a formula adopted for such purpose by
resolution of the Trustees (which formula shall be consistent with the 1940 Act)
provided that (i) such amount per Share shall not exceed the cash equivalent of
the proportionate interest of each Share in the assets of the particular Sub-
Trust or class at the time of the purchase or redemption and (ii) if so
authorized by the Trustees, the Trust may, at any time and from time to time,
charge fees for effecting such redemption, at such rates as the Trustees may
establish, as and to the extent permitted under the 1940 Act. The procedures
for effecting redemption with respect to a particular Sub-Trust shall be set
forth from time to time in the Prospectus for that Sub-Trust or class.
Notwithstanding the foregoing, the Trust may postpone payment of the redemption
price and may suspend the right of the holders of Shares of any Sub-Trust or
class to require the Trust to redeem Shares of that Sub-Trust or class during
any period or at any time when and to the extent permissible under the 1940 Act.
(h) Redemption by Trust. Each Share of each Sub-Trust and each class
-------------------
thereof is subject to redemption by the Trust at the redemption price determined
pursuant to subsection (g) of this Section 4.2: (i) at any time, if the
Trustees determine in their sole discretion that failure to so redeem may have
materially adverse consequences to the holders of the other Shares of the Trust
or any Sub-Trust or any classes thereof, or (ii) upon such other conditions as
may from time to time be determined by the Trustees and described in the then
current Prospectus for a Sub-Trust or class with respect to maintenance of
Shareholder accounts of a minimum amount in that Sub-Trust or class. Upon such
redemption the holders of the Shares so redeemed shall have no further right
with respect thereto other than to receive payment of such redemption price.
(i) Net Asset Value. The net asset value of a Sub-Trust or class shall be
---------------
the amount determined by subtracting the liabilities belonging or allocable to
that Sub-Trust or class from the assets belonging or allocable to that Sub-Trust
or class. The net asset value of each outstanding Share of each Sub-Trust or
class shall be determined at such time or times on such days as the Trustees may
determine in accordance with the 1940 Act. The method of determination of the
net asset value of a Sub-Trust or class shall be determined by the Trustees from
time to time and shall be as described in the Prospectus for that Sub-Trust or
class. The power and duty to make the daily calculations may be delegated by
the Trustees to the adviser, administrator, manager, custodian, transfer agent
or such other person as the Trustees may determine. The Trustees may suspend
the daily determination of net asset value to the extent permitted by the 1940
Act.
The Trustees may determine to maintain the net asset value per Share of any
Sub-Trust at a designated constant dollar amount and in connection therewith may
adopt procedures not inconsistent with the 1940 Act for the continuing
declarations of income attributable to that Sub-Trust as dividends payable in
additional Shares of that Sub-Trust at the designated constant dollar amount and
for the
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handling of any losses attributable to that Sub-Trust. Such procedures may
provide that in the event of any loss each Shareholder shall be deemed to have
contributed to the capital of the Trust attributable to that Sub-Trust his pro
rata portion of the total number of Shares required to be canceled in order to
permit the net asset value per Share of that Sub-Trust to be maintained, after
reflecting such loss, at the designated constant dollar amount. Each Shareholder
of the Trust shall be deemed to have agreed, by his investment in any Sub-Trust
with respect to which the Trustees shall have adopted any such procedure, to
make the contribution referred to in the preceding sentence in the event of any
such loss.
(j) Transfer. All Shares shall be transferable, but transfers of Shares
--------
of a particular Sub-Trust or class will be recorded on the Share transfer
records of the Trust applicable to that Sub-Trust or class only at such times as
Shareholders shall have the right to require the Trust to redeem Shares of that
Sub-Trust or class and at such other times as may be permitted by the Trustees.
Shares shall be transferable on the records of the Trust upon delivery to the
Trust or its transfer agent of such evidence of assignment, transfer, succession
or authority to transfer as the Trustees or the transfer agent may reasonably
require, accompanied by any certificate or certificates representing such shares
previously issued to the transferor. Upon such delivery the transfer shall be
recorded on the books of the Trust. The Trust shall be entitled to treat the
record holder of Shares as shown on its books as the owner of such Shares for
all purposes, including the payment of dividends and the right to receive notice
and to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such Shares until the Shares have been transferred on the books
of the Trust in accordance with the requirements of this Declaration of Trust.
(k) Equality. All Shares of each Sub-Trust shall represent an equal
--------
proportionate interest in the assets belonging to that Sub-Trust (subject to the
liabilities belonging to that Sub-Trust); provided that such equality need not
be maintained among all Shares of a Sub-Trust but shall be maintained among all
Shares of each class of that Sub-Trust whenever the Trustees divide the Shares
of the Sub-Trust into classes, with the expenses relating solely to the Shares
of a particular class being borne by, and reflected in the net asset value,
dividends and liquidation rights of, that class.
(l) Fractions. Any fractional Share of any class of any Sub-Trust, if any
---------
such fractional Share is outstanding, shall carry proportionately all the rights
and obligations of a whole Share of that class of that Sub-Trust, including
rights and obligations with respect to voting, receipt of dividends and
distributions, redemption of Shares, and liquidation of the Trust.
(m) Conversion and Exchange Rights. Subject to compliance with the
------------------------------
requirements of the 1940 Act, the Trustees shall have the authority to provide
that holders of Shares of any class of any Sub-Trust shall have the right to
convert such Shares into, or to exchange such Shares for, Shares of the same or
one or more other Sub-Trusts or classes thereof in accordance with such
requirements and procedures as may be established by the Trustees.
Section 4.3 Ownership of Shares. The ownership of Shares shall be
-------------------
recorded on the books of the Trust or of a transfer or similar agent for the
Trust. No certificates certifying the ownership of Shares need be issued except
as the Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the issuance of Shares
certificates, the use of facsimile signatures, the transfer of Shares and
similar matters. The record books of the Trust as kept by the Trust or any
transfer or similar agent, as the case may be, shall be conclusive for all
purposes as to who are the Shareholders and as to the number of Shares of each
class of each Sub-Trust held from time to time by each such Shareholder.
Section 4.4 Investments in the Trust. The Trustees may accept investments
------------------------
in the Trust and each Sub-Trust and class thereof, subject to any requirements
of law, from such persons and on such terms and for such consideration, as they
from time to time authorize. The Trustees may authorize any distributor,
principal underwriter, custodian, transfer agent or other person to accept
orders for the
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purchase of Shares that conform to such authorized terms and to reject any
purchase orders for Shares whether or not conforming to such authorized terms.
Section 4.5 No Preemptive Rights. Shareholders shall have no preemptive
--------------------
or other rights to receive, purchase or subscribe to any additional Shares or
other securities issued by the Trust.
Section 4.6 Trust Only. It is the intention of the Trustees to create
----------
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
Section 4.7 Status of Shares and Limitation of Personal Liability. Shares
-----------------------------------------------------
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the continuance of the
Trust shall not operate to terminate the Trust or any Sub-Trust or class thereof
nor entitle the representative of any deceased Shareholder to an accounting or
to take any action in court or elsewhere against the Trust or the Trustees, but
only to the rights of said decedent under this Trust. Ownership of Shares shall
not entitle the Shareholder to any title in or to the whole or any part of the
Trust property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees nor any officer, employee or agent
of the Trust shall have any power to bind personally any Shareholder nor, except
as specifically provided herein, to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time personally agree to pay.
ARTICLE V
---------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
Section 5.1 Voting Powers. The Shareholders shall have power to vote
-------------
only (i) for the election or removal of Trustees as provided in Section 3.1,
(ii) with respect to any contract with a Contracting Party as provided in
Section 3.3 as to which Shareholder approval is contemplated by the 1940 Act,
(iii) with respect to any termination or reorganization of the Trust or any Sub-
Trust to the extent and as provided in Sections 7.1 and 7.2, (iv) with respect
to any amendment of the Declaration of Trust to the extent and as provided in
Section 7.3, (v) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought or maintained derivatively or as a class action
on behalf of the Trust or any Sub-Trust thereof or the Shareholders (provided,
however, that a Shareholder of a particular Sub-Trust shall not be entitled to
bring, maintain or participate in a derivative or class action on behalf of any
other Sub-Trust (or Shareholder of any other Sub-Trust) of the Trust) and (vi)
with respect to such additional matters relating to the Trust as may be required
by the 1940 Act, other law, this Declaration of Trust, the By-Laws or any
registration of the Trust with the Commission (or any successor agency) or any
state, or as the Trustees may consider necessary or desirable. Only
Shareholders of record shall be entitled to vote. There shall be no cumulative
voting in the election of Trustees. Until Shares are issued, the Trustees may
exercise all rights of Shareholders and may take any action required by law,
this Declaration of Trust or the By-Laws to be taken by Shareholders.
15
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Section 5.2 Proxies. At any meeting of Shareholders, any holder of
-------
Shares entitled to vote thereat may vote in person or by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Secretary, or with such other officer or agent of the Trust as the
Secretary may direct, for verification prior to the time at which such vote
shall be taken. Pursuant to a resolution of the Trustees, proxies may be
solicited in the name of one or more persons, including one or more Trustees or
one or more of the officers of the Trust. When any Shares are held in the names
of two or more persons, any one of them may vote at any meeting in person or by
proxy in respect of such Shares, but if more than one of them shall be present
at such meeting in person or by proxy, and such joint owners or their proxies so
present disagree as to any vote to be cast, such vote shall not be received in
respect of such Shares. If the holder of any Share is a minor or a person of
unsound mind, and subject to guardianship or to the legal control of any other
person as regards the charge or management of such Shares, he may vote by his
guardian or such other person appointed or having such control, and such vote
may be given in person or by proxy. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise, and the burden of proving invalidity shall rest on the challenger.
Section 5.3 Meetings. Meetings of Shareholders of the Trust or of
--------
any Sub-Trust or Sub-Trusts or classes thereof may be called by the Trustees (or
such other person or persons as may be specified in the By-Laws) from time to
time for the purpose of taking action upon any matter requiring the vote or
authority of such Shareholders as herein provided or upon any other matter
deemed by the Trustees to be necessary or desirable. Written notice of any
meeting of Shareholders shall be given at least seven days before such meeting.
If the Trustees (or such other person or persons as may be specified in the By-
Laws) fail to call or give notice of any meeting of Shareholders for 30 days
after written application by Shareholders holding at least 25% of the Shares
issued and outstanding, and entitled to vote at the meeting, requesting a
meeting be called for a purpose requiring action by the Shareholders as provided
herein or in the By-Laws, then Shareholders holding at least 25% of the Shares
then outstanding may call and give notice of such meeting, and thereupon the
meeting shall be held in the manner provided for herein in case of call thereof
by the Trustees.
Section 5.4 Place of Meetings. All meetings of the Shareholders
-----------------
shall be held at the principal office of the Trust or at such other place within
the United States as shall be designated by the Trustees or the President of the
Trust.
Section 5.5 Record Dates. For the purpose of determining the
------------
Shareholders who are entitled to notice of and to vote or act at any meeting or
any adjournment thereof, or who are entitled to participate in any dividend or
distribution, or for the purpose of any other action, the Trustees may from time
to time close the transfer books for such period, not exceeding 30 days (except
at or in connection with the termination of the Trust), as the Trustees may
determine; or without closing the transfer books, the Trustees may fix a date
and time not more than 60 days prior to the date of any meeting of Shareholders
or other action as the date and time of record for the determination of
Shareholders entitled to notice of and to vote at such meeting or any
adjournment thereof or to be treated as Shareholders of record for purposes of
such other action, and any Shareholder who was a Shareholder at the date and
time so fixed shall be entitled to vote at such meeting or any adjournment
thereof or to be treated as a Shareholder of record for purposes of such other
action, even though he has since that date and time disposed of his Shares, and
no Shareholder becoming such after that date and time shall be so entitled to
vote at such meeting or any adjournment thereof or to be treated as a
Shareholder of record for purposes of such other action.
Section 5.6 Quorum and Required Vote. Thirty percent of the Shares
------------------------
entitled to vote shall be a quorum for the transaction of business at a
Shareholders' meeting, but any lesser number shall be sufficient for
adjournments. Any adjourned session or sessions may be held, within a
reasonable time after the date set for the original meeting, without the
necessity of further notice. A majority of the Shares voted, at a meeting at
which a quorum is present, shall decide any questions and a plurality shall
16
<PAGE>
elect a Trustee, except when a different vote is required or permitted by any
provision of the 1940 Act or other applicable law or by this Declaration of
Trust or the By-Laws. If a Series or a class of Shares is required or permitted
by the 1940 Act or other applicable law or by this Declaration of Trust or the
By-Laws to have exclusive voting rights with respect to certain matters, the
aforesaid quorum and voting requirements shall apply to the action to be taken
on those matters by the Shareholders of such Series or class.
Section 5.7 Action by Written Consent. Subject to the provisions of
-------------------------
the 1940 Act and other applicable law, any action taken by Shareholders may be
taken without a meeting if the Shareholders of a majority of the outstanding
shares entitled to vote on the matter (or such larger portion thereof as shall
be required by the 1940 Act or by any express provision of this Declaration of
Trust or the By-Laws) consent to the action in writing and such written consents
are filed with the records of the meetings of Shareholders. Such consent shall
be treated for all purposes as a vote taken at a meeting of Shareholders.
Section 5.8 Inspection of Records. The records of the Trust shall be
---------------------
open to inspection by Shareholders to the same extent as is permitted
stockholders of a Massachusetts business corporation under the Massachusetts
Business Corporation Law.
Section 5.9 Additional Provisions. The By-Laws may include further
---------------------
provisions for Shareholders' votes and meetings and related matters not
inconsistent with the provisions hereof.
ARTICLE VI
----------
LIMITATION OF LIABILITY; INDEMNIFICATION
----------------------------------------
Section 6.1 Trustees, Shareholders, etc. Not Personally Liable;
---------------------------------------------------
Notice. All persons extending credit to, contracting with or having any claim
- ------
against the Trust shall look only to the assets of the Sub-Trust or class
thereof with which such person dealt for payment under such credit, contract or
claim; and neither the Shareholders of any Sub-Trust nor the Trustees nor any of
the Trust's officers, employees or agents, whether past, present or future, nor
any other Sub-Trust shall be personally liable therefor. Every note, bond,
contract, instrument, certificate or undertaking and every other act or thing
whatsoever executed or done by or on behalf of the Trust, any Sub-Trust or the
Trustees or any of them in connection with the Trust shall be conclusively
deemed to have been executed or done only by or for the Trust (or the Sub-Trust)
or the Trustees and not personally. Nothing in this Declaration of Trust shall
protect any Trustee or officer against any liability to the Trust or the
Shareholders to which such Trustee or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office of Trustee or of such
officer.
Every note, bond, contract, instrument, certificate or undertaking
made or issued by the Trustees or by any officers or officer shall give notice
that this Declaration of Trust is on file with the Secretary of the Commonwealth
of Massachusetts and shall recite to the effect that the same was executed or
made by or on behalf of the Trust or by them as Trustees or Trustee or as
officers or officer and not individually and that the obligations of such
instrument are not binding upon any of them or the Shareholders individually but
are binding only upon the assets belonging to the Trust, or the particular Sub-
Trust or class in question, as the case may be, but the omission thereof shall
not operate to bind any Trustees or Trustee or officers or officer or
Shareholders or Shareholder individually.
Section 6.2 Trustee's Good Faith Action; Expert Advice; No Bond or
------------------------------------------------------
Surety. The exercise by the Trustees of their powers and discretions hereunder
- ------
shall be binding upon everyone interested. A Trustee shall be liable for his
own willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee, and for nothing
else, and shall not be liable
17
<PAGE>
for errors of judgement or mistakes of fact or law. Subject to the foregoing,
(a) the Trustees shall not be responsible or liable in any event for any neglect
or wrongdoing of any officer, agent, employee, consultant, adviser,
administrator, distributor or principal underwriter, custodian, or transfer,
dividend disbursing, Shareholder servicing or accounting agent of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee;
(b) the Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Declaration of Trust and their duties as Trustees,
and shall be under no liability for any act or omission in accordance with such
advice or for failing to follow such advice; and (c) in discharging their
duties, the Trustees, when acting in good faith, shall be entitled to rely upon
the books of account of the Trust and upon written reports made to the Trustees
by any officer appointed by them, any independent public accountant, and (with
respect to the subject matter of the contract involved) any officer, partner or
responsible employee of a Contracting Party appointed by the Trustees pursuant
to Section 3.3 The Trustees as such shall not be required to give any bond or
surety or any other security for the performance of their duties.
Section 6.3 Indemnification of Shareholders. In case any Shareholder
-------------------------------
(or former Shareholder) of any Sub-Trust shall be charged or held to be
personally liable for any obligation or liability of the Trust solely be reason
of being or having been a Shareholder and not because of such Shareholder's acts
or omissions or for some other reason, the Sub-Trust (upon proper and timely
request by the Shareholder) shall assume the defense against such charge and
satisfy any judgment thereon, and the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or in the case
of a corporation or other entity, its corporate or other general successor)
shall be entitled to be held harmless from and indemnified against all loss and
expense arising from such liability, but only out of the assets of such Sub-
Trust.
Section 6.4 Indemnification of Trustees, Officers, etc. The Trust
------------------------------------------
shall indemnify (from the assets of the Sub-Trust or Sub-Trusts in question)
each of its Trustees and officers (including persons who serve at the Trust's
request as directors, officers, or trustees of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise) (herein referred
to as a "Covered Person") against all liabilities, including but not limited to
amounts paid in satisfaction of judgements, in compromise or as fines and
penalties, and against all expenses, including but not limited to accountants
and counsel fees, reasonably incurred by any Covered Person in connection with
the defense or disposition of any action, suit or other proceeding, whether
civil or criminal, before any court or administrative or legislative body, in
which such Covered Person may be or may have been involved as a party or
otherwise or with which such person may be or may have been threatened, while in
office or thereafter, by reason of being or having been such a Trustee or
officer, director or trustee, except as otherwise provided in Section 6.5.
Expenses, including accountants and counsel fees so incurred by any such Covered
Person (but excluding amounts paid in satisfaction of judgments, in compromise
or as fines or penalties), may be paid from time to time by the Sub-Trust in
question in advance of the final disposition of any such action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the Covered Person
to repay the amounts so paid to the Sub-Trust in question if it is ultimately
determined that indemnification of such expenses is not authorized under this
Article, provided that (i) the Covered Person shall have provided security for
such undertaking, (ii) the Trust shall be insured against losses arising by
reason of any lawful advances, or (iii) a majority of a quorum of the Trustees
who are neither Interested Persons of the Trust (the "disinterested Trustees")
nor parties to the proceeding, or an independent legal counsel in a written
opinion, shall have determined, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to believe that the
Covered Person ultimately will be found entitled to indemnification.
Section 6.5 Exceptions to Indemnification. Indemnification shall not
-----------------------------
be provided to a Covered Person under Section 6.4 if it shall have been finally
adjudicated in a decision on the merits by the court or other body before which
the proceeding was brought that such Covered Person (i) did not act in good
faith in the reasonable belief that such Covered Person's action was in the best
interests of the Trust or (ii) is liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence
18
<PAGE>
or reckless disregard of the duties involved in the conduct of such Covered
Person's office (either and both of the conduct described in (i) and (ii) being
referred to hereafter as "Disabling Conduct"). As to any matter disposed of
(whether by a compromise payment, pursuant to a consent decree or otherwise)
without a final adjudication in a decision on the merits that such Covered
Person is liable by reason of Disabling Conduct, indemnification shall be
provided if there has been (i) a determination by the court or other body before
which the proceeding was brought that the Covered Person was not liable by
reason of Disabling Conduct, (ii) a dismissal of a court action or any
administrative or other proceeding against a Covered Person for insufficiency of
evidence of Disabling Conduct, or (iii) a reasonable determination, based upon a
review of the facts, that the Covered Person was not liable by reason of
Disabling Conduct either by a vote of a majority of a quorum of disinterested
Trustees who are not parties to the proceeding, or by an independent legal
counsel in a written opinion. Approval by the Trustees or by independent legal
counsel of indemnification as to any matter disposed of by a compromise payment
by the Covered Person shall not prevent the recovery from the Covered Person of
any amount paid to such Covered Person as indemnification for such payment or
for any other expenses if such Covered Person is subsequently adjudicated by a
court of competent jurisdiction to be liable by reason of Disabling Conduct.
Section 6.6 Indemnification Not Exclusive, etc. The right of
----------------------------------
indemnification provided by this Article shall not be exclusive of or affect any
other rights to which any such Covered Person may be entitled. As used in this
Article, "Covered Person" shall include such person's heirs, executors and
administrators. Nothing contained in this Article shall affect any rights to
indemnification to which personnel of the Trust, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law,
nor the power of the Trust to purchase and maintain liability insurance on
behalf of any such person.
Section 6.7 Liability of Third Persons Dealing with Trustee. No
-----------------------------------------------
person dealing with the Trustees shall be bound to make any inquiry concerning
the validity of any transaction made or to be made by the Trustees or to see to
the application of any payments made or property transferred to the Trust or
upon its order.
ARTICLE VII
-----------
MISCELLANEOUS
-------------
Section 7.1 Duration and Termination of Trust. Unless terminated as
---------------------------------
provided herein, the Trust shall continue without limitation of time and,
without limiting the generality of the foregoing, no change, alteration or
modification with respect to any Sub-Trust shall operate to terminate the Trust.
The Trust may be terminated at any time by a majority of the Trustees then in
office by written notice to the Shareholders or by a Majority Shareholder Vote,
Shares of each Sub-Trust voting separately by Sub-Trust. Any Sub-Trust may be
terminated at any time by a majority of the Trustees then in office by written
notice to the Shareholders of that Sub-Trust or by a Majority Shareholder Vote
of the Shares of that Sub-Trust.
Upon termination of the Trust or any Sub-Trust, after paying or
otherwise providing for all charges, taxes, expenses and liabilities, whether
due or accrued or anticipated as may be determined by the Trustees, the Trust
shall, in accordance with such procedures as the Trustees consider appropriate,
reduce the remaining assets to distributable form in cash, securities or other
property, or any combination thereof, and distribute the proceeds to the
Shareholders of the Sub-Trusts involved, in conformity with the provisions of
subsection (e) of Section 4.2.
Section 7.2 Reorganization. The Trust or one or more Sub-Trust may
--------------
merge or consolidate with any other trust, partnership, association, corporation
or other organization and the Trustees may sell,
19
<PAGE>
convey and transfer the assets of the Trust, or the assets belonging to any one
or more Sub-Trusts ("Transferor Sub-Trust"), to another trust, partnership,
association, corporation or other organization, or to the Trust to be held as
assets belonging to another Sub-Trust, in exchange for cash, securities or other
consideration (including, in the case of a transfer to another Sub-Trust of the
Trust, Shares of such other Sub-Trust) with such transfer being made subject to,
or with the assumption by the transferee of, the liabilities belonging to each
Transferor Sub-Trust; provided, however, that no merger, consolidation or sale
of all or substantially all the assets belonging to any particular Sub-Trust
shall be effected unless the terms of such transaction shall have first been
approved by a Majority Shareholder Vote of the Shareholders of that Sub-Trust.
Section 7.3 Amendments. All rights granted to the Shareholders under
----------
this Declaration of Trust are granted subject to the reservation of the right to
amend this Declaration of Trust as herein provided, except that no amendment
shall repeal the limitations on personal liability of any Shareholder or Trustee
or repeal the prohibition of assessment upon the Shareholders without the
express consent of each Shareholder or Trustee involved. Subject to the
foregoing, the provisions of this Declaration of Trust (whether or not related
to the rights of Shareholders) may be amended at any time, so long as such
amendment does not adversely affect the rights of any Shareholder with respect
to which such amendment is or purports to be applicable and so long as such
amendment is not in contravention of applicable law, including the 1940 Act, by
an instrument in writing signed by a majority of the then Trustees (or by an
officer of the Trust pursuant to the vote of a majority of such Trustees). Any
amendment to this Declaration of Trust that adversely affects the rights of
Shareholders may be adopted at any time by an instrument in writing signed by a
majority of the then Trustees (or by an officer of the Trust pursuant to a vote
of a majority of such Trustees) when authorized to do so by a Majority
Shareholder Vote in accordance with subsection (f) of Section 4.2.
An amendment which would affect the Shareholders of one or more Sub-Trusts but
not the Shareholders of all Sub-Trusts shall be authorized by a Majority
Shareholder Vote of the Shareholders of each Sub-Trust affected, and no vote of
Shareholders of a Sub-Trust not affected shall be required. Subject to the
foregoing, any such amendment shall be effective as provided in the instrument
containing the terms of such amendment or, if there is no provision therein with
respect to effectiveness, upon the execution of such instrument and of a
certificate (which may be a part of such instrument) executed by a Trustee or
officer of the Trust to the effect that such amendment has been duly adopted.
Section 7.4 Resident Agent. The Trustees shall have the power to
--------------
appoint on behalf of the Trust a resident agent and maintain a resident agent
for the Trust in the Commonwealth of Massachusetts, and from time to time, to
replace the resident agent so appointed. The initial resident agent shall be
John D. DesPrez III, Esq., 116 Huntington Avenue, Boston, Massachusetts, 02116.
Section 7.5 Filing of Copies; References; Headings. The original or
--------------------------------------
a copy of this instrument and of each amendment hereto, shall be kept at the
office of the Trust where it may be inspected by any Shareholder. A copy of
this instrument and of each amendment hereto shall be filed by the Trust with
the Secretary of The Commonwealth of Massachusetts and with the Boston City
Clerk, as well as any other governmental office where such filing may from time
to time be required, but the failure to make any such filing shall not impair
the effectiveness of this instrument or any such amendment. Anyone dealing with
the Trust may rely on a certificate by an officer of the Trust as to whether or
not any such amendments have been made, as to the identities of the Trustees and
officers, and as to any matters in connection with the Trust hereunder; and,
with the same effect as if it were the original, may rely on a copy certified by
an officer of the Trust to be a copy of this instrument or of any such
amendments. A restated Declaration of Trust, containing the original
Declaration of Trust and all amendments theretofore made, may be executed from
time to time by a majority of the Trustees and shall, upon filing with the
Secretary of The Commonwealth of Massachusetts, be conclusive evidence of all
amendments contained therein and may thereafter be referred to in lieu of the
original Declaration of Trust and the various amendments thereto. In this
instrument and in any such amendment, references to this
20
<PAGE>
instrument, and all expressions like "herein", "hereof" and "hereunder" shall be
deemed to refer to this instrument as a whole as the same may be amended or
affected by any such amendments. The masculine gender shall include the female
and neuter genders. Headings are placed herein for convenience of reference only
and shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be executed in
any number of counterparts each of which shall be deemed an original.
Section 7.6 Applicable Law. This Declaration of Trust is created
--------------
under and is to be governed by and construed and administered according to the
laws of The Commonwealth of Massachusetts, including the Massachusetts Business
Corporation Law as the same may be amended from time to time, to which reference
is made with the intention that matters not specifically covered herein or as to
which an ambiguity may exist shall be resolved as if the Trust were a business
corporation organized in Massachusetts, but the reference to said Business
Corporation Law is not intended to give the Trust, the Trustees, the
Shareholders or any other person any right, power, authority or responsibility
available only to or in connection with an entity organized in corporate form.
The Trust shall be of the type referred to in Section 1 of Chapter 182 of the
Massachusetts General Laws and of the type commonly called a Massachusetts
business trust, and without limiting the provisions hereof, the Trust may
exercise all powers which are ordinarily exercised by such a trust.
Section 7.7 Reliance by Third Parties. Any certificate executed by
-------------------------
an individual who, according to the records of the Trust, appears to be a
Trustee hereunder, or Secretary or Assistant Secretary of the Trust, certifying
to: (a) the number or identity of Trustees or Shareholders, (b) the due
authorization of the execution of any instrument or writing, (c) the form of any
vote passed at a meeting of Trustees or Shareholders, (d) the fact that the
number of Trustees or Shareholders present at any meeting or executing any
written instruments satisfies the requirement of this Declaration of Trust, (e)
the form of any By-Laws adopted by or the identity of any officers elected by
the Trustees, or (f) the existence of any fact or facts which in any manner
relate to the affairs of the Trust, shall be conclusive evidence as to the
matters so certified in favor of any person dealing with the Trustees and their
successors.
Section 7.8 Provisions in Conflict with Law or Regulations.
----------------------------------------------
The provisions of this Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code, the laws of The Commonwealth of Massachusetts or other
applicable laws and regulations, the conflicting provisions shall be deemed
superseded by such law or regulation to the extent necessary to eliminate such
conflict; provided, however, that such determination shall not affect any of the
remaining provisions of this Declaration of Trust or render invalid or improper
any action taken or omitted prior to such determination.
If any provision of this Declaration of Trust shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
pertain only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration of Trust in any jurisdiction.
Section 7.9 Use of the Name "North American." North American Life
---------------------------------
Assurance Company ("North American") has consented to the use by the Trust of
the identifying name "North American", which is a property right of North
American. The Trust will only use the name "North American" or the initials
"NA" as a component of its name and for no other purpose, and will not purport
to grant any third party the right to use the name "North American" or the
initials "NA" for any purpose. North American or any corporate affiliate of
North American may use or grant to others the right to use the name "North
American" or the initials "NA", as all or a portion of a corporate or business
name or for any commercial purpose, including a grant of such right to any other
investment company. At the request of North American, the Trust will take such
action as may be required to provide its consent to the use by North
21
<PAGE>
American, or any corporate affiliate of North American, or by any person to whom
North American or an affiliate of North American shall have granted the right to
the use of the name "North American" or the initials "NA". At the request of
North American, the Trust shall cease to use the name "North American" or the
initials "NA" as a component of its name, and shall not use such name or
initials as a part of its name or for any other commercial purpose, and shall
cause its officers and trustees to take any and all actions which North American
may request to effect the foregoing and to reconvey to North American or such
corporate affiliate of North American any and all rights to such name and
initials.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
18th day of February, 1994.
William J. Atherton
-------------------
William J. Atherton
Trustee
22
<PAGE>
Exhibit (b)(1)(d)
North American Funds
Establishment and Designation
of Additional Series of Shares of Beneficial Interest
($0.001 par value per share)
Establishment and Designation of Classes of Shares
The undersigned, being a majority of the Trustees of North American
Funds (the "Trust"), acting pursuant to Section 4.1(a) of the Amended and
Restated Agreement and Declaration of Trust, dated February 18, 1994 (the
"Declaration of Trust"), hereby establish and designate a new Series of Shares
(as defined in the Declaration of Trust), such Series to have the following
special and relative rights:
1. The new Series of Shares shall be designated the "International
Growth and Income Fund".
2. The new Series of Shares shall have the relative rights and preferences
described in Section 4.2 of the Declaration of Trust, provided that the
Trustees, in their absolute discretion, may amend any previously
established relative rights and preferences as they may deem necessary
or desirable to enable the Trust to comply with the Investment Company
Act of 1940 or other applicable law.
* * *
The undersigned, being a majority of the Trustees of the Trust, acting
pursuant to Section 4.1(b) of the Declaration of Trust, hereby create three
classes of shares of the International Growth and Income Fund, within the
meaning of Section 4.1(b), as follows:
1. The three classes of shares are designated "Class A" shares of
beneficial interest, "Class B" shares of beneficial interest and "Class
C" shares of beneficial interest.
2. Class A, Class B and Class C of beneficial interest shall be entitled
to all the rights and preferences accorded to Shares under the
Declaration of Trust.
3. The rights and preferences of Class A, Class B and Class C of
beneficial interest shall be established by the Trustees of the Trust
in accordance with the Declaration of Trust and shall be set forth in
the current prospectus and statement of additional information of the
Trust or the International Growth and Income Fund, as amended from time
to time.
<PAGE>
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 28 day of December, 1994.
Don B. Allen William J. Atherton
- -------------------- -------------------
Don B. Allen William J. Atherton
Charles L. Bardelis Frederick W. Gorbet
- -------------------- -------------------
Charles L. Bardelis Frederick W. Gorbet
Samuel Hoar Brian L. Moore
- -------------------- -------------------
Samuel Hoar Brian L. Moore
Robert J. Myers
- --------------------
Robert J. Myers
The Amended and Restated Agreement and Declaration of Trust of the Trust, dated
February 18, 1994, a copy of which together with all amendments thereto is on
file in the office of the Secretary of The Commonwealth of Massachusetts,
provides that this instrument was executed by the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of them or the shareholders of the Trust individually but
are binding only upon the assets belonging to the Trust, or the particular
Sub-Trust or class in question, as the case may be.
<PAGE>
Exhibit (b)(1)(e)
North American Funds
Establishment and Designation of Classes of Shares
The undersigned, being a majority of the Trustees of North American
Funds (the "Trust"), acting pursuant to Section 4.1(b) of the Amended and
Restated Agreement and Declaration of Trust of the Trust, dated February 18,
1994 (the "Declaration of Trust"), hereby create three classes of shares of each
Series, within the meaning of Section 4.1(b), as follows:
1. The three classes of shares are designated "Class A" shares of
beneficial interest, "Class B" shares of beneficial interest and "Class
C" shares of beneficial interest.
2. Class A shares, Class B shares and Class C shares shall be entitled to
all the rights and preferences accorded to Shares under the Declaration
of Trust.
3. The rights and preferences of Class A shares, Class B shares and Class
C shares shall be established by the Trustees of the Trust in
accordance with the Declaration of Trust and shall be set forth in the
current prospectus and statement of additional information of the Trust
or any Series thereof, as amended from time to time.
4. Effective April 1, 1994, all the then outstanding shares of beneficial
interest of each of the Strategic Income, Investment Quality Bond, U.S.
Government Securities, National Municipal Bond, California Municipal
Bond and Money Market Funds are reclassified and designated as Class A
shares of beneficial interest of each such Series.
5. Effective April 1, 1994, all the then outstanding shares of beneficial
interest of each of the Global Growth, Growth, Growth and Income and
Asset Allocation Funds are reclassified and designated as Class C
shares of beneficial interest of each such Series.
<PAGE>
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust as of the 17th day of March, 1994.
Don B. Allen William J. Atherton
- ----------------------- --------------------------------
Don B. Allen William J. Atherton
Charles L. Bardelis Frederick W. Gorbet
- ----------------------- --------------------------------
Charles L. Bardelis Frederick W. Gorbet
Samuel Hoar Brian L. Moore
- ----------------------- --------------------------------
Samuel Hoar Brian L. Moore
Robert J. Myers
- -----------------------
Robert J. Myers
The Amended and Restated Agreement and Declaration of Trust of the Trust, dated
February 18, 1994, a copy of which together with all amendments thereto is on
file in the office of the Secretary of The Commonwealth of Massachusetts,
provides that this instrument was executed by the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of them or the shareholders of the Trust individually but
are binding only upon the assets belonging to the Trust, or the particular
Sub-Trust or class in question, as the case may be.
<PAGE>
Exhibit (b)(1)(f)
NORTH AMERICAN FUNDS
Establishment and Designation
of Additional Series of Shares of Beneficial Interest
($0.001 par value per share)
Establishment and Designation of Classes of Shares
The undersigned, being a majority of the Trustees of North American Funds
(the "Trust"), acting pursuant to Section 4.1(a) of the Amended and Restated
Agreement and Declaration of Trust, dated February 18, 1994 (the "Declaration of
Trust"), hereby establish and designate a new Series of Shares (as defined in
the Declaration of Trust), such Series to have the following special and
relative rights:
1. The new Series of Shares shall be designated the "Small/Mid Cap Fund."
2. The new Series of Shares shall have the relative rights and preferences
described in Section 4.2 of the Declaration of Trust, provided that the
Trustees, in their absolute discretion, may amend any previously
established relative rights and preferences as they may deem necessary or
desirable to enable the Trust to comply with the Investment Company Act of
1940 or other applicable law.
* * *
The undersigned, being a majority of the Trustees of the Trust, acting
pursuant to Section 4.1(b) of the Declaration of Trust, hereby create three
classes of shares of the new Series of Shares, within the meaning of Section
4.1(b), as follows:
1. The three classes of shares are designated "Class A" shares of beneficial
interest, "Class B" shares of beneficial interest and "Class C" shares of
beneficial interest.
2. Class A, Class B and Class C of beneficial interest shall be entitled to
all the rights and preferences accorded to Shares under the Declaration of
Trust.
3. The rights and preferences of Class A, Class B and Class C of beneficial
interest shall be established by the Trustees of the Trust in accordance
with the Declaration of Trust and
<PAGE>
shall be set forth in the current prospectus and statement of additional
information of the new Series of Shares, as amended from time to time.
<PAGE>
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this28th day of February, 1996.
Don B. Allen
- ------------------------------
Don B. Allen
Charles L. Bardelis
- ------------------------------
Charles L. Bardelis
Samuel Hoar
- ------------------------------
Samuel Hoar
Robert J. Myers
- ------------------------------
Robert J. Myers
Brian L. Moore
- ------------------------------
Brian L. Moore
The Amended and Restated Agreement and Declaration of Trust of the Trust, dated
February 18, 1994, a copy of which together with all amendments thereto is on
file in the office of the Secretary of The Commonwealth of Massachusetts,
provides that this instrument was executed by the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of them or the shareholders of the Trust individually but
are binding only upon the assets belonging to the Trust, or the particular Sub-
Trust or class in question, as the case may be.
<PAGE>
NORTH AMERICAN FUNDS
Establishment and Designation
of Additional Series of Shares of Beneficial Interest
($0.001 par value per share)
Establishment and Designation of Classes of Shares
The undersigned, being a majority of the Trustees of North American Funds
(the "Trust"), acting pursuant to Section 4.1(a) of the Amended and Restated
Agreement and Declaration of Trust, dated February 18, 1994 (the "Declaration of
Trust"), hereby establish and designate a new Series of Shares (as defined in
the Declaration of Trust), such Series to have the following special and
relative rights:
1. The new Series of Shares shall be designated the "International Small Cap
Fund."
2. The new Series of Shares shall have the relative rights and preferences
described in Section 4.2 of the Declaration of Trust, provided that the
Trustees, in their absolute discretion, may amend any previously
established relative rights and preferences as they may deem necessary or
desirable to enable the Trust to comply with the Investment Company Act of
1940 or other applicable law.
* * *
The undersigned, being a majority of the Trustees of the Trust, acting
pursuant to Section 4.1(b) of the Declaration of Trust, hereby create three
classes of shares of the new Series of Shares, within the meaning of Section
4.1(b), as follows:
1. The three classes of shares are designated "Class A" shares of beneficial
interest, "Class B" shares of beneficial interest and "Class C" shares of
beneficial interest.
2. Class A, Class B and Class C of beneficial interest shall be entitled to
all the rights and preferences accorded to Shares under the Declaration of
Trust.
3. The rights and preferences of Class A, Class B and Class C of beneficial
interest shall be established by the Trustees of the Trust in accordance
with the Declaration of Trust and
<PAGE>
shall be set forth in the current prospectus and statement of additional
information of the new Series of Shares, as amended from time to time.
<PAGE>
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 28th day of February, 1996.
Don B. Allen
- ---------------------------------
Don B. Allen
Charles L. Bardelis
- ---------------------------------
Charles L. Bardelis
Samuel Hoar
- ---------------------------------
Samuel Hoar
Robert J. Myers
- ---------------------------------
Robert J. Myers
Brian L. Moore
- ---------------------------------
Brian L. Moore
The Amended and Restated Agreement and Declaration of Trust of the Trust, dated
February 18, 1994, a copy of which together with all amendments thereto is on
file in the office of the Secretary of The Commonwealth of Massachusetts,
provides that this instrument was executed by the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of them or the shareholders of the Trust individually but
are binding only upon the assets belonging to the Trust, or the particular Sub-
Trust or class in question, as the case may be.
<PAGE>
NORTH AMERICAN FUNDS
Establishment and Designation
of Additional Series of Shares of Beneficial Interest
($0.001 par value per share)
Establishment and Designation of Classes of Shares
The undersigned, being a majority of the Trustees of North American Funds
(the "Trust"), acting pursuant to Section 4.1(a) of the Amended and Restated
Agreement and Declaration of Trust, dated February 18, 1994 (the "Declaration of
Trust"), hereby establish and designate a new Series of Shares (as defined in
the Declaration of Trust), such Series to have the following special and
relative rights:
1. The new Series of Shares shall be designated the "Growth Equity Fund."
2. The new Series of Shares shall have the relative rights and preferences
described in Section 4.2 of the Declaration of Trust, provided that the
Trustees, in their absolute discretion, may amend any previously
established relative rights and preferences as they may deem necessary or
desirable to enable the Trust to comply with the Investment Company Act of
1940 or other applicable law.
* * *
The undersigned, being a majority of the Trustees of the Trust, acting
pursuant to Section 4.1(b) of the Declaration of Trust, hereby create three
classes of shares of the new Series of Shares, within the meaning of Section
4.1(b), as follows:
1. The three classes of shares are designated "Class A" shares of beneficial
interest, "Class B" shares of beneficial interest and "Class C" shares of
beneficial interest.
2. Class A, Class B and Class C of beneficial interest shall be entitled to
all the rights and preferences accorded to Shares under the Declaration of
Trust.
3. The rights and preferences of Class A, Class B and Class C of beneficial
interest shall be established by the Trustees of the Trust in accordance
with the Declaration of Trust and
<PAGE>
shall be set forth in the current prospectus and statement of additional
information of the new Series of Shares, as amended from time to time.
<PAGE>
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 28th day of February, 1996
Don B. Allen
- ---------------------------------
Don B. Allen
Charles L. Bardelis
- ---------------------------------
Charles L. Bardelis
Samuel Hoar
- ---------------------------------
Samuel Hoar
Robert J. Myers
- ---------------------------------
Robert J. Myers
Brian L. Moore
- ---------------------------------
Brian L. Moore
The Amended and Restated Agreement and Declaration of Trust of the Trust, dated
February 18, 1994, a copy of which together with all amendments thereto is on
file in the office of the Secretary of The Commonwealth of Massachusetts,
provides that this instrument was executed by the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of them or the shareholders of the Trust individually but
are binding only upon the assets belonging to the Trust, or the particular Sub-
Trust or class in question, as the case may be.
<PAGE>
Exhibit (b)(1)(g)
NORTH AMERICAN FUNDS
Redesignation
of Series of Shares of Beneficial Interest
known as the "Growth Fund"
The undersigned, being a majority of the Trustees of North American Funds (the
"Trust"), acting pursuant to the Amended and Restated Agreement and Declaration
of Trust dated February 18, 1994 (the "Declaration of Trust"), hereby
redesignate the Series of Shares known as the "Growth Fund" as the "Value Equity
Fund" such Series to continue to have the relative rights and preferences
described in Section 4.2 of the Declaration of Trust, provided that the
Trustees, in their absolute discretion, may amend any previously established
relative rights and preferences as they may deem necessary or desirable to
enable the Trust to comply with the Investment Company Act of 1940 or other
applicable law.
<PAGE>
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 28th day of February, 1996.
Don B. Allen
- --------------------------------
Don B. Allen
Charles L. Bardelis
- --------------------------------
Charles L. Bardelis
Samuel Hoar
- --------------------------------
Samuel Hoar
Robert J. Myers
- --------------------------------
Robert J. Myers
Brian L. Moore
- --------------------------------
Brian L. Moore
The Amended and Restated Agreement and Declaration of Trust of the Trust, dated
February 18, 1994, a copy of which together with all amendments thereto is on
file in the office of the Secretary of The Commonwealth of Massachusetts,
provides that this instrument was executed by the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of them or the shareholders of the Trust individually but
are binding only upon the assets belonging to the Trust, or the particular Sub-
Trust or class in question, as the case may be.
<PAGE>
Exhibit (b)(1)(h)
NORTH AMERICAN FUNDS
Redesignation
of Series of Shares of Beneficial Interest
The undersigned, being a majority of the Trustees of North American Funds (the
"Trust"), acting pursuant to the Amended and Restated Agreement and Declaration
of Trust dated February 18, 1994 (the "Declaration of Trust"), hereby
redesignate the Series of Shares set forth below, such Series to continue to
have the relative rights and preferences described in Section 4.2 of the
Declaration of Trust, provided that the Trustees, in their absolute discretion,
may amend any previously established relative rights and preferences as they may
deem necessary or desirable to enable the Trust to comply with the Investment
Company Act of 1940 or other applicable law.
"Global Growth" redesignated as "Global Equity."
"Asset Allocation" redesignated as "Balanced."
<PAGE>
In witness whereof, the undersigned have executed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 1st day of October, 1996.
Don B. Allen
- ---------------------------------
Don B. Allen
Charles L. Bardelis
- ---------------------------------
Charles L. Bardelis
Samuel Hoar
- ---------------------------------
Samuel Hoar
Robert J. Myers
- ---------------------------------
Robert J. Myers
Brian L. Moore
- ---------------------------------
Brian L. Moore
The Amended and Restated Agreement and Declaration of Trust of the Trust, dated
October 1, 1996, a copy of which together with all amendments thereto is on file
in the office of the Secretary of The Commonwealth of Massachusetts, provides
that this instrument was executed by the Trustees of the Trust as Trustees and
not individually and that the obligations of this instrument are not binding
upon any of them or the shareholders of the Trust individually but are binding
only upon the assets belonging to the Trust, or the particular Sub-Trust or
class in question, as the case may be.
<PAGE>
Exhibit (b)5(i)
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1996, between NASL Financial
Services, Inc., a Massachusetts corporation ("NASL Financial" or the "Adviser"),
and Morgan Stanley Asset Management Inc., a Delaware Corporation (the
"Subadviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to
manage the investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and
other information affecting the economy generally and individual
companies or industries the securities of which are included in the
Portfolios or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each
Portfolio consistent with the investment objectives and related
investment policies for each such Portfolio as described in the
Trust's registration statement, as amended;
iii. take whatever steps are necessary to implement these investment
programs by the purchase and sale of securities including the placing
of orders for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide determinations, in accordance with procedures and methods
established by the Trustees of the Trust, of the fair value of
securities held by the Portfolios for which market quotations are not
readily available for purposes of enabling the Trust's Custodian to
calculate net asset value.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage
<PAGE>
commissions if applicable. The Subadviser is directed at all times to seek
to execute brokerage transactions for the Portfolios in accordance with
such policies or practices as may be established by the Trustees and
described in the Trust's registration statement as amended. The Subadviser
may pay a broker-dealer which provides research and brokerage services a
higher spread or commission for a particular transaction than otherwise
might have been charged by another broker-dealer, if the Subadviser
determines that the higher spread or commission is reasonable in relation
to the value of the brokerage and research services that such broker-dealer
provides, viewed in terms of either the particular transaction or the
Subadviser's overall responsibilities with respect to accounts managed by
the Subadviser. The Subadviser may use for the benefit of the Subadviser's
other clients, or make available to companies affiliated with the
Subadviser or to its directors for the benefit of its clients, any such
brokerage and research services that the Subadviser obtains from brokers or
dealers. In accordance with Section 11(a) of the Securities Exchange Act of
1934, as amended and Rule 11a2-2(T) thereunder, and subject to any other
applicable laws and regulations including Section 17(e) of the Investment
Company Act of 1940 (the "1940 Act") and Rule 17e-1 thereunder, the
Subadviser may engage its affiliates as broker-dealers to effect portfolio
transactions in securities for the Portfolios.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its affiliates, officers, partners or
employees nor anyone who controls the Subadviser (or any of its affiliates,
officers, partners or employees) within the meaning of Section 15 of the
Securities Act of 1933 (the "1933 Act") shall be liable to the Adviser or Trust
for any loss suffered by the Adviser or Trust resulting from any error of
judgment made in the good faith exercise of the Subadviser's investment
discretion in connection with selecting Portfolio investments except for losses
resulting from willful misfeasance, bad faith or gross negligence of, or from
reckless disregard of, the duties of the Subadviser or any of its affiliates,
partners or employees; and neither the Subadviser nor any of its affiliates,
officers, partners or employees, nor anyone who controls the Subadviser (or any
of its affiliates, officers, partners or employees) within the meaning of
Section 15 of the 1933 Act shall be liable to the Adviser or Trust for any loss
suffered by the Adviser or Trust resulting from any other matters to which this
Agreement relates (i.e., those other matters specified in Sections 2 and 8 of
- -
this Agreement), except for losses resulting from willful misfeasance, bad
faith, or gross negligence in the performance of, or from disregard of, the
duties of the Subadviser or any of its affiliates, partners or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser, including, but not limited to, Morgan Stanley Asset
Management Limited, to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers, partners
or otherwise; that directors, officers, agents and partners of the Subadviser
are or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested
<PAGE>
in the Trust; and that the existence of any such dual interest shall not affect
the validity hereof or of any transactions hereunder except as otherwise
provided in the Agreement and Declaration of Trust of the Trust and the
Certificate of Incorporation of the Subadviser, respectively, or by specific
provision of applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of (i) its execution, (ii) the effective date of the registration
statement of the Portfolio and (iii) with respect to each Portfolio except the
Global Equity Portfolio (formerly, the Global Growth Portfolio), the date of the
meeting of the shareholders of the Portfolio, at which meeting this Agreement is
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Portfolio. The Agreement will
continue in effect for a period more than two years from the date of its
execution only so long as such continuance is specifically approved at least
annually either by the Trustees of the Trust or by a majority of the outstanding
voting securities of each of the Portfolios, provided that in either event such
continuance shall also be approved by the vote of a majority of the Trustees of
the Trust who are not interested persons (as defined in the Investment Company
Act) of any party to this Agreement cast in person at a meeting called for the
purpose of voting on such approval. The required shareholder approval of the
Agreement or of any continuance of the Agreement shall be effective with respect
to any Portfolio if a majority of the outstanding voting securities of the
series (as defined in Rule 18f-2(h) under the Investment Company Act) of shares
of that Portfolio votes to approve the Agreement or its continuance,
notwithstanding that the Agreement or its continuance may not have been approved
by a majority of the outstanding voting securities of (a) any other Portfolio
affected by the Agreement or (b) all the portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement that is submitted to shareholders for approval, the
Subadviser will continue to act as investment subadviser with respect to such
Portfolio pending the required approval of the Agreement or its continuance or
of any contract with the Subadviser or a different adviser or subadviser or
other definitive action; provided, that the compensation received by the
Subadviser in respect of such Portfolio during such period is in compliance with
Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
<PAGE>
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust;
c. there is a change of control of the Subadviser which constitutes an
assignment of this Agreement under the 1940 Act;
d. the portfolio manager of any Portfolio changes.
10. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the amendment or (b) all the
portfolios of the Trust.
11. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
12. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
13. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
14. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
15. LIMITATION OF LIABILITY
The Amended and Restated Agreement and Declaration of Trust dated February
18, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth of
Massachusetts, provides that the name "North American Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in connection
with the affairs of the Trust or any portfolio thereof, but only the assets
belonging to the Trust, or to the particular portfolio with which the obligee or
claimant dealt, shall be liable.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] NASL Financial Services, Inc.
by: Richard C. Hirtle
----------------------------------
Vice President Treasurer & CFO
by: James D. Gallagher
----------------------------------
Vice President & General Counsel
[SEAL] Morgan Stanley Asset Management Inc.
by: James M Allwin
----------------------------------
James M Allwin,
President
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the "Subadviser
Percentage Fee"):
Global Equity Portfolio: .500% of the first $50,000,000, .450% between
$50,000,000 and $200,000,000, .375% between $200,000,000 and $500,000,000
and .325% on the excess over $500,000,000 of the current value of the net
assets of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
prospectus and statement of additional information as of the close of business
on the previous business day on which the Trust was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
<PAGE>
Exhibit (b)(5)(j)
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1996, between NASL Financial
Services, Inc., a Massachusetts corporation ("NASL Financial" or the "Adviser"),
and T. Rowe Price Associates, Inc., a Maryland Corporation (the "Subadviser").
In consideration of the mutual covenants contained herein, the parties agree as
follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to
manage the investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and
other information affecting the economy generally and individual
companies or industries the securities of which are included in the
Portfolios or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each
Portfolio consistent with the investment objectives and related
investment policies for each such Portfolio as described in the
Trust's registration statement, as amended;
iii. take whatever steps are necessary to implement these investment
programs by the purchase and sale of securities including the placing
of orders for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide assistance to the Trust's Custodian regarding the fair value
of securities held by the Portfolios for which market quotations are
not readily available.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage commissions
if applicable. The Subadviser is directed at all times to seek to execute
brokerage transactions for the Portfolios in accordance with such policies
or practices as may be established by the Trustees and
<PAGE>
described in the Trust's registration statement as amended. The Subadviser
may pay a broker-dealer which provides research and brokerage services a
higher spread or commission for a particular transaction than otherwise
might have been charged by another broker-dealer, if the Subadviser
determines that the higher spread or commission is reasonable in relation
to the value of the brokerage and research services that such broker-dealer
provides, viewed in terms of either the particular transaction or the
Subadviser's overall responsibilities with respect to accounts managed by
the Subadviser. The Subadviser may use for the benefit of the Subadviser's
other clients, or make available to companies affiliated with the
Subadviser or to its directors for the benefit of its clients, any such
brokerage and research services that the Subadviser obtains from brokers or
dealers.
d. On occasions when the Subadviser deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as other clients of the
Subadviser, the Subadviser to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities to be purchased or sold to attempt to obtain a more favorable
price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Subadviser in
the manner the Subadviser considers to be the most equitable and consistent
with its fiduciary obligations to the Portfolio and to its other clients.
e. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its employees shall be liable to the
Adviser or Trust for any loss suffered by the Adviser or Trust resulting from
any error of judgment made in the good faith exercise of the Subadviser's
investment discretion in connection with selecting Portfolio investments except
for losses resulting from willful misfeasance, bad faith or gross negligence of,
or from reckless disregard of, the duties of the Subadviser or any of its
partners or employees; and neither the Subadviser nor any of its employees shall
be liable to the Adviser or Trust for any loss suffered by the Adviser or Trust
resulting from any other matters to which this Agreement relates (i.e., those
- -
other matters specified in Sections 2 and 8 of this Agreement), except for
losses resulting from willful misfeasance, bad faith, or gross negligence in the
performance of, or from disregard of, the duties of the Subadviser or any of its
partners or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers, partners
or otherwise; that directors, officers, agents and partners of the Subadviser
are or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested in the Trust; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions
<PAGE>
hereunder except as otherwise provided in the Agreement and Declaration of Trust
of the Trust and the Certificate of Incorporation of the Subadviser,
respectively, or by specific provision of applicable law.
<PAGE>
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of (i) its execution, (ii) the effective date of the registration
statement of the Portfolio and (iii) with respect to each Portfolio except the
Value Equity Portfolio, the date of the meeting of the shareholders of the
Portfolio, at which meeting this Agreement is approved by the vote of a majority
of the outstanding voting securities (as defined in the Investment Company Act)
of the Portfolio. The Agreement will continue in effect for a period more than
two years from the date of its execution only so long as such continuance is
specifically approved at least annually either by the Trustees of the Trust or
by a majority of the outstanding voting securities of each of the Portfolios,
provided that in either event such continuance shall also be approved by the
vote of a majority of the Trustees of the Trust who are not interested persons
(as defined in the Investment Company Act) of any party to this Agreement cast
in person at a meeting called for the purpose of voting on such approval. The
required shareholder approval of the Agreement or of any continuance of the
Agreement shall be effective with respect to any Portfolio if a majority of the
outstanding voting securities of the series (as defined in Rule 18f-2(h) under
the Investment Company Act) of shares of that Portfolio votes to approve the
Agreement or its continuance, notwithstanding that the Agreement or its
continuance may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the Agreement or (b) all the
portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. any change in actual control or management of the Subadviser or the
portfolio manager of any Portfolio.
<PAGE>
10. PROVISION OF CERTAIN INFORMATION BY THE ADVISER
The Adviser shall furnish the Subadviser with copies of the Trust's
Prospectus and Statement of Additional Information, and any reports made by the
Trust to its shareholders, as soon as practicable after such documents become
available. The Adviser shall furnish the Subadviser with any further documents,
materials or information that the Subadviser may reasonably request to enable it
to perform its duties pursuant to this Agreement."
11. SERVICES TO OTHER CLIENTS
The Adviser understand, and has advised the Trust's Board of Trustees, that
the Subadviser now acts, or may in the future act, as an investment adviser to
fiduciary and other managed accounts and as investment adviser or subadviser to
other investment companies. Further, the Adviser understands, and has advised
the Trust's Board of Trustees that the Subadviser and its affiliates may give
advice and take action for its accounts, including investment companies, which
differs from advice given on the timing or nature of action taken for the
Portfolio. The Subadviser is not obligated to initiate transaction for the
Portfolio in any security which the Subadviser, its principals, affiliates or
employees may purchase or sell for their own accounts or other clients."
12. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the amendment or (b) all the
portfolios of the Trust.
13. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
14. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
15. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
16. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
17. GOVERNING LAW
<PAGE>
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
18. LIMITATION OF LIABILITY
The Amended and Restated Agreement and Declaration of Trust dated February
18, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth of
Massachusetts, provides that the name "North American Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in connection
with the affairs of the Trust or any portfolio thereof, but only the assets
belonging to the Trust, or to the particular portfolio with which the obligee or
claimant dealt, shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] NASL Financial Services, Inc.
by: Richard C Hirtle
----------------------------------
Richard C. Hirtle
Vice President and Treasurer
by: James D. Gallagher
----------------------------------
Vice President, Secretary & General Counsel
[SEAL] T. Rowe Price Associates, Inc.
by: Nancy Morris
----------------------------------
Nancy Morris
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the "Subadviser
Percentage Fee"):
Value Equity Portfolio: .325% of the first $50,000,000, .275% between
$50,000,000 and $200,000,000, .225% between $200,000,000 and $500,000,000
and .150% on the excess over $500,000,000 of the current value of the net
assets of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
prospectus and statement of additional information as of the close of business
on the previous business day on which the Trust was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
<PAGE>
Exhibit (b)(5)(k)
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1996, between NASL Financial
Services, Inc., a Massachusetts corporation ("NASL Financial" or the "Adviser"),
and Manufacturers Adviser Corporation, a Colorado Corporation (the
"Subadviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to
manage the investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and
other information affecting the economy generally and individual
companies or industries the securities of which are included in the
Portfolios or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each
Portfolio consistent with the investment objectives and related
investment policies for each such Portfolio as described in the
Trust's registration statement, as amended;
iii. take whatever steps are necessary to implement these investment
programs by the purchase and sale of securities including the placing
of orders for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide determinations, in accordance with procedures and methods
established by the Trustees of the Trust, of the fair value of
securities held by the Portfolios for which market quotations are not
readily available for purposes of enabling the Trust's Custodian to
calculate net asset value.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage commissions
if ap plicable. The Subadviser is directed at all times to seek to execute
brokerage transactions for
<PAGE>
the Portfolios in ac cordance with such policies or practices as may be
established by the Trustees and described in the Trust's registration
statement as amended. The Subadviser may pay a broker-dealer which provides
research and brokerage services a higher spread or commission for a
particular transaction than otherwise might have been charged by another
broker-dealer, if the Subadviser determines that the higher spread or
commission is reasonable in relation to the value of the brokerage and
research services that such broker-dealer provides, viewed in terms of
either the particular transaction or the Subadviser's overall
responsibilities with respect to accounts managed by the Subadviser. The
Subadviser may use for the benefit of the Subadviser's other clients, or
make available to companies affiliated with the Subadviser or to its
directors for the benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its officers or employees shall be liable
to the Adviser or Trust for any loss suffered by the Adviser or Trust resulting
from any error of judgment made in the good faith exercise of the Subadviser's
investment discretion in connection with selecting Portfolio investments except
for losses resulting from willful misfeasance, bad faith or gross negligence of,
or from reckless disregard of, the duties of the Subadviser or any of its
partners or employees; and neither the Subadviser nor any of its officers or
employees shall be liable to the Adviser or Trust for any loss suffered by the
Adviser or Trust resulting from any other matters to which this Agreement
relates (i.e., those other matters specified in Sections 2 and 8 of this
- -
Agreement), except for losses resulting from willful misfeasance, bad faith, or
gross negligence in the performance of, or from disregard of, the duties of the
Subadviser or any of its officers or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers or
otherwise; that directors, officers, agents and partners of the Subadviser are
or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested in the Trust; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Trust and the Certificate of Incorporation of the
Subadviser, respectively, or by specific provision of applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
<PAGE>
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of (i) its execution, (ii) the effective date of the registration
statement of the Portfolio and (iii) with respect to each Portfolio except the
Money Market Portfolio, the date of the meeting of the shareholders of the
Portfolio, at which meeting this Agreement is approved by the vote of a majority
of the outstanding voting securities (as defined in the Investment Company Act)
of the Portfolio. The Agreement will continue in effect for a period more than
two years from the date of its execution only so long as such continuance is
specifically approved at least annually either by the Trustees of the Trust or
by a majority of the outstanding voting securities of each of the Portfolios,
provided that in either event such continuance shall also be approved by the
vote of a majority of the Trustees of the Trust who are not interested persons
(as defined in the Investment Company Act) of any party to this Agreement cast
in person at a meeting called for the purpose of voting on such approval. The
required shareholder approval of the Agreement or of any continuance of the
Agreement shall be effective with respect to any Portfolio if a majority of the
outstanding voting securities of the series (as defined in Rule 18f-2(h) under
the Investment Company Act) of shares of that Portfolio votes to approve the
Agreement or its continuance, notwithstanding that the Agreement or its
continuance may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the Agreement or (b) all the
portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. any change in actual control or management of the Subadviser or the
portfolio manager of any Portfolio.
<PAGE>
10. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the amendment or (b) all the
portfolios of the Trust.
11. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
12. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
13. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
14. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
15. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
16. LIMITATION OF LIABILITY
The Amended and Restated Agreement and Declaration of Trust dated February
18, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth of
Massachusetts, provides that the name "North American Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in connection
with the affairs of the Trust or any portfolio thereof, but only the assets
belonging to the Trust, or to the particular portfolio with which the obligee or
claimant dealt, shall be liable.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] NASL Financial Services, Inc.
by: Richard C. Hirtle
----------------------------------
Vice President Treasurer & CFO
by: James D. Gallagher
--------------------------------
Vice President, Secretary &
General Counsel
[SEAL] Manufacturers Adviser Corporation
by: J B Mounsey
---------------------------
President
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the "Subadviser
Percentage Fee"):
Money Market Portfolio: .075% of the first $50,000,000, .075% between
$50,000,000 and $200,000,000, .075% between $200,000,000 and $500,000,000
and .020% on the excess over $500,000,000 of the current value of the net
assets of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
prospectus and statement of additional information as of the close of business
on the previous business day on which the Trust was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
<PAGE>
Exhibit (b)(5)(l)
AMENDMENT TO
SUBADVISORY AGREEMENT
NORTH AMERICAN FUNDS
AMENDMENT made as of this 1st day of October 1996 to the Subadvisory
--- ------- -
Agreement dated January 4, 1996 (the "Agreement"), between NASL Financial
Services, Inc., a Massachusetts corporation (the "Adviser"), and Founders Asset
Management, Inc., a Delaware Corporation (the "Subadvisers"). In consideration
of the mutual covenants contained herein, the parties agree as follows:
1. CHANGE IN APPENDIX A
Providing for the appointment and compensation of the Subadviser for the
new Balanced Portfolio. Section 3 of the Agreement, "Compensation of
Subadviser," is hereby amended by adding an additional portfolio to Appendix A
as follows:
1. Balanced Portfolio: .325% of the first $50,000,000, .275% between
$50,000,000 and $200,000,000, .225% between $200,000,000 and $500,000,000
and .150% on the excess over $500,000,000 of the average daily value of the
net assets of the Portfolio.
2. SUBADVISORY AGREEMENT
In all other respects, the Agreement is confirmed and remains in full force
and effect.
3. EFFFECTIVE DATE
This Amendment shall become effective with respect to the Balanced
Portfolio on the date of its execution.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
NASL Financial Services, Inc.
By: Richard C. Hirtle
----------------------------
Vice President and Treasurer
By: James D. Gallagher
----------------------------
Vice President, Secretary and General Counsel
Founders Asset Management, Inc.
By: David L. Ray
----------------------------
Vice President & Treasurer
<PAGE>
Exhibit (b)(11)
CONSENT OF INDEPENDENT ACCOUNTANTS
- ----------------------------------
We consent to the inclusion through incorporation by reference into
this Post-Effective Amendment No. 25 under the Securities Act of 1933 and
Amendment No. 27 under the Investment Company Act of 1940 to the Trust's
Registration Statement on Form N-1A (File No. 33-27958) of our report dated
December 20, 1996, on our audits of the financial statements and financial
highlights of the North American Funds, which are included in the Registration
Statement. We also consent to the reference to our Firm as "Experts" under the
caption "Independent Accountants" in Parts A and B of the Registration
Statement.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 30, 1996
<PAGE>
Exhibit (b)(19)(d)
NORTH AMERICAN FUNDS
POWER OF ATTORNEY
I, Joseph Scott, do hereby constitute and appoint James. D. Gallagher,
John D. DesPrez III, Richard C. Hirtle, Brian L. Moore, John G. Vyrsen and James
Boyle, or any one of them, my true and lawful attorneys to execute registration
statements to be filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act") and/or the Investment
Company Act of 1940, as amended (the "1940 Act"), and to do any and all acts and
things and to execute any and all instruments for me and in my name in the
capacities indicated below, which said attorney, may deem necessary or advisable
to enable North American Funds (the "Fund") to comply with the 1933 Act and the
1940 Act, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with such registration statement, including
specifically, but without limitation, power and authority to sign for me or in
my name and in the capacities indicated below, any and all amendments (including
post-effective amendments); and I do hereby ratify and confirm all that the said
attorneys, or any of them, shall do or cause to be done by virtue of this power
of attorney.
Signature Title Date
- --------- ----- ----
Joseph Scott President September 27, 1996
- --------------------- ------------------
Joseph Scott
<PAGE>
NORTH AMERICAN FUNDS
POWER OF ATTORNEY
I, Richard C. Hirtle, do hereby constitute and appoint James. D.
Gallagher, John D. DesPrez III, Joseph Scott, Brian L. Moore, John G. Vyrsen and
James Boyle, or any one of them, my true and lawful attorneys to execute
registration statements to be filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "1933 Act") and/or the
Investment Company Act of 1940, as amended (the "1940 Act"), and to do any and
all acts and things and to execute any and all instruments for me and in my name
in the capacities indicated below, which said attorney, may deem necessary or
advisable to enable North American Funds (the "Fund") to comply with the 1933
Act and the 1940 Act, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with such registration
statement, including specifically, but without limitation, power and authority
to sign for me or in my name and in the capacities indicated below, any and all
amendments (including post-effective amendments); and I do hereby ratify and
confirm all that the said attorneys, or any of them, shall do or cause to be
done by virtue of this power of attorney.
Signature Title Date
- --------- ----- ----
Richard C. Hirtle Treasurer September 27, 1996
- ----------------- ------------------
Richard C. Hirtle Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> VALUE EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 137508500
<INVESTMENTS-AT-VALUE> 139653436
<RECEIVABLES> 1034179
<ASSETS-OTHER> 16869
<OTHER-ITEMS-ASSETS> 55615
<TOTAL-ASSETS> 140760099
<PAYABLE-FOR-SECURITIES> 1030978
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 345935
<TOTAL-LIABILITIES> 1376913
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107830852
<SHARES-COMMON-STOCK> 1638828
<SHARES-COMMON-PRIOR> 1381954
<ACCUMULATED-NII-CURRENT> 454658
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 28952740
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2144936
<NET-ASSETS> 139383186
<DIVIDEND-INCOME> 2714831
<INTEREST-INCOME> 419617
<OTHER-INCOME> 0
<EXPENSES-NET> 2517690
<NET-INVESTMENT-INCOME> 616758
<REALIZED-GAINS-CURRENT> 28955933
<APPREC-INCREASE-CURRENT> (6846565)
<NET-CHANGE-FROM-OPS> 22726126
<EQUALIZATION> 44707
<DISTRIBUTIONS-OF-INCOME> 216448
<DISTRIBUTIONS-OF-GAINS> 1874732
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 928055
<NUMBER-OF-SHARES-REDEEMED> 808325
<SHARES-REINVESTED> 137144
<NET-CHANGE-IN-ASSETS> 13764215
<ACCUMULATED-NII-PRIOR> 322091
<ACCUMULATED-GAINS-PRIOR> 10211913
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 936036
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2794419
<AVERAGE-NET-ASSETS> 134958231
<PER-SHARE-NAV-BEGIN> 15.94
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> 2.69
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.37
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> VALUE EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 137508500
<INVESTMENTS-AT-VALUE> 139653436
<RECEIVABLES> 1034179
<ASSETS-OTHER> 16869
<OTHER-ITEMS-ASSETS> 55615
<TOTAL-ASSETS> 140760099
<PAYABLE-FOR-SECURITIES> 1030978
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 345935
<TOTAL-LIABILITIES> 1376913
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107830852
<SHARES-COMMON-STOCK> 1571748
<SHARES-COMMON-PRIOR> 1254421
<ACCUMULATED-NII-CURRENT> 454658
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 28952740
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2144936
<NET-ASSETS> 139383186
<DIVIDEND-INCOME> 2714831
<INTEREST-INCOME> 419617
<OTHER-INCOME> 0
<EXPENSES-NET> 2517690
<NET-INVESTMENT-INCOME> 616758
<REALIZED-GAINS-CURRENT> 28955933
<APPREC-INCREASE-CURRENT> (6846565)
<NET-CHANGE-FROM-OPS> 22726126
<EQUALIZATION> 44707
<DISTRIBUTIONS-OF-INCOME> 118093
<DISTRIBUTIONS-OF-GAINS> 1711898
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 624167
<NUMBER-OF-SHARES-REDEEMED> 419960
<SHARES-REINVESTED> 113120
<NET-CHANGE-IN-ASSETS> 13764215
<ACCUMULATED-NII-PRIOR> 322091
<ACCUMULATED-GAINS-PRIOR> 10211913
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 936036
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2794419
<AVERAGE-NET-ASSETS> 134958231
<PER-SHARE-NAV-BEGIN> 15.84
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<EXPENSE-RATIO> 1.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> VALUE EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 137508500
<INVESTMENTS-AT-VALUE> 139653436
<RECEIVABLES> 1034179
<ASSETS-OTHER> 16869
<OTHER-ITEMS-ASSETS> 55615
<TOTAL-ASSETS> 140760099
<PAYABLE-FOR-SECURITIES> 1030978
<SENIOR-LONG-TERM-DEBT> 0
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<TOTAL-LIABILITIES> 1376913
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107830852
<SHARES-COMMON-STOCK> 4854997
<SHARES-COMMON-PRIOR> 5284502
<ACCUMULATED-NII-CURRENT> 454658
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 28952740
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2144936
<NET-ASSETS> 139383186
<DIVIDEND-INCOME> 2714831
<INTEREST-INCOME> 419617
<OTHER-INCOME> 0
<EXPENSES-NET> 2517690
<NET-INVESTMENT-INCOME> 616758
<REALIZED-GAINS-CURRENT> 28955933
<APPREC-INCREASE-CURRENT> (6846565)
<NET-CHANGE-FROM-OPS> 22726126
<EQUALIZATION> 44707
<DISTRIBUTIONS-OF-INCOME> 187978
<DISTRIBUTIONS-OF-GAINS> 6634855
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 953226
<NUMBER-OF-SHARES-REDEEMED> 1821843
<SHARES-REINVESTED> 439112
<NET-CHANGE-IN-ASSETS> 13764215
<ACCUMULATED-NII-PRIOR> 322091
<ACCUMULATED-GAINS-PRIOR> 10211913
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<OVERDIST-NET-GAINS-PRIOR> 0
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> U.S. GOVERNMENT SECURITIES FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
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<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 147801006
<INVESTMENTS-AT-VALUE> 147582827
<RECEIVABLES> 29538988
<ASSETS-OTHER> 12851
<OTHER-ITEMS-ASSETS> 2644
<TOTAL-ASSETS> 177137310
<PAYABLE-FOR-SECURITIES> 64427811
<SENIOR-LONG-TERM-DEBT> 0
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<PAID-IN-CAPITAL-COMMON> 115123668
<SHARES-COMMON-STOCK> 7425475
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<ACCUMULATED-NII-CURRENT> (383354)
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<ACCUM-APPREC-OR-DEPREC> (218179)
<NET-ASSETS> 112227154
<DIVIDEND-INCOME> 0
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<NET-INVESTMENT-INCOME> 6347417
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<EQUALIZATION> 5
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<DISTRIBUTIONS-OTHER> 502592
<NUMBER-OF-SHARES-SOLD> 1020293
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<SHARES-REINVESTED> 331636
<NET-CHANGE-IN-ASSETS> (3130747)
<ACCUMULATED-NII-PRIOR> (389597)
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 1872572
<AVERAGE-NET-ASSETS> 115567842
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> U.S. GOVERNMENT SECURITIES FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
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<INVESTMENTS-AT-VALUE> 147582827
<RECEIVABLES> 29538988
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<OTHER-ITEMS-ASSETS> 2644
<TOTAL-ASSETS> 177137310
<PAYABLE-FOR-SECURITIES> 64427811
<SENIOR-LONG-TERM-DEBT> 0
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<ACCUM-APPREC-OR-DEPREC> (218179)
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<ACCUMULATED-NII-PRIOR> (389597)
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<AVERAGE-NET-ASSETS> 115567842
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 023
<NAME> U.S. GOVERNMENT SECURITIES FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (218179)
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<DIVIDEND-INCOME> 0
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<APPREC-INCREASE-CURRENT> (2144261)
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<EQUALIZATION> 5
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<NUMBER-OF-SHARES-SOLD> 1238374
<NUMBER-OF-SHARES-REDEEMED> 1319689
<SHARES-REINVESTED> 100270
<NET-CHANGE-IN-ASSETS> (3130747)
<ACCUMULATED-NII-PRIOR> (389597)
<ACCUMULATED-GAINS-PRIOR> (3350703)
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 693407
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1872572
<AVERAGE-NET-ASSETS> 115567842
<PER-SHARE-NAV-BEGIN> 9.98
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> (0.12)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> MONEY MARKET FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 21950653
<INVESTMENTS-AT-VALUE> 21950653
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<PAYABLE-FOR-SECURITIES> 788693
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 442367
<TOTAL-LIABILITIES> 1231060
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20989129
<SHARES-COMMON-STOCK> 8086668
<SHARES-COMMON-PRIOR> 11378848
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 20989129
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1057116
<OTHER-INCOME> 0
<EXPENSES-NET> 95680
<NET-INVESTMENT-INCOME> 961436
<REALIZED-GAINS-CURRENT> 0
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
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</TABLE>
